Time for a new Bretton-Woods conference?
02 Feb 2009
The 2008 financial crisis has revealed the inadequacy of the institutional structure inherited from the 1944 Bretton Woods Conference. Theories that our financial system had little need for regulatory oversight have proved to be false, and responses have been improvised at best. Speaking at the 21st Century School on 29 January, Dr Augusto Lopez-Claros laid out his views on the need for substantial institutional reforms in light of the current crisis.
He began by tracing the origins of the current institutional system, and the IMF in particular, to the 1944 Bretton Woods Conference. Pointing out that the Bretton Woods system is incapable of delivering the global financial governance which the highly integrated financial markets of the 21st century seem to require, he argued that today's financial system needs stronger regulation and oversight. Dr Lopez-Claros agreed that calls for a new Bretton Woods conference were sensible enough, but argued that the G20, which has so far taken the lead on this issue, did not have the credibility, or the expertise necessary for the task. Instead he would give the job to the International Monetary Fund (IMF).
While the IMF in its current form is woefully unprepared to manage global financial crises, it is still a far more inclusive organisation (with 185 member countries) than the G20, and it has the advantage of an existing bureaucracy with unparalleled expertise in the field of global financial governance. Its main problems, according to Dr Lopez-Claros, stem from a lack of influence. He went on to outline the weaknesses of the IMF's current structure and to make some suggestions about how to turn it into an organisation capable of providing oversight to the global financial system.
As Dr Lopez-Claros noted, the IMF's central problem is a lack of resources. Firstly, the IMF does not have sufficient resources to work with. Although it can create small amounts of liquidity, its funds (as of Nov. 2008) amount to about $241bn, which does not compare favourably with the larger figures involved in recent bailouts.
Secondly, its members are sovereign nations and, as such, the IMF has few powers of enforcement. If a particular path is unsustainable, as with the Asian crisis of 1997, or the recent US housing bubble, the most the IMF can do is to issue warnings.
Lastly, Dr Lopez-Claros mentioned the governance issues undermining the IMF's credibility. A comparison of voting powers reveals that Europe has 32.4% of the vote, while the combined votes of the US, China, India, Brazil and Russia amount to only 26.9%.
His suggestions for improving the quality of global financial governance include:
- A degree of simplification with regard to the proliferation of innovative new financial instruments. Regulators need to be able to understand balance sheets in order to enforce a level of oversight and global governance.
- Including everybody in the process of creating this system, in order to create a more sustainable and equitable system.
- Giving appropriate consideration to long-term proposals for increasing the stability of the global economy.
- Increasing the powers and resources of the IMF. For example by giving it the authority to create special drawing rights (SDRs) in the way that a central bank can create currency, which would give the IMF more leverage over those using its resources.
Responding to a question about the cause of the 2008 crisis, Dr Lopez-Claros brought attention back to the overriding need for an institution to regulate today's globalized financial market. He warned against complacency in the event of financial recovery, reminding the audience that the system was simply not as capable of self-regulation as had been previously assumed. He urged politicians to seize the opportunity to implement institutional reforms in order to guard against future global crises.
This blog comes from the seminar series on "Global Governance Challenges"
Dr Lopez-Claros is the founder of EFD-Global Consulting Network advising on economic, financial, and development issues. Previously he has served as a Professor of economics at the University of Chile, the IMF's resident representative in the Russian Federation, a senior international economist with Lehman Brothers and Director of the Global Competitiveness Programme at the World Economic Forum.
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