JEDDAH – The G20 has ensured that the international financial institutions are receiving increasing resources to deal with the economic crisis.
However, the institutions are resisting the drive to find new paths for world development, particularly for ensuring jobs and employment, and instead remain attached to dogmatic liberal principles and recommend the same old-fashioned liberalization proposals that have driven the world economy to the deepest crisis since the 1930s.
As this developed, discussions went back to concerns about the then Bretton Woods 2. The first is equity, with a new generation of leaders in the emerging markets increasingly questioning whether their expanded role in global financial institutions is merely ceremonial, as frustration grows that their practical ability to shape the policy priorities of these institutions remains limited.
The BW2 agreement ratified the merger in 2014 of the Bank for International Settlements, Bretton Woods in 2010, which marginally reformed voting rights at the IMF and World Bank.
In Towards Bretton Woods III, the authors argued that the BW2 process actually came at an opportune time for the developed nations: "The emerging markets were badly affected by the recession, which temporarily disguised the inevitable and ongoing shift of economic power away from the advanced economies towards those countries destined sooner or later to be the new global powers, and so afforded the established powers one last opportunity to entrench global financial rules in their favor".
The second issue is stability. A growing number of experts express concern that the BW2 institutions provide wholly inadequate safeguards against the possibility of a new financial crisis.
A professor argued that "international agreements may have tightened the supervision of financial institutions, introduced links to macroeconomic policy and increased transparency by ensuring elements of Basel II are better enforced across borders, but there are serious fears that they overlook potential points of contagion and have not adequately addressed behavioral elements of the markets".
The primary concern is that BW2 has actually exacerbated risk by creating "a single point of failure and increased homogenization, meaning the potential downside is higher than ever."
The downside scenario of another financial crisis caused considerable concern. Economists point to the rise in prices of various assets and abnormally low levels of risk pricing in swaps and derivative trades as worrying signs that another financial crisis is imminent, perhaps fuelled by the concerted efforts of governments to keep the global economy growing at all costs.
Nobel Laureate in Economics Charlton Sanders worried that there are converging factors in regulatory systems that could exacerbate the severity of another shock: "With the increased transparency of information and electronic trading systems now linking almost all markets, it is possible that a negative price shock combined with converging objectives, sizable cross-holdings and herding behavior could result in a pro-cyclical trend and an almost instantaneous loss of confidence across the entire global system."
Given that the international crisis management agreements established by BW2 have not yet been seriously tested, this prospect is scary indeed. Perhaps it is not too soon to revisit Bretton Woods yet again, this time with a commitment to greater inclusion and a renewed appreciation of the threats. Sanders identified many reasons, high on his list are volatile capital flows, inflation, infrastructure bottlenecks and water and resource shortages being high on his list. – SG/Agencies