Global Policy Forum

Towards a Post-Bretton Woods Global Financial Architecture


By Daniel McDowell

World Politics Review
February 4, 2009

Since 1944, America's position within the International Monetary Fund has given it tremendous influence over national and international financial markets. Increasingly, however, this influence has been met with resistance in some parts of the world, with America's relative economic decline causing some to question its dominant role within the Fund. But the U.S. has been largely unwilling to relinquish its privileged position, or to dramatically change its stance on the benefits of unfettered markets. As a result, despite a recent resurgence in the face of the global financial crisis, the IMF is today facing a serious challenge to its status as the world's lender of last resort, threatening to weaken even further America's global financial preeminence.

The challenge comes from two fronts: East Asia and Latin America. In Asia, both the U.S. and the IMF have taken a credibility hit since the 1997 crisis, when recipient countries were angered by the austere conditions attached to emergency loans. Though the U.S. successfully blocked Japan's Asian Monetary Fund (AMF) proposal then, the region has continued on a steady path toward financial integration and self-sufficiency. In 2000, ASEAN+3 implemented the Chiang Mai Initiative (CMI), designed to provide short-term liquidity support in the form of U.S. dollar swaps with the domestic currencies of participating nations. Then, in May 2007, ASEAN+3 announced an agreement in principle for a "self-managed reserve pooling arrangement governed by a single contractual agreement . . ." In short, the group declared its intentions to create a new AMF in practice, if not in name. With the world's largest pool of foreign reserves -- over $4 trillion -- there is plenty of cash in the region to capitalize a new institution at a minimum of $80 billion. Recent reports have placed the total at $120 billion. In Latin America, meanwhile, the intersection of neoliberal economic reforms and democracy has resulted in a notable turn to the left over the past decade. In 2006, Hugo Chavez began promoting his idea for a "Bank of the South" as an alternative to the Bretton Woods financial institutions. While initially only garnering a few supporters, much of Latin America -- including Argentina and Brazil -- is now on board. The new bank could provide both developmental as well as balance of payment assistance to member countries. As in Asia, the accumulation of foreign reserves, largely due to high commodity prices, gives the region the ability to entertain such notions. The continued American dominance of the IMF and World Bank has provided the incentive.

It remains to be seen what impact the current global financial crisis will have on these initiatives. To date, the crisis seems to have sped up talks in East Asia. In an unprecedented meeting in December of last year, the region's three major powers -- China, Japan, and South Korea -- held their first ever trilateral summit to discuss multilateralizing the CMI, among other regional concerns. Due to the volume of forex reserves in the region, the capacity to create an AMF is not likely to be threatened by the present global financial climate. The biggest roadblock remains the Sino-Japanese rivalry. In 1997 China failed to support Japan's proposal, contributing to its demise. However, China has been on board with regional financial integration since 1999, and there have been few public signs of discord in the interim. Yet, with the bulk of talks still to come, disagreements between the two should be expected -- especially when it comes to institutional control. Presently, the Bank of the South appears more vulnerable than the Asian initiative. Combined, participating countries have roughly $300 billion in exchange reserves, which, while significant, pales in comparison to Asia. The decline in the price of crude oil, and commodities in general, may limit the resources Chavez and his partners can devote to such regional projects. Still, with a modest goal of capitalizing the new institution at $10 billion, success does not seem out of reach. As in Asia, disagreements over voting power and how capital should be raised have been, and remain, the primary obstacles to an agreement. If successful, these initiatives could blunt a significant weapon in America's financial arsenal, while offering the world a regionalized system of potential lenders of last resort. Such a multipolar financial architecture could lead to a more equitable system that incorporates a plurality of perspectives. However, it may also lead to moral hazard, as borrowers "shop" between institutions for the least painful terms.

The United States could take several concrete steps to shore up the IMF's position by accommodating the interests and opinions of rising economic powers. First, it could publicly support an Asian or Latin American nominee for the Fund's next Managing Director, a post that has heretofore always gone to a European. While largely symbolic, the move would bring the face of the IMF in line with the reality of the 21st century global economy. Second, and more significantly, it could open talks regarding voting power within the fund, presently biased to favor the United States and Western Europe. Obama's new Treasury secretary, Timothy Geithner, recently expressed the administration's support for such a new round of quota adjustments that would give more voice to emerging economies. Third, it could support the further relaxing of conditions attached to bailout loans. The IMF publicly stated it would do just that in October of last year as the global financial climate grew increasingly gloomy. Skeptics, however, will likely view this as only a temporary move rather than a sign of permanent reform, making it the least significant of the three.

It is impossible to know if these steps would effectively moot current interest in crafting regional financial institutions. But if the United States does not try to rebalance its influence within the IMF, it's very likely that Asia and Latin America will.

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