Hardball at Bretton Woods II
by Arvind Subramanian, Peterson Institute for International Economics
Op-ed in Forbes
November 13, 2008
The rising powers must hold Western feet to the fire. Their motives may be in part a mixture of the expedient (Europe) and the desperate (the lame duck US administration). But there is no denying that the existing powers—Europe and the United States—are the instigators of the Bretton Woods II process that aims to rewrite the rules of the international economic system. How should the new powers, the emerging-market countries, respond?
There is enough commonality of interests between the existing and new powers for all participants to desist from finger-wagging and playing the blame game, and to agree to do their utmost to avert a downturn in the global economy. Individually and collectively, they could also agree to provide macroeconomic stimuli to shore up their economies.
It should, of course, be understood that not all countries may have the ability to do so, and also that each country should be able to chose its preferred method for providing a stimulus. For example, while China has shown that it has the room to increase fiscal spending, India and Brazil have less fiscal space and may opt to provide a monetary stimulus. All participants should also commit to keeping their markets open. The threat of protectionism is, ironically, greatest not in the emerging markets but in the United States Even a small retreat by the United States could have serious consequences for the global economy.
But the forthcoming summit is a golden opportunity for the new powers to hold the feet of Western leaders to the fire. Do the existing powers really intend to move toward a cooperative framework for solving future problems as they claim? Do they really intend to give up their stranglehold on power?
There is an easy way to find out. Having dealt with the obviously win-win parts of the agenda, the rising powers should then quietly but firmly and forcefully seek agreement on a number of governance-related issues that will signal the dawn of a new era where influence in the international economic system reflects current economic realities rather than the receded ones of the Atlantic-centered world of 1945.
Take one egregious example of the laughably antiquated nature of the status quo. Belgium and the Netherlands have a larger voting share than Brazil and India despite the fact that the economies of these two emerging-market countries are four-and-half times that of the former (where the measurement is in terms of the real purchasing power of the economy). The new powers must not shy away from correcting these anomalies.
Specifically, the new powers must insist on the following (for more, see "India and Bretton Woods II" [pdf]):
Will the insistence by emerging-market countries on these issues create the discord that is so important to avoid in these difficult times, when markets are skittish and need all the reassurance that can be mustered? Not really, because the principles underlying the proposals made above are widely supported for being fair and necessary. Discord on these issues can arise only because of an unreasonable unwillingness on the part of the industrial countries to give up some of their current power. But current arrangements have detracted from the legitimacy and effectiveness of the international financial institutions such as the IMF. It is therefore in the enlightened self-interest of the existing powers to accept quickly (and graciously) serious reform of the governance of the international institutions.