Rethinking Bretton Woods

The leaders of the 20 wealthiest countries, the G20, met in Washington DC over the weekend.  Their agenda: to find a way to deal with the global economic crisis.  The meeting had initially been envisioned by French President Nicolas Sarkozy, who believed that nothing short of a new Bretton Woods system was necessary to deal with the crisis.

But what was the first Bretton Woods system?  The Bretton Woods system is the name given to the global financial and trade system created at the end of World War II.  The Bretton Woods system encompassed the International Monetary Fund (IMF) and the World Bank (and was originally supposed to include an organization like the World Trade Organization as well, though this took much longer to create).  The ideas behind the original Bretton Woods system were described by John Gerard Ruggie as “embedded liberalism.”  Drawing heavily from the philosophy of Keynesianism, this system of embedded liberalism included a system of fixed currency exchange rates and an acceptance of the need for state intervention in the economy in order to ensure full employment.

The Bretton Woods system began to collapse in the 1970s, as currency values were allowed to float, or be determined by the market, restrictions on the global movement of capital were reduced, and the Keynesian commitment to full employment was replaced by a monetarist focus on keeping the rate of inflation low.  Over time, the system of embedded liberalism was gradually replaced by the system of neoliberalism we know today.

Fast forward to today, and Sarkozy’s calls for a new Bretton Wood system make greater sense.  If the current global economic crisis was caused by the failure of national systems of financial regulation to govern global financial flows, then perhaps it makes sense to think about a new Bretton Woods system.  But not everyone is convinced.  At the summit, President Bush cautioned that “a meeting is not going to solve the world’s problems.”  And he’s probably right

So what reforms are on the agenda?  Certainly a rethinking of the role of the IMF is an imporatnt beginning.  But the only firm commitment offered at the G20 meeting was an agreement to meet again, in April.  To be fair, the final communiqué coming out of the weekend’s meeting included commitments to resist pro-cyclicality in regulatory policy and to review a number of questions in anticipation of the April meeting, including assessments of global accounting standards, derivatives markets, executive compensation practices, and the mandates, governance and resource requirements of international financial institutions.  This is certainly important, but it is hard to see how this represents the type of shift to a more regulated form of capitalism, as envisioned by Sarkozy.

So how is the blogosphere responding to the weekend’s excitement?  Dani Rodrick points out that “The fundamental dilemma of financial globalization is that regulation and supervision remains national while financial markets are international.”  He credits the G20 for recognizing this problem in their final communiqué, even if they did little to address the problem

Daniel Drezner is more melancholy.  He points to a similar dilemma, arguing,

the basic conundrum is that governments would like to regulate financial institutions in such a way that private capital does not come up with a way to evade those regulations and engage in the exact same activities with a lower regulatory cost.  In the history of financial regulation, however, private capital has excelled at regulatory avoidance.  Given the complexities of financial markets, I have every confidence that even if the G-20 were to agree on common standards, they would not be airtight.  The loopholes that would be found would let the air out of any governance balloon that was inflated.

Not a very uplifting read over your morning coffee.

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