Peterson Institute publications
The Peterson Institute for International Economics is a private, nonprofit, nonpartisan
research institution devoted to the study of international economic policy. More › ›
RSS News Feed Search


India and Bretton Woods II

by Arvind Subramanian, Peterson Institute for International Economics

Op-ed in the Business Standard, New Delhi
November 13, 2008

© Business Standard

The circumstances are odd: a lame duck administration, reflexively reticent about multilateralism, convening the mother-of-all multilateral initiatives, with the aim of reframing the rules of international capitalism. The original motives were a tad cynical: European leaders seeking to grandstand globally to boost their domestic political standing. The participants' predispositions are varied: from the regulatory zeal of France to the likely minimalism of the United States to Chinese—well, who really knows, what are Chinese predispositions?

Yet, all these provocations to cynicism should be overlooked. The forthcoming Bretton Woods summit this week is important for the world because the current international financial system has proved catastrophically inadequate, and the global financial crisis provides the rare opportunity to overhaul it. The summit is also important for India, requiring active Indian engagement to shape the rules of the international financial system in line with India's long-term interests.

In the latest issue of Economic and Political Weekly [pdf] (November 8), Aaditya Mattoo of the World Bank and I have outlined the rationale for and content of such engagement. Consider each in turn.

That India will be a middling power rather than an economic superpower for the foreseeable future suggests that multilateralism will be an important means for India's international economic management. Multilateralism will be especially important for India to manage its relations with the major powers—the United States, the European Union, and China. Multilateralism will allow India to strike alliances opportunistically: for example, with China on the environment, and possibly with the United States and the European Union on regulating exchange rates and limiting resource nationalism.

Second, India's growth and globalization, more specifically its exports of goods, services, foreign investment, and people, create a big stake for India in sustaining open markets globally. Until very recently, India could have taken the status quo of global openness for granted, and indeed that was India's working assumption even in the context of the Doha negotiations.

But the financial crisis could easily undermine that assumption. The economic downturn in the United States and the European Union could easily interact with preexisting anxieties about globalization in these places to rekindle protectionist pressures. A Democratic administration with a healthy Democratic majority in Congress could find it difficult to resist these pressures.

So, what should India be seeking and advocating? A large part of the summit will be focused on the short-term crisis response. Here, India should support globally coordinated actions (fiscal and monetary stimulus, and expansion of liquidity facilities for all countries in or close to crisis) to help limit the economic downturn. Most important, India should call for a strong political commitment by all countries to keep markets open and refrain from taking protectionist action.

Beyond this short-term response, India should be pushing for a substantive medium-term agenda in three broad areas. First, on the International Monetary Fund (IMF), India should be seeking to significantly enhance the Fund's financial resources. The crisis has shown that the world needs pooled liquidity to be made quickly available and in a coordinated fashion. The IMF, warts and all, and for lack of alternatives, remains the institution to undertake these tasks. This expansion then affords the opportunity to remove some of these warts, most notably the absurd and antiquated governance structure. What sense can it make in 2008 to have Belgium, the Netherlands, and Italy having as much say as Brazil, India, and China? What sense can it also make for the current, outrageously outmoded method for selecting the heads of the international financial institutions?

If the industrial powers that have convened this summit are serious about creating a cooperative framework, the economic status of the new powers must be legitimized and given de jure legitimacy. Transparent, competitive, and merit-based procedures for selecting heads of institutions must also be adopted. More radically, if a genuinely cooperative framework is the aim, eliminating the veto power of the United States and the European Union in the IMF must be on the table.

Second, on trade, consistent with its growth and globalization, India should be in the vanguard of securing global openness. Completing the Doha round is an option but this alone may not be enough to head off future protectionist pressures. India should be pushing for a post-Doha plan that would advance the current agenda in two ways: deepening rules in existing areas (especially services) and developing rules in new areas (to deal with undervalued exchange rates, cartelization of oil markets, investment restrictions, and environmental protectionism.) A key point here is that India cannot be credible in seeking openness unless it signals its willingness to open its own markets, which remain highly protected compared with most countries. India confronts a difficult political choice here but the risks of operating on the current assumption—that markets will remain open without significant new initiatives and without India and other emerging-markets contributing—are significant.

Third, India must push for reform of the meta-process for global decision making. Currently, the G-7 is this meta-process. Reflecting, however, the receded realities of a post-War Atlantic-centered world, and excluding the rising powers, its claims to legitimacy are fast evaporating. In convening a larger group, the G-20, the current powers are acknowledging the new realities and have created the opening for ending the monopoly of global decision making. India's aim should be to ensure that a more representative grouping, some variant of the G-20 perhaps, becomes permanent. This can be achieved by insisting that the Bretton Woods summit not be a one-off event but a medium-term process with a clearly defined and substantive agenda.

Finally, this crisis affords an opportunity for India to punch a little bit above its current economic weight. The success of the United Kingdom in achieving this task in the original Bretton Woods conference is captured in this famous ditty:

In Washington Lord Halifax
Once whispered to Lord Keynes,
"It's true they have all the money-bags,
But we have all the brains."

Does India have the intellectual capital to pull off something similar in Bretton Woods II?

Over to you, Dr. Manmohan Singh.


Book: Responding to Financial Crisis: Lessons from Asia Then, the United States and Europe Now October 2013

Policy Brief 13-21: Lehman Died, Bagehot Lives: Why Did the Fed and Treasury Let a Major Wall Street Bank Fail? September 2013

Op-ed: Misconceptions About Fed's Bond Buying September 2, 2013

Op-ed: A Dose of Reality for the Dismal Science April 19, 2013

Op-ed: Five Myths about the Euro Crisis September 7, 2012

Working Paper 12-7: Lessons from Reforms in Central and Eastern Europe in the Wake of the Global Financial Crisis April 2012

Article: Why the Euro Will Survive: Completing the Continent's Half-Built House August 22, 2012

Policy Brief 12-18: The Coming Resolution of the European Crisis: An Update June 2012

Policy Brief 12-20: Why a Breakup of the Euro Area Must Be Avoided: Lessons from Previous Breakups August 2012

Book: Sustaining China's Economic Growth after the Global Financial Crisis January 2012

Testimony: A New Regime for Regulating Large, Complex Financial Institutions December 7, 2011

Working Paper 11-2: Too Big to Fail: The Transatlantic Debate January 2011

Policy Brief 10-24: The Central Banker's Case for Doing More October 2010

Policy Brief 10-3: Confronting Asset Bubbles, Too Big to Fail, and Beggar-thy-Neighbor Exchange Rate Policies February 2010

Article: The Dollar and the Deficits: How Washington Can Prevent the Next Crisis November 2009

Speech: Rescuing and Rebuilding the US Economy: A Progress Report July 17, 2009

Testimony: Needed: A Global Response to the Global Economic and Financial Crisis March 12, 2009

Testimony: A Proven Framework to End the US Banking Crisis Including Some Temporary Nationalizations February 26, 2009

Speech: Financial Regulation in the Wake of the Crisis June 8, 2009

Paper: World Recession and Recovery: A V or an L? April 7, 2009

Op-ed: Stopping a Global Meltdown November 12, 2008

Book: Banking on Basel: The Future of International Financial Regulation September 2008

Book: Bailouts or Bail-ins? Responding to Financial Crises in Emerging Economies August 2004