REVITALIZING THE SPIRIT OF BRETTON WOODS 50 PERSPECTIVES ON THE FUTURE OF THE GLOBAL ECONOMIC SYSTEM

The Bretton Woods Committee

REVITALIZING THE SPIRIT OF BRETTON WOODS 50 PERSPECTIVES ON THE FUTURE OF THE GLOBAL ECONOMIC SYSTEM

JULY 2019

The Bretton Woods Committee ACKNOWLEDGMENTS

The Bretton Woods@75 Compendium membership and stakeholder network, is a unique and timely publication, though they do not purport to represent issued to honor a historic year for the the views of all Committee members Bretton Woods institutions, and during or to serve as the collective voice of the an extraordinary moment in history Bretton Woods Committee. for the global, rules-based system that Such a monumental effort could not they have operated through and helped have taken place without a great deal of to strengthen since their inception in support from a handful of individuals 1944. As the world celebrates the his- who are exceptionally dedicated to the toric milestone of the 75th anniversary Bretton Woods Committee. Production of the (for- of this volume was conceived, planned, mally known as the and implemented by the Committee sec- Monetary and Financial Conference) in retariat team, based in Washington, D.C.: July 2019, the rules-based international Randy Rodgers, Emily Slater, Brooke economic system and its staunchest sup- Snowdon, and Kasey Stelter, with support porters face a significant challenge: how from Melissa Smith and Hana Barkett. to ensure that the global economic system Direction and advisory support were evolves and endures to meet the challenges provided by Bretton Woods Committee of this and the next generation. Co-chairs Richard A. Debs, James D. This collection of insightful and Wolfensohn, and Jim Kolbe, as well as forward-­looking thought pieces orga- William R. Rhodes, a key member of nized by the Bretton Woods Committee the Committee’s Advisory Council. is—we hope—an inspiring attempt to The Committee greatly appreci- respond to such an ambitious ques- ates the invaluable review and advice tion. The Bretton Woods Committee received from the members of the is the nonpartisan network of prom- Bretton Woods@75 Compendium inent global citizens that works to Review Committee, who generously demonstrate the value of international shared their expertise and time to economic cooperation and to foster guide the production of this volume strong, effective Bretton Woods institu- from commencement to comple- tions as forces for global well-being. The tion. Specifically, the Bretton Woods essays in this volume are authored by a Committee recognizes Meg Lundsager, diverse cross-section of the Committee’s Public Policy Fellow at the Wilson

iv | REVITALIZING THE SPIRIT OF BRETTON WOODS Center; Scott Morris, Senior Fellow Additionally, the Bretton Woods Com­ and Director of the US Development mittee wishes to thank long-­standing Policy Initiative at the Center for Global members Mark Gillen and Gary Kleiman, Development; Jeffrey J. Schott, Senior as well as Committee friend and colleague Fellow at the Peterson Institute for Elizabeth King, for contributing advisory International Economics; and Edwin support to various sections of the volume. M. Truman, Nonresident Senior Fellow The Bretton Woods Committee at the Peterson Institute for International wishes to acknowledge the generous Economics. Meg Lundsager, who served support of Bretton Woods@75 principal as Chair of the Review Committee, sponsors Morgan Stanley and Mizuho. contributed guidance throughout the The Committee is also grateful for editorial and compilation processes for significant contributions from Bretton this volume and was instrumental to Woods@75 sponsor SICPA and com- the success of the project. pendium sponsor Structured Credit International Corporation.

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Founded in 1927, headquartered in and operating on five continents, SICPA’s mission is to Enable Trust through constant innovation. Based on core expertise in high security inks, the company protects the majority of the world’s banknotes, as well as security and value documents such as passports, from the threats of counterfeiting and fraud. Furthermore, SICPA integrates material security features and cutting edge digital technology to offer sophisticated tracking and tracing, data management and tax administration systems, in particular for excisable products. These systems protect the legitimate economy, safeguard consumer health, strengthen domestic revenue mobilization and fight illicit trade around the world. SICPA is building and leading the Economy of Trust.

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Founded in 1927, headquartered in Switzerland and Acknowledgments...... iv operating on five continents, SICPA’s mission is to ...... Enable Trust through constant innovation. Based on core Sponsors vi expertise in high security inks, the company protects the Foreword...... xiii majority of the world’s banknotes, as well as security and value documents such as passports, from the threats of MEG LUNDSAGER counterfeiting and fraud. Furthermore, SICPA integrates material security features and cutting edge digital technology to offer sophisticated tracking and tracing, data management and tax administration systems, in THE SPIRIT OF BRETTON WOODS: particular for excisable products. These systems protect PAST, PRESENT, AND FUTURE...... 1 the legitimate economy, safeguard consumer health, strengthen domestic revenue mobilization and fight illicit The Spirit of Bretton Woods...... 2 trade around the world. SICPA is building and leading the Economy of Trust. PAUL A. VOLCKER The Bretton Woods Mission: Before, Then, Now...... 5 RICHARD A. DEBS Rethinking Multilateralism for Our Future World...... 14 JAMES D. WOLFENSOHN

LEADERSHIP OF THE BRETTON WOODS INSTITUTIONS...... 25 The Innovative Monetary Fund ...... 26 CHRISTINE LAGARDE Common Purpose Advancing Development: 75 Years of Innovation for Progress and Shared Prosperity...... 31 DAVID MALPASS Strengthening the WTO for the Future...... 41 ROBERTO AZEVÊDO

MULTILATERAL COOPERATION AND SYSTEMS CHANGE...... 47 Building the New Cooperative International Order...... 48 THARMAN SHANMUGARATNAM The World of More Unpredictable and Harder-to-Understand National and Global Economies...... 55 MOHAMED A. EL-ERIAN Bretton Woods at 75: Rethinking Multilateral Cooperation for the Modern Era...... 62 ARMINIO FRAGA Has Globalization Peaked? Renewing the Prospect and Promise of Global Integration...... 65 CATHERINE L. MANN Toward a New Economy of Trust...... 78 PHILIPPE AMON Better Business with Bretton Woods...... 85 MYRON BRILLIANT AND GARY LITMAN Trans-sovereign Networks: ’s Role in the New Global Order...... 92 KEYU JIN Reshaping Multilateralism as a Tool for Global Economic Prosperity...... 101 JOSÉ ÁNGEL GURRÍA The Bretton Woods Regime in a Changing World Order...... 107 TOYOO GYOHTEN

EVOLVING GLOBAL ECONOMIC AND FINANCIAL ARCHITECTURE...... 115 True Finance...... 116 MARK CARNEY The Bank for International Settlements: If It Didn’t Exist, It Would Have to Be Invented...... 125 WILLIAM C. DUDLEY Global Financial Cooperation as a Legacy of Bretton Woods...... 133 RANDAL K. QUARLES Coordination in the Future Regulatory Environment...... 140 AXEL A. WEBER Strengthening and Deepening the International Financial Architecture...... 147 JEAN-CLAUDE TRICHET The International Monetary System and Its Challenges for Emerging-Market Central Banks...... 157 KSENIA YUDAEVA Strengthening the Rules-Based International Monetary System...... 170 JOHN B. TAYLOR The Future of the Eurozone...... 177 LORENZO BINI SMAGHI The Long March of China’s Exchange Rate Regime Reform...... 183 YU YONGDING The Bretton Woods Era: The Hidden, Misunderstood Role of Debt...... 186 RICHARD VAGUE An Interconnected World: Bolstering Financial Resilience through Insurance...... 192 WALTER B. KIELHOLZ The Governance of the International Monetary System...... 199 JOSÉ ANTONIO OCAMPO MULTILATERAL DEVELOPMENT BANKS IN THE NEW DEVELOPMENT LANDSCAPE...... 221 Institutional Reform at the World Bank Group: Staying Relevant in the Modern Era...... 222 SRI MULYANI INDRAWATI The Spirit of Bretton Woods, the World Bank, and the Next 75 Years: From Where Within the Development Sphere Will Leadership on Bretton Woods Values Come?...... 230 AFSANEH M. BESCHLOSS AND MINA MASHAYEKHI The MDBs: How Governance Matters...... 238 NANCY BIRDSALL Drawing Lessons for an Evolving Multilateral System...... 247 JOACHIM VON AMSBERG Efficiency Does Matter in Development...... 253 MUHAMMAD SULAIMAN AL JASSER A Call for a Paradigm Shift in Approaching Sustainable Investment...... 257 THIERRY DÉAU Reviving the Spirit of Bretton Woods: A Development Perspective...... 265 ABDLATIF Y. AL-HAMAD Rising Role of Preferred Creditor Status in Ratings of Multilateral Development Banks...... 273 MAHESH K. KOTECHA

GLOBAL TRADE AND THE FUTURE OF THE ...... 287 Whither the World Trade Organization?...... 288 MARTIN WOLF Is the Multilateral Trading System Fit for Purpose?...... 295 MARI PANGESTU Challenges to the WTO Dispute Settlement System...... 304 CELSO LAFER Global Gains from the WTO...... 315 JAMES BACCHUS Trade Policy: The Legacy of Bretton Woods and the Politics of Today...... 322 JIM KOLBE Upgrading and Strengthening the World Trade Organization...... 328 CARLA A. HILLS FORCES OF CHANGE...... 335 Bank-Fund: Facing the Rising Challenges of Corruption...... 336 FRANK VOGL AND WILLIAM R. RHODES A Call For Exceptional Business Leadership...... 347 GAIL KELLY The New Global Agenda: Scale, Urgency, and the Future of the Multilateral Development Bank System...... 352 NICHOLAS STERN AND AMAR BHATTACHARYA A New Bretton Woods Vision for a Global Green New Deal...... 360 ANDREW SHENG Beyond Development: Rethinking Aid in an Era of Fragile States...... 368 DAVID MILIBAND In Search of a Global Approach to the Global Migration Crisis...... 376 DAMBISA MOYO Cyclical Crises in the 21st Century...... 384 ISRAEL KLABIN Technology, the Future of Work, and Prospects for Developing Economies...... 391 SUSAN LUND AND JAMES MANYIKA

FUTURE OF THE BRETTON WOODS COMMITTEE...... 403 Reflections on the Future of the Bretton Woods Committee...... 404 RANDY RODGERS FOREWORD

MEG LUNDSAGER Public Policy Fellow, Wilson Center, and former US Executive Director, International Monetary Fund

ABOUT BRETTON • Global Dialogue Series—a series of WOODS@75 conversations among the Bretton Woods Committee membership The Bretton Woods Committee urges and global community to debate global policy makers to recommit to current and future issues impacting the spirit of Bretton Woods. Seventy- the Bretton Woods architecture, five years ago, this spirit reflected the institutions, and Committee. The overarching need to restore global peace perspectives accumulated through and economic prosperity. Establishing this series of conferences, seminars, the Bretton Woods institutions (BWIs) roundtables, virtual conferences, demonstrated that countries could surveys, and blog posts are synthe- overcome their resistance to economic sized on the Committee website at cooperation and find common solutions. brettonwoods.org. With nationalist tendencies having resurfaced in the years leading up to • Compendium—the present volume, the 75th anniversary of the Bretton a timely collection of 50 essays from a Woods Conference, the opportunity globally diverse subset of the Bretton is ripe for global leaders once again to Woods Committee’s network of consider how the international eco- thought leaders, providing recommen- nomic system must evolve and endure dations for the future of international to meet the challenges confronting our economic cooperation own and future generations. • Gala dinner—a celebratory evening In response, the Bretton Woods that honors the 75th anniversary Committee launched Bretton of the Bretton Woods Conference Woods@75: a global dialogue to honor and promotes the forward-looking 75 years of economic progress and to ideas generated through the Bretton revitalize the spirit of Bretton Woods now Woods@75 initiative and for the future. The yearlong initiative consists of three primary activities:

REVITALIZING THE SPIRIT OF BRETTON WOODS | xiii The objectives of the broader initia- can the World Bank Group (WBG) and tive and of this compendium are twofold: the broader multilateral development bank (MDB) system remain central to 1. To help global leaders envision how setting the global development agenda to evolve and strengthen the current in a rapidly diversifying development rules-based economic system and landscape? How can the World Trade its collection of multilateral devel- Organization (WTO) remain the leader opment and financial institutions to of the rules-based trading system and address the challenges of tomorrow effective adjudicator of modern trade 2. To encourage and embolden policy disputes? makers to recommit to the “spirit” of Compendium contributors—con- Bretton Woods and the value of inter- sisting of current and former policy national economic cooperation as a makers, global financial and business fundamental force for global peace leaders, academic scholars, and thoughtful and prosperity commentators—believe the BWIs can continue to support and help finance countries’ future growth and develop- ABOUT THE BRETTON ment. They remind national leaders of WOODS@75 the benefits of countries’ engagement COMPENDIUM with and through the IMF, WBG and Within this unique, forward-looking MDBs, and WTO. Universally, they urge volume, global thought leaders offer policy makers once again to realize that their recommendations on how the a renewed spirit of multilateral coopera- BWIs and their broad membership tion can lead to future economic gains can once again deepen cooperation to for all countries. Contributors’ growing address current and future economic awareness of shared challenges and deep concerns. The publication is organized interlinkages among countries generated around the core issues identified by their specific recommendations on how these leaders. Authors were asked to these institutions can adapt to augment consider the major trends and issues their policy choices and provide the reshaping the global economy now and financial resources that all their members into the future, and how the system and will need to counter future risks and institutions should evolve and adapt to achieve financial stability and sustained enable the next generation to thrive. economic development. How can the International Monetary In assessing past performance, many Fund (IMF) remain effective at moni- of the contributors point to the institu- toring and promoting global financial tional flexibility that has allowed country stability and be fit for purpose within officials to overcome divergent views and the modern financial architecture? How reach agreement on modifying policy

xiv | REVITALIZING THE SPIRIT OF BRETTON WOODS approaches or augmenting financial BWIs to respond to growing cross-border resources. Highly adept staff members problems even as they continue to work have broadened their knowledge and on individual country policy priorities. learned to partner more effectively with Contributors call for all of the institu- policy makers. A recurrent theme is that tions to better reflect the changing global the BWIs have helped countries help economic landscape. The traditional lead- themselves—to strengthen their eco- ing international creditor nations have nomic policy-making tools, to broaden been supplemented and even replaced domestic resource bases, to improve by rapidly growing emerging-market attractiveness to foreign assistance and and developing countries. These coun- private capital flows, and to open markets tries should have a voice and economic to increase trade flows, promoting job representation in the BWIs that reflects creation and growth. this new reality and deepens their stake The responsiveness of the IMF and in the future of the organizations. World Bank to member country needs Several authors focus on trust as the requires adaptability, sensitivity, and often underpinning of effective governance and patience. But in responding to requests economic efficiency. Countering forces for help, the institutions themselves that destroy trust, such as corruption, deepen their knowledge of effective should be a priority across all multi- policy making and can utilize that lateral institutions and their members. knowledge in future engagement with Understanding how the private sector countries. As the institutions recognize generates economic prosperity, built on gaps in their tool kits, they seek a range trust among economic agents and policy of possible solutions to help countries makers, should be a more prominent find an approach that will work best BWI focus. Instead of fearing deeper for their particular economic problems. cross-border networks, business leaders Recognizing the importance of multi- and policy makers should use those net- lateral cooperation while our economic systems works to expand mutual understanding undergo continuous change, authors express and deepen trust, particularly among the deep concerns over the current trends largest trading economies. across the membership, most prominently Rising uncertainty and increasingly the rising fear of globalization. Public unpredictable economic trends and policy misunderstanding and the inability of responses are only the start of the chang- political leaders to counter these fears ing systems confronting governments could undermine future progress toward everywhere. In response, strengthening addressing deepening global economic the global economic and financial architecture challenges. With these fears in mind, remains a high priority. For this pur- authors point to various aspects of insti- pose, a multiplicity of country groupings tutional reform that could enable the has emerged over the past decade, most

REVITALIZING THE SPIRIT OF BRETTON WOODS | xv geared toward specific shared problems. will enable them to promote growth, While some are built on treaty commit- job creation, and rising living standards. ments, others are informal groupings of By establishing sound domestic institu- like-minded experts convened to consult tions, private-sector finance can play a on or address particular issues. Those larger role in development, particularly that are based on binding international infrastructure. Development experts urge agreements can apply enforcement tools the institutions to bring innovative sug- to promote the goals of these agreements, gestions to policy makers that will build but even such agreements face obstacles trust among partners and within eco- to promoting actions to achieve their nomic networks. In this manner, future goals, as highlighted in several authors’ development needs will be more readily focus on eurozone challenges. Overseeing financed by private and domestic sources, the way countries manage exchange rates, and less by aid flows. a key task of the IMF, also illustrates the The most serious concerns regarding challenges of monitoring commitments. institutional effectiveness are focused on Other institutions have formed more the global trading system and the central role informally to bring together policy of the WTO. Concerns about the policies makers tasked with specific responsibil- of larger countries and the limited ability ities. Gatherings of financial regulators of WTO members to reach agreement on allow them to share worries and ideas the most pressing priorities preoccupies for tools to strengthen financial-sector these experts. They fear the spread of resiliency, leaving national officials to and the growing inability of determine how best to apply these tools leaders or citizens to see the gains from in their home countries. international trade. Multilateral agreement The development institutions’ his- appears out of reach, perhaps even com- torical focus on providing financing to pletely sidelining the WTO. Nonetheless, reduce poverty is less explicitly high- some countries are forming plurilateral lighted in this volume, but that goal trade agreements that could form the basis permeates many of the recommen- for future wider agreements. Authors look dations. Authors focusing on the new to the world’s largest trading countries to development landscape prioritize advice find the will to change misperceptions, on how to foster internal economic address the fears of deeper integration, development, how to make developing and use the tools of the multilateral trad- economies more flexible and resilient, ing system to help restore trust. and how to generate more internal Contributors to this volume univer- resources by galvanizing private-sector sally contend that the BWIs are needed job creation. These are the tools needed just as much today as they were decades to reduce poverty. Countries are seeking ago. While the immense challenge of knowledge transfer from the BWIs that rebuilding the global economy 75 years

xvi | REVITALIZING THE SPIRIT OF BRETTON WOODS ago appeared overwhelming, coun- The range of challenges facing the tries overcame their distrust and found global community and the urgency of areas for cooperation. These circles of cooperating to find solutions call for cooperation broadened over the years countries to renew the spirit of Bretton as more countries sought to join these Woods. Our Committee believes the systemic institutions and benefit from recommendations presented in this that membership. Looking ahead, we volume can stimulate dialogue on the all face daunting forces of change, rang- critical importance of the BWIs in ing from climate change to cross-border addressing shared problems. We urge the migration to acquiring the skills to utilize broad membership of these institutions increasingly sophisticated technologies, to heed these recommendations and all while living through wider economic recommit to discussion and cooperation. fluctuations. These authors tell us to use The Bretton Woods Committee will our multilateral institutions, draw on continue to promote broader under- their experience and expertise, and seek standing of the IMF, World Bank, and a common understanding of the way WTO, and will remain steadfast in sup- forward to mitigate the impacts of adverse porting their objectives. developments and more effectively utilize the wealth of advances our interlinked global economy has produced.

REVITALIZING THE SPIRIT OF BRETTON WOODS | xvii The Bretton Woods Conference was attended by 730 delegates representing all 44 Allied nations. Here, delegates are addressed by conference president Henry Morgenthau Jr.

Source: Bettmann/Getty Images THE SPIRIT OF BRETTON WOODS Past, Present, and Future

REVITALIZING THE SPIRIT OF BRETTON WOODS | 1 THE SPIRIT OF BRETTON WOODS

PAUL A. VOLCKER Chair Emeritus, Bretton Woods Committee, and former Chair, Federal Reserve System

I’m at an age when one becomes con- rates, stability, and orderly economic scious that, incrementally or with a development. A stable sudden insight, interpretations of past dollar convertible into gold at a fixed events change radically. For me, that has price was at the core. been true with respect to the institutions I was a devoted servant of the Bretton born in the midst of World War II at an Woods system under Bob Roosa, international retreat amid the mountains under­secretary of the US Treasury for of New Hampshire. monetary affairs in the early 1960s. I first learned of the “Bretton He clearly considered defense of the Woods Con­ference” as a student. It system as more than a matter of eco- was widely and rightly acclaimed as nomic policy. It was a moral calling a remarkable achievement. Years of for the United States, having emerged prewar depression and crisis, culminat- from the great war with unquestioned ing in “beggar-thy-neighbor” economic strength and a sense of mission. policies and the destruction of war, By the early 1970s, when I became would be replaced by a structure of undersecretary of the Treasury for cooperation and open markets, anchored monetary affairs, growing tensions with fixed exchange rates, all with a in international markets and increas- focus on economic growth. The new ingly visible strains in the international International Monetary Fund and the monetary system became impossible to International Bank for Reconstruction reconcile within the central requirement and Development would be the formal of dollar convertibility into gold at the instruments for monitoring and enforc- price of US$35 per ounce established ing a “rules-based” system of exchange in the 1930s.

2 | REVITALIZING THE SPIRIT OF BRETTON WOODS I was alive and present on that fateful To that extent, the spirit of Bretton day, August 15, 1971, when President Woods is alive—but not yet fully secure. Nixon accepted the recommendation The rise of new economic powers—first to suspend convertibility. , then China—and now the internal I vigorously argued then that the tensions within the eurozone—pose new system could be rebuilt, with “modern” challenges for cooperation. The political additions we could visualize: the use uncertainties within the United States of the newly created Special Drawing itself could become the greatest threat. Right, a new rule book to guide the That is why the Bretton Woods adjustment process, and fatefully, some Committee remains relevant. “escape valve” for the limited floating We won’t restore the fixed exchange of exchange rates. rate system as it existed in the 1950s and It was not to be. One difficulty was 1960s—nor do we need to. that the United States itself failed over the We won’t forever maintain a single decade of the 1970s in its basic respon- national currency as the essential keystone sibility of maintaining the domestic of the system, nor should we want to. stability of its currency. Repetitive oil We won’t provide the same volume and financial crises undermined a sense of official development assistance—nor of collective responsibility for the finan- do we need to. cial system and economic development. But we do need recognition of some Sharp fluctuations in exchange rates upset basic elements of “good behavior” if competitive relationships. the international financial and trading The International Monetary Fund system is to flourish. and World Bank seemed to recede into We do need to recognize that the background, unable to cope with exchange rate practices are inherently the disturbances. But they survived, multinational and that greater stability and that was important. can be an international good. They symbolized the ideal of Bretton We do need appreciation of the need Woods—the belief in a common inter- for international standards with respect est in international cooperation, the to technology and its multiplying uses. importance of certain basic rules of good We do need to avoid trade dis­ behavior with respect to exchange rates, crimination in services as well as goods. and the need for development among We certainly need to recognize that the multitude of “emerging” nations. corruption is not only a “cancer on Quite specifically, the Fund was called development” but a bleeding scar on fair upon to undertake a central role in trade. resolving a succession of financial crises We certainly will need the leader- in the “emerging” world in the 1980s ship and ample financial resources for and 1990s. the Fund and the Bank when new

REVITALIZING THE SPIRIT OF BRETTON WOODS | 3 international financial crises arise, as That is to ask no more than the they surely will. response to the challenge faced at Bretton So let’s keep the spirit of Bretton Woods after the years of deconstruction Woods alive as we rethink the specific of World War II. The risks are real—eco- requirements of the new world. It is a nomic, political, military. They must be world without the single national focus dealt with. Many more countries demand of leadership that we once took for a seat at the table. Maybe a grand new granted. The growing challenge of “my conference to reach conclusions and country first and only” in a world in enforce reform is beyond any present which the fortunes of all nations are possibility. But surely a study and debate irretrievably tied together needs to be of new approaches is much in order. That recognized with a clear response. is where the Bretton Woods Committee Mission impossible? can help lead the way in new thinking for the 21st century.

4 | REVITALIZING THE SPIRIT OF BRETTON WOODS THE BRETTON WOODS MISSION Before, Then, Now

RICHARD A. DEBS International Council Chair, Bretton Woods Committee; Advisory Director, Morgan Stanley; former President, Morgan Stanley International; and former Chief Operating Officer, Federal Reserve Bank of New York

It is not an overstatement to say that Woods period with the post–Bretton the individuals who met in Bretton Woods period. Woods, New Hampshire, in 1944 set a course that changed, and remarkably improved, the way the world worked. PRE–BRETTON WOODS The objective and mission of the Bretton It is difficult, if not impossible, to sum- Woods Conference has continued to marize history, but in general, prior to guide global policy makers for decades Bretton Woods, relations between coun- since then—until now, 75 years later. But tries were often dictated by national now, challenges to the spirit of Bretton political leaders with parochial, nation- Woods have emerged from many political alistic self-interests that resulted in leaders in many countries. Multinational commercial conflict, trade wars, aggres- cooperation, which is the keystone of the sive economic and financial measures, , is being rejected and in many cases, military action and in many quarters, and isolationist nation- ultimately wars—wars that killed their alism has been reemerging. Where does own citizens as well as those of their the future lie? Is this just a passing phase adversaries and caused destruction in in global history, or is it a more extended all of the nations affected. Apart from ad period during which the Bretton Woods hoc alliances that often changed partners, ideals are rejected and there is a reversion diplomacy was based on confrontation to what the world was like before 1944? rather than cooperation in political and It may be too early to answer that, but military affairs, and competitive beggar­ in attempting an answer, it would be -thy-neighbor trade policies with little illuminating to compare the pre–Bretton or no concern for or vision of what the

REVITALIZING THE SPIRIT OF BRETTON WOODS | 5 long-term adverse effects of these strat- was that “to the victors go the spoils,” egies might be on their own countries. which had the effect of punishing the The idea that prosperity and stability people of the defeated country—usu- could better be achieved by one coun- ally through economic measures. The try if other countries with which it had idea of helping the defeated population relations had a sufficient level of prosper- recover from the effects of war—to try ity and stability, instead of poverty and to support stability and a minimum instability, was not considered. standard of living—was often beyond On a global basis, rules of law did consideration by the victors. not exist. There were attempts over the In the earliest days, when the world years by legal scholars aiming to codify was fragmented geographically, and international rules of law, and some were time, distance, and communication recognized by some nations in princi- among countries were a major political ple, but the execution of any rule was and economic barrier, such a strategy impossible if a sovereign nation or agency might not have been workable. But later, did not wish to comply. There were, of as the years went by, time, distance, and course, rules agreed to in treaties between communication between countries and some nations, but their geographic cover- individuals were no longer a barrier. age was not extensive, and their content Communication came to be virtually was not comprehensive. There were also instantaneous, and global transportation rules that had widespread application developed to provide rapid access to among groups of nations within exten- any other place in the world for indi- sive empires, such as the Ottoman, the viduals, businesses, governments, and British, the French, and the Spanish. But indeed armed forces. Yet even into these were laws dictated by the imperial the 20th century, the foreign policy rulers and had no jurisdiction beyond strategies of most nations continued the empirical borders. They were not to be based on trade wars, commercial international law. conflicts, currency manipulation, land It is noteworthy that the domestic aggrandizement—all backed up by the rule of law within each nation was in implicit—or explicit—threat of mili- many cases propagated by authoritarian tary force. leadership with virtually no represen- tation by the people of the country. In these cases, the leadership was not con- THE PRE–BRETTON strained by its public in formulating and WOODS 20TH CENTURY executing foreign policy vis-à-vis other During just the first half of the 20th cen- nations. If the leadership decided to use tury, leading up to the Bretton Woods military force as a result of such policy, Conference in 1944, the world suf- the citizens had to bear the risks of war- fered two disastrous world wars, during fare. The usual outcome of such wars which millions of people around the

6 | REVITALIZING THE SPIRIT OF BRETTON WOODS world were killed and maimed; and in law in 1930 was a major contributing the remaining years, between the two factor to the 1929 stock market crash wars, there was a global depression that in the United States, ultimately affect- created economic chaos, poverty, and ing the entire world. The impact of the degradation, and severely affected the subsequent world depression affected lives of millions of people throughout people around the globe and had a par- the globe. That is the record of the ticularly onerous effect on the people decades just prior to Bretton Woods. of the conquered countries, who had As a result of the First World War, already suffered the losses of the post- the people of the defeated countries war period—all of this resulting in the suffered particularly severely, without growth of nationalist fascism in any external help from the victors, and . Hitler and Mussolini and their who focused primarily on dividing nationalistic parties took power, and the the spoils of war among themselves. seeds of the Second World War were The Paris Peace Conference was pri- planted and soon blossomed. By 1944, marily concerned with reparations and World War II had caused massive death with geographic redistributions of ter- and destruction, and the war was still ritory formerly held by the defeated not over. countries. Indeed, the boundaries of This entire period was what the del- the countries of the Middle East were egates gathering in Bretton Woods had literally redrawn by senior officials of lived through themselves. By 1944 they the Allies, sitting in Paris and . knew the world wasn’t working well, Subsequently, the League of Nations and they set forth to bring about change. was formed under the leadership of President Wilson in 1920, with the stated objective of maintaining world POST–BRETTON WOODS peace. Unfortunately, it was not given In July 1944, as it appeared hopeful support by the international community that the world war would be coming of that period, and it certainly did not to a successful end for the Allies, senior achieve its objective of maintaining financial experts from 44 countries gath- world peace in the years that followed. ered in Bretton Woods for meetings Following the Paris Peace Conference, called The United Nations Monetary global trade and commerce were dramat- and Financial Conference. Stories about ically reduced in size, caused in large part the conference abound, one of which by the Smoot-Hawley legislation in the is about the arguments between John United States, whereby a protectionist Maynard Keynes of the UK and Harry Congress raised tariffs by about 45 per- Dexter White of the United States cent. US imports decreased by about regarding which currency—the dollar 65 percent. Ironically, the long debate or the pound—should underpin the new leading to the final enactment of that proposed international financial regime.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 7 White and the US dollar won that par- and Development (OECD), the Financial ticular argument, but that was a minor Stability Board, NATO, and indeed the part of the conference’s mission. That —were established in mission, in the words of US Treasury subsequent years, not directly born at, Secretary Henry Morgenthau, was that or succeeding from, the Bretton Woods the conference should “do away with the Conference but nonetheless reflecting economic evils—the competitive deval- the widespread recognition of the value uation and destructive impediments of multinationalism. to trade—which preceded the present At the same time that the Bretton war.”1 In many respects, the conference Woods Conference was being organized, succeeded in doing that. Overall, the preparations were being made for the basic mission of the conference was to establishment of what came to be the avoid the mistakes made in the past by United Nations. That institution traces narrow nationalistic policies, which too back to 1942 as a wartime measure, with often led to conflict and deadly wars. members pledging their resources against The objective was to aim for a rela- the Axis enemy. It developed into a post- tively peaceful, stable, and productive war international organization based world, supported by mutually beneficial on the principle of collective security. rules of law and assistance to those who Its charter was signed by 50 nations in needed it, all with the goal that every 1945. The objectives of the UN and the country would benefit by inhabiting Bretton Woods mission as they were then such a world. The basic path to that goal organized were similar in spirit: based was through international economic in general on multilateral cooperation, cooperation—that is, cooperation on different in specific objectives, but in a global scale. support of each other’s goals. In the initial phases, the institutional The establishment of a world bank structure that emerged was the creation was a major achievement of Bretton of the World Bank, the International Woods. Its original name was the Monetary Fund, and a currency regime International Bank for Reconstruction based on gold and the US dollar. and Development (IBRD): reconstruc- Other institutional arrangements were tion to deal with the devastation of the also discussed but not adopted at that Second World War, and development over time, including the concept of a world the long term for the less-­developed trade organization. Many other multi- countries suffering from poverty and national institutions—for example, the instability. Its membership grew to Organisation for Economic Co-operation include virtually all countries of the

1 Henry Morgenthau Jr., “Closing Address to the Conference” (Speech given at United Nations Monetary and Financial Conference, Bretton Woods, NH, July 1944), https://www.cvce.eu/obj/closing_address_ by_henry_morgenthau_jr_22_july_1944-en-b88b1fe7-8fec-4da6-ae22-fa33edd08ab6.html.

8 | REVITALIZING THE SPIRIT OF BRETTON WOODS world, all of which subscribe to, and are finally institutionalized in 1961 with governed by, Bretton Woods rules— the establishment of the United States rules that apply to both borrowers and Agency for International Development lenders. It was a new concept on an (USAID). By then, most other devel- international scale, and it worked. It oped countries had also established has had growing pains over the many national foreign aid agencies and were years that it has been in operation, but participating as members in other inter- generally it has been very successful national development agencies such as in achieving its objectives. The World the Inter-American Development Bank Bank Group’s operations have grown in and the Asian Development Bank. scope and breadth, and now include, in In the early postwar period, these addition to the IBRD, the International agencies financed the reconstruction Development Association, a vehicle that of countries that were affected by the provides interest-free loans and grants to war, including the Axis countries, the the poorest countries, as well as signifi- populations of which sorely needed help. cant debt relief; its private-sector arm, All of these efforts were based on the the International Finance Corporation, recognition that poverty and instability which makes equity investments and should be fought throughout the world loans as well as providing advisory ser- in order to support world prosperity and vices; and the Multilateral Investment stability. All major nations today main- Guarantee Agency, which provides tain aid agencies based on the principles political risk insurance. that were first put forth by the Bretton The mission of the Bretton Woods Woods Conference in its creation of Conference was also reflected in activ- the World Bank. ities undertaken unilaterally by the Apart from the issue of reconstruc- United States, and then ultimately by tion and development aid on a global other nations, to establish foreign aid basis, as institutionalized in the World agencies. The most innovative and Bank, the Bretton Woods Conference remarkable program—the Marshall was also focused on the issue of world Plan—began with a speech in 1947 trade. Looking back to the experience of by then Secretary of State General the 1920s and 1930s, when high tariffs, George C. Marshall, a wartime hero, competitive currency devaluations, and who called for a comprehensive pro- discriminatory commercial practices gram to rebuild Europe—a Europe that destabilized the world, US President included former enemy Axis countries. Roosevelt and UK Prime Minister This plan was succeeded by additional Churchill shared the view that free trade US foreign aid programs, such as the not only was good for the economy but Point Four Program, as well as a vari- also helped ensure peace in the world. ety of other specialized agencies, all This belief was reflected in of which were brought together and Charter of 1941, issued by Roosevelt and

REVITALIZING THE SPIRIT OF BRETTON WOODS | 9 Churchill, which included a commit- Since then, the work of the WTO and ment by both countries “to further the the important role it has played in various enjoyment by all states, great or small, trade agreements among its member victor or vanquished, of access, on equal countries has increased world trade. In terms, to the trade and to the raw mate- recent years, however, while acknowledg- rials of the world which are needed for ing the achievement of increased trade, their economic prosperity.” They also there has been criticism of the terms of committed to “the fullest collaboration such treaties and their perceived negative between all nations in the economic impacts on domestic businesses and labor field with the object of securing, for conditions. The present US adminis- all, improved labor standards, economic tration itself has criticized the WTO advancement, and social security” and and has also withdrawn from treaties in to “respect the right of all peoples to which the United States had long been choose the form of government under a leading member. Although it is early in which they will live.”2 the game, if this trend continues it could Preparatory work was done at the have a detrimental impact not only on Bretton Woods Conference on how to world trade, but also on domestic eco- structure an institution to deal with the nomic conditions affected by the results trade issue, but obstacles arose in part of any trade wars. because the British Commonwealth had Together with the World Bank, the its own preferential system of tariffs and other most important institutional change the Smoot-Hawley tariffs were still in was the establishment of the International effect in the United States. After much Monetary Fund (IMF). Its objectives, work, three years later, agreement was as stated in its Articles of Agreement, reached on the General Agreement on are to promote international monetary Tariffs and Trade (GATT) and a draft cooperation, international trade, high charter for the International Trade employment, exchange rate stability, sus- Organi­zation (ITO). The ITO was not tainable economic growth, and making adopted because of opposition by the resources available to member countries United States, but GATT was adopted, in financial difficulty. Upon its founding, and it governed international trade for one of its important functions was to about 50 years, proving successful in oversee the fixed exchange rate arrange- meaningful rounds of tariff reductions. ment that was agreed to at the time, Agreement was finally reached on a based upon the dollar and gold. The new trade institution, to be known as fixed exchange rate arrangements were the World Trade Organization (WTO), abandoned in the 1970s, but oversight in 1995. of exchange rate arrangements between

2 “The Atlantic Charter” (Declaration of principles issued by the president of the United States and the prime minister of the , Placentia Bay, Newfoundland, , August 14, 1941), https://www.nato.int/cps/en/natohq/official_texts_16912.htm?.

10 | REVITALIZING THE SPIRIT OF BRETTON WOODS countries continued to be a responsibility by the United States, with the Treasury of the IMF. In one basic sense, the IMF’s Secretary saying to the world that “the primary responsibility is to ensure the dollar is our currency, but it’s your prob- stability of the international monetary lem”—seemed to reflect a tilting back system. The fund’s mandate was expanded to the days before Bretton Woods. in 2012 to include all macroeconomic However, reality soon set in with the and financial-sector issues that bear on emergence of new international crises to global stability. The institution has been be dealt with: the oil embargo of 1973, crucial in supporting and strengthening the oil price shocks of 1974 and 1979, global stability by dealing with financial the petrodollar recycling crisis of 1974 crises that have arisen over the years in through 1980, the resultant growth of the a variety of countries around the world. Latin American debt crisis in the decade The IMF’s role with respect to a of the 1980s—all against the background fixed-rate exchange regime changed of raging inflationary pressures in the dramatically during the Nixon admin- United States and other major coun- istration in the United States. In 1971, tries—presented major challenges. In Nixon announced his New Economic that atmosphere, it became clear that Policy (known abroad as the “Nixon the Bretton Woods system should not shock”), which froze prices and wages, be declared obsolete and that the IMF‘s and suspended the dollar’s convertibil- role in dealing with these new challenges ity into gold—the underlying basis for should be strengthened, not weakened. the fixed-rate regime. This policy led Any talk of the demise of the Bretton to the Smithsonian Agreement, whose Woods institutions was dismissed by US “agreed” regime did not last long, and Treasury Secretary Henry “Joe” Fowler, after several other experiments, it wasn’t who stated that if we didn’t have the until 1973 that the current regime of IMF today, we would have to invent floating exchange rates was established one in a hurry. Secretary Fowler was also and followed. instrumental in recognizing that, until At that point, some observers said then, the Bretton Woods institutions did that the Bretton Woods system was not have any public constituency that dead. Some journalists and politicians would be knowledgeable or influen- began to wonder aloud whether there tial enough to assess and support them. was any need to have an IMF or indeed Together with other senior officials and the Bretton Woods institutions in gen- financial experts, he helped organize eral. Some of the other measures taken the Bretton Woods Committee in 1983. by the US government at that time— Since then, the committee has expanded such as an extra 10 percent tariff on internationally and performed the role imports, or the process by which the of constructive critic and supportive whole issue was handled unilaterally public observer.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 11 NOW—75 YEARS LATER Another difference is in the much It should seem clear from a compari- closer integration of the affairs of all son of the pre–Bretton Woods era to countries. The world has indeed become the post–Bretton Woods era that the the global village. Communication, Bretton Woods approach was by far transportation, finance, business, med- the preferred route to follow—for any icine, entertainment, manufacturing, country, and for every country. History employment have all become globally has proven that a nationalistic, isolation- connected. Some of the effects of glo- ist, protectionist approach to dealing balization in domestic economies have with other countries of the world can been criticized, with justice, but most lead, and has often led, to instability, of the problems cited can be resolved conflict, and wars. The 75 years of the by adjustments, both domestically and Bretton Woods era, based on interna- internationally, through cooperative tional cooperation, has not suffered any negotiation. Today, a nation cannot global wars or global depressions, and be an island unto itself and must deal has enjoyed relative stability—certainly with, and be part of, an increasingly relative to the decades before Bretton interdependent world. Woods. It has been a period during Another difference between pre– which the world has had to deal with and post–Bretton Woods is the fact inevitable economic and social chal- that there are more democracies in the lenges and even serious crises, but not world now than there were then. This worldwide war and depression. There welcome result cannot be attributable have been regional wars during this solely to Bretton Woods, but it was period, and hundreds of thousands of implicitly encouraged and supported by people have suffered from them, but the reforms of the Bretton Woods con- nothing on the scale of global wars. ference and articulated by those leaders There were the years of the Cold War, who led the way with world reform in but those tensions were also dealt with, the 1940s, beginning with the precepts without turning them into a hot war. of the Atlantic Charter. There are other notable differences So the question remains: Today we between the pre– and post–Bretton see a reversion to many of the economic Woods periods. The first is the birth of and political policies and practices that nuclear weapons and their subsequent were common pre–Bretton Woods. We availability to many nations. The damage see the development of nationalism, iso- wrought to the world in the event of a lationism, and protectionism, reflected in war employing those weapons would inward-looking economic and political be catastrophic. Foreign policies should policies. In recent years, these tendencies be aimed at minimizing the risk of war, have been evidenced in several countries. not permitting the risk to increase by If they continue to develop further, the aggressive, warmongering tactics. people of the world may find themselves

12 | REVITALIZING THE SPIRIT OF BRETTON WOODS set back to the troublesome days of In the words of , who was life before Bretton Woods. Therefore it once chairman of the Bretton Woods would be most timely, in celebrating the Committee, “‘Bretton Woods’ is not a 75th anniversary of the Bretton Woods particular institution—it is an ideal, a Conference, to recognize its long-proven symbol, of the never-ending need for value and further strengthen the poli- sovereign nations to work together to cies, practices, and institutions that were support open markets in goods, in ser- inspired by the Bretton Woods mission vices, and in finance, all in the interest of a of international cooperation. stable, growing, and peaceful economy.”3

3 Paul A. Volcker, “The Future of the Global Financial System” (Remarks by Paul A. Volcker at the 2017 Annual Meeting of the Bretton Woods Committee, The Volcker Alliance, New York, NY, April 19, 2017), https://www.volckeralliance.org/publications/future-global-financial-system.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 13 RETHINKING MULTILATERALISM FOR OUR FUTURE WORLD

JAMES D. WOLFENSOHN Co-chair, Bretton Woods Committee, and former President, World Bank Group

The world of today looks starkly differ- A CHANGING GLOBAL ent than the world of 1944. When you LANDSCAPE consider several of the tectonic shifts The only thing we can guarantee is that occurring before our eyes—economic the players who are shaping our world power, demographics, technology, and tomorrow will be very different than climate among them—and you con- those who have shaped it to date. Any sider the velocity at which change is number of forecasts tell a similar story. A occurring, it’s safe to surmise that the recent Standard Chartered Bank report world of the next 75, 50, 25, or even 10 looking ahead to only 2030 ranks China years will seem very unfamiliar. Below and as first and second, respectively, are some of the challenges, at least as I among the largest world economies by see them, and a few thoughts on how nominal GDP. The United States comes we will need to respond if we hope in at number 3, and the only EU coun- to advance peace, prosperity, and the try in the top 10 is Germany, coming well-being of humanity. in below Indonesia, Turkey, , and at number 10.1 Advanced econ- omies that, together, once contributed 80 percent of global GDP are projected

1 Enda Curran, “These Could Be the World’s Biggest Economies by 2030,” Bloomberg, January 8, 2019, https://www.bloomberg.com/news/articles/2019-01-08/world-s-biggest-economies-seen-dominated- by-asian-ems-by-2030.

14 | REVITALIZING THE SPIRIT OF BRETTON WOODS to account for only 43 percent in the can do much of the work currently done coming decades.2 at the World Bank. In addition, many of Conversely, Asian economies cur­ the developing countries may create and rently on the rise will come to dominate. use their own institutions to provide for By 2050, the leading seven emerging-­ themselves better-adapted services and market countries (China, India, financial backing as a real alternative to Indonesia, Brazil, , , and current options. With the world changing Turkey) are poised to represent double in this way, new leaders will emerge and the collective size of the G7 countries.3 new centers of power will develop, chang- Vietnam, the Philippines, and ing our traditional system of organization will all likely rise into the world’s top in international finance. 20 economies.4 And Africa is poised Frankly, the system can no longer be to become an economic engine as its molded by or for the West. For the past population approaches 2 billion in 2050. 75 years, the Bretton Woods institutions Clearly, the economic strength of the have evolved in the context of a uni- West is weakening, and these dramatic polar monetary system dominated by shifts in the balance of power stand to the US dollar. Following the collapse of have profound effects on the future the Bretton Woods fixed exchange rate governance of our global economic system in the early 1970s, the brand of system. We have come to accept that the multilateralism that emerged was lim- International Monetary Fund (IMF) and ited in scope and organized around the the World Bank are the natural leaders of leadership of the G7. This group, while the international community, residing as economically powerful, was and is ill they do in Washington. But there will equipped to address problems such as be no reason why China and India do inequality between the world’s advanced not demand a leading position in the economies and the so-called “periphery.” organization of the international commu- And, despite globalization’s­ great successes, nity. China has already applied its global many among the G7 are now facing rising influence to bring together most of the populism and economic nationalism, in nations of the world to be shareholders part from the widening inequality divide in a new global investment bank (The that has occurred within their nations. Asian Infrastructure Investment Bank, or The unequal distribution of the ben- AIIB) led by China—an institution that efits of growth presents a major threat

2 Organisation for Economic Co-operation and Development (OECD), “Looking to 2060: Long-Term Global Growth Prospects—Bloomberg Brief,” OECD, November 9, 2012, http://www.oecd.org/eco/ lookingto2060long-termglobalgrowthprospects.htm. 3 PricewaterhouseCoopers, “The World in 2050: The Long View—How Will the Global Economic Order Change by 2050?” (PwC UK, London, 2017), https://www.pwc.com/gx/en/world-2050/ assets/pwc-the-world-in-2050-full-report-feb-2017.pdf. 4 PricewaterhouseCoopers, “The World in 2050.”

REVITALIZING THE SPIRIT OF BRETTON WOODS | 15 FIGURE 1. POPULATION PROJECTION BY THE UN, 2050 Figure shows medium-variant projection by the UN Population Division.

SOURCE: UN Population Division, Our World in Data, 2017 revision, https://ourworldindata.org/future-population- growth. Reproduced under Creative Commons license.

to global economic progress. In the and put resources to good use in service postwar era, one-sixth of the world’s of all their people. population held 80 percent of its wealth. In the modern era, we will also need This was the reality of the world in leaders steering a global development which I grew up, and I was determined agenda who recognize and respond to over the course of my career to address the demographic forces shaping our the needs of the other five-sixths of the planet. According to the UN, more world. With the turn of the 21st cen- than half of the anticipated growth in tury, the pendulum began to swing in global population between now and the direction of increased equality. Yet 2050 is expected to occur in 10 coun- still today, approximately 80 percent of tries: India, Nigeria, the Democratic global GDP goes to only 20 percent of Republic of the Congo, Pakistan, the world’s people. But there is hope. Ethiopia, Tanzania, the United States, There is potential to begin to flip the Uganda, Indonesia, and Egypt (figure script if we can achieve rapid growth 1).5 By 2050, Africa will make up 25 in emerging and developing economies percent of the world population, and

5 United Nations Department of Economic and Social Affairs (UN DESA) Population Division, “World Population Prospects: The 2017 Revision, Key Findings and Advance Tables” (Working Paper No. ESA/P/WP/248, UN DESA Population Division, New York, NY, 2017).

16 | REVITALIZING THE SPIRIT OF BRETTON WOODS India will have surpassed China as the to automation in the next few decades.9 world’s most populous country.6 In addition, nearly two-thirds of current Youthful populations in these primary school students will be employed countries will be the drivers of global in jobs and industries that do not cur- economic expansion as graying pop- rently exist. Factories will no longer be ulations in advanced economies cause staffed by thousands of people. A produc- economic growth to slow. Globally, tion line that once employed 50 people the number of people 60 and older is can now be staffed by two machines expected to double by 2050, and the that can turn out risk-free products in greatest percentage of this senior pop- a way that the founders of the Bretton ulation will be in Europe.7 A shrinking Woods institutions could never have working-age population in the euro area imagined. But between our existing mul- is projected to cause an average decline tilateral and regional development banks, in its output growth of -0.2 percent the private sector, and other sources of annually beginning in the 2020s.8 A development finance, we have collective growth counterbalance will be needed. knowledge and pools of resources that Attention to improving the climate for can be catalyzed in innovative ways that investment in the countries that lead were equally unimaginable in 1944. population expansion will be essential Any development model that can for job creation among their young hope to engage people in a techno- people, who will fuel the lion’s share logically driven labor market must of future global growth. emphasize not only job creation but Technology will most likely have the also education. The educational chal- biggest impact on the labor force of the lenge in lower-income countries is to future—and we need global leaders who improve their education system enough can anticipate the resulting disruption so that students leave school with the and will collaborate to capitalize on the skills they will need for a better life opportunities. In 2016, the World Bank and productive work. The report of the estimated that up to two-thirds of all jobs International Commission on Financing in developing countries are susceptible Global Education Opportunity10 warns

6 UN DESA Population Division, “World Population Prospects.” 7 UN DESA Population Division, “World Population Prospects.” 8 European Commission, Directorate-General for Economic and Financial Affairs, “The 2018 Ageing Report: Economic & Budgetary Projections for the 28 EU Member States (2016–2070)” (European Economy Institutional Paper 079, European Commission, , Belgium, 2018), https://ec.europa.eu/info/sites/info/files/economy-finance/ip079_en.pdf. 9 World Bank, “World Development Report 2016: Digital Dividends” (World Bank, Washington, DC, 2016). These estimates are aggregate numbers that combine all economic sectors (namely, agriculture, industry, and services). 10 International Commission on Financing Global Education Opportunity, “The Learning Generation” (The Education Commission, New York, NY, 2016).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 17 that only one-half of students in pri- trend, allowing women to take more mary schools and little more than a leadership positions in governments and quarter of children in secondary schools private enterprise. Advancing gender in low- and middle-income countries equality as a global norm ensures that are learning basic academic skills, and economic progress benefits more people. higher education institutions are not My support for countries’ efforts responding adequately to the need for to build their human capital through new technical skills. The countries that investments in education, health, and are the most able and quickest to respond social protection programs comes from to this learning crisis will be the future’s my deep belief that the governments economic leaders. and citizens of countries should be the Already, we have seen the prominence primary movers of their development of East Asian countries in leading the agenda. Literate and able citizens are a league tables in academic performance, robust foundation on which to build and new centers of science and tech- progress, but the rule of law and cit- nology have arisen in China, India, and izen participation should also be part South Korea. We need similar progress of that foundation. Perhaps for the first in Africa and South Asia. Young people time in the history of the World Bank, need to adapt their professional objectives as its president I spoke strongly—and and pursue training for new occupations repeatedly—against weak governance and technologies. Without assistance, and corrupt practices that squander however, their efforts will hardly be an valuable resources and stall social and adequate response. Resources must be economic progress. With so much change allocated to upgrade the skills of the labor on the horizon, good governance and force as well as develop holistic social trans­parency will be critical tools for protection systems that can support the establishing confidence and trust between needs of dislocated workers. public institutions and citizenry. It has also become apparent that In the past two decades, pandemic countries benefit when women partic- events, violence, and terrorist activ- ipate in economic and civic activities. ities worldwide have reminded us International indicators show that time and again of how suddenly and women’s educational levels have risen quickly human lives and talent can be significantly in recent decades, reach- lost. Public health programs and med- ing levels similar to (or higher than) ical innovations have prolonged and men’s, except in the poorest countries or improved lives, but there is a continuing marginalized populations. Eliminating role for global institutions to support gender-based prejudice in the work- initiatives that increase global prepared- place and taking down legal barriers ness for threats to health. And I believe for women to own land or hold wealth that there is a role for global leaders will further strengthen this positive to work with national leaders to fight

18 | REVITALIZING THE SPIRIT OF BRETTON WOODS insidious religious and cultural intol- the ravages of extreme weather events. erance and to mitigate inequalities in Infrastructure investments will be futile opportunity and wealth that fuel anger without first addressing the issue of sus- and violence among the dispossessed. A tainability in the face of climate shocks. In unified and coherent support by global fact, thoughtful investment now can have institutions for these global norms can, positive spillover effects for the future I believe, make a difference. global economy. UN Secretary-General Climate change and challenges Guterres recently remarked that investing brought about by environmental dis- in climate action could result in global ruption and resource constraints across productivity gains of US$26 trillion by our planet will be a massive global chal- 2030.12 But let us be realistic. The scope lenge that we should not underestimate. of this challenge means that it can be By 2050, an estimated world population effectively addressed only by a coalition of 9.8 billion people—2 billion more of multilateral institutions, national gov- than we have today—will be tapping ernments, and the private sector. Twenty into the earth’s already strained water years ago, the World Bank focused only supply and amplifying carbon emissions.11 on “doing no harm” to the environment, Rapid population growth, accompa- but this pledge is no longer sufficient. nied by increased industrial output and Today, the bank has an environmental energy use, are exacerbating environ- portfolio of US$16 billion, including mental degradation. climate change and biodiversity programs. Extreme weather events that seem It must continue to prioritize resources to be occurring with greater frequency in these areas, and it must enjoin other due to global warming remind us of institutions, governments, and the private the need for immediate action to mit- sector to do the same. igate the effects of climate change. In 18 of the last 20 years, there have been substantial and previously not seen A FUTURE OF interventions by nature that have dis- MULTILATERALISM rupted economic development efforts. How does the world of today respond Hurricanes Katrina, Harvey, and Maria to the great shifts we are already see- illustrate the ease with which a natural ing and the challenges that tomorrow disaster can wipe out billions of dollars will bring? The challenges are gen- of investment. Infrastructure in dense erational, not isolated to any country urban areas is particularly vulnerable to nor solved by domestic policies alone.

11 UN DESA Population Division, “World Population Prospects.” 12 Antonio Guterres, “Secretary-General’s Remarks on Climate Change” (Speech, New York, NY, September 10, 2018), https://www.un.org/sg/en/content/sg/statement/2018-09-10/ secretary-generals-remarks-climate-change-delivered.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 19 To me, the implications are clear: it’s meet the changing faces and features of time to rethink our global institutions the world economy, they must be careful and our cooperative, open international to avoid mission drift. The World Bank order to accommodate change in a way must retain a global competence and a that can deliver beneficial outcomes global diagnostic capacity, but this does for more, and ideally all, nations and not mean it should “do everything.” It peoples across the globe. does imply more selectivity and much First and foremost, greater inclusivity better partnership and division of labor of rising economic powers within our among all the players: international insti- global governance networks is vital. tutions, the United Nations, bilateral The growing recognition of the G20 donors, nongovernmental organizations, as a premier coordinating mechanism philanthropists, and the private sector. for global agenda setting and prioritiza- With a new World Bank president at the tion is a noteworthy construct. Within helm comes a new opportunity for the existing institutions, we can formally Bank to clearly articulate, champion, and promote the newer economic powers coordinate a global development agenda, that are driving today’s growth into a tackling challenges that are beyond the bigger global leadership role, empow- capability of any individual country or ering them to own the responsibilities regional forum to address effectively. that come with that role. Accelerating To this end, the World Bank and quota reform within the IMF is one its sister regional development insti- clear example of where this type of shift tutions can do more to help countries can occur. We need innovative and bold help themselves. Country programs and solutions, coordinated by new global development projects need to account leaders, to address the rising concerns of for global shifts such as demographic inequality, education, labor and produc- and technology trends, but they must be tivity gaps, climate change, and the like. fully owned by the local stakeholders if The Bretton Woods institutions should they are to succeed. Governments must rejuvenate themselves by becoming the be empowered to set their own devel- meeting place for emerging economies opment objectives, leveraging creative to join in forging solutions to address financial tool kits placed at their disposal the pressing global economic challenges by the wider international finance com- of the next generation. munity, including the private sector. The world will continue to need We must accept that projects receiving multilateral institutions to be guardians development financing or other forms of global public goods, addressing issues of multilateral support are not World such as pandemic threats, climate change, Bank, AIIB, or IMF projects—they and nativist restrictions on international are Indian projects, Ugandan projects, mobility. But as these institutions adapt to Nigerian projects.

20 | REVITALIZING THE SPIRIT OF BRETTON WOODS Multilateral institutions and the lead- question is not necessarily how individual ers steering them will also need to be bodies and institutions should be restruc- better partners with other stakeholders. tured, but how the system can bring To be a good partner, they must be ready its collective firepower, knowledge, and to listen and respond to constructive goodwill to the table to solve the world’s criticism. I want to see a World Bank problems. We must draw upon a growing, that is open to learning from others and but still fragile, asset: an international that holds itself accountable. When I was recognition of global interdependence. at the helm, I listened to the needs of Finally, if we can be bold and all our constituents, which helped shape forward-looking­ enough to act now my vision for the institution. At that and reimagine ways in which our existing time, our central purpose was to save open, rules-based global economic system countries from crisis and help the world’s and institutions can more aptly represent poor forge better lives. In response, we and support our world of tomorrow, we implemented the Heavily Indebted Poor must first embrace how we, as individuals Countries (HIPCs) Initiative, a debt relief and as a Bretton Woods Committee, program intended to break HIPCs out can change. Fundamentally, how do we of the debt trap and free up resources for challenge ourselves to see past our own poverty reduction initiatives. biases? Many of us, myself included, were How can a better partnering approach educated in Western tradition. In school, translate across the broader landscape I learned about British history, not Asian of multilateral development banks? As history. I attended the 29th G8 it stands, the world’s multilateral insti- in in 2003, when Indian and tutions are still too siloed, resulting in Chinese representatives were invited to programmatic overlap, duplication, attend as guests for the first time. They and competition. The AIIB, the New were not accepted as being a part of the Development Bank established by the central group, nor were they invited to BRICS countries (Brazil, Russia, India, attend the most consequential meetings. China, and ), and the African Now these economies are among Development Bank, among others, are the fastest growing in the world, and poised to help address regional financ- their continued growth is becoming less ing gaps. The recent report of the G20 reliant on North-South cooperation. Eminent Persons Group on Global The Belt and Road Initiative is creating Financial Governance offers very infrastructure that will greatly increase thoughtful proposals and encourages regional trade and investment flows, taking a systems approach to multi­ and the free trade agreement among lateralism, which I agree is needed.13 The the BRICS countries is increasing

13 G20 Eminent Persons Group on Global Financial Governance, Making the Global Financial System Work for All (n.p.: G20 EPG, 2018), https://www.globalfinancialgovernance.org/assets/pdf/ G20EPG-Full%20Report.pdf.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 21 emerging-­market inclusion in the global The truly global involvement and gains of trade. As the world becomes diversity of perspectives represented more multipolar, there is now real risk across this compendium gives me that unilateral agendas and bilateral or encouragement that the spirit of Bretton regional preferences will chip away our Woods remains strong today. It is how cooperative international order. we apply this spirit—within an inter- I believe that is where the Bretton connected, multipolar world—that Woods Committee can help—if it may ultimately determine whether we recasts and retools itself to be fit for can continue to evolve and strengthen purpose in a multipolar world. We will our current system and institutions to need new leaders—representative of the meet the needs of our global citizenry. world of tomorrow—with global clout Hopefully, enough of us will appreci- and sincerity to bridge conversations ate that our human interconnectedness and perspectives, encourage economic outweighs our many differences. collaboration over confrontation, and champion the committee’s mission in emerging centers of power.

22 | REVITALIZING THE SPIRIT OF BRETTON WOODS We have come to recognize that the wisest and most effective way to protect our national interests is through international cooperation. This is to say, through united effort for the attainment of common goals. This has been the great lesson of contemporary life, that the peoples of the earth are inseparably linked to one another by a deep, underlying community of purpose.

—U.S. Treasury Secretary Henry Morgenthau Jr. at the closing session of the 1944 Bretton Woods Conference

REVITALIZING THE SPIRIT OF BRETTON WOODS | 23 U.S. Secretary of the Treasury Henry Morgenthau Jr. speaking at the Bretton Woods Conference.

Source: Bettmann/Getty Images LEADERSHIP OF THE BRETTON WOODS INSTITUTIONS

REVITALIZING THE SPIRIT OF BRETTON WOODS | 25 THE INNOVATIVE MONETARY FUND

CHRISTINE LAGARDE Managing Director, International Monetary Fund

The International Monetary Fund (IMF) international order had broken down was born during that remarkable multi- amidst trade protectionism and compet- lateral moment after World War II, when itive currency devaluations. Imploding the nations of the world joined together world trade had deepened the reach of in a cooperative endeavor, determined the Great Depression, exacting huge eco- to avoid the mistakes of the past that had nomic, financial, and social costs that led to devastation and ruin. ultimately gave rise to nationalist and Instead of insularity and the suprem- populist movements, culminating in the acy of national interests, they chose outbreak of World War II. collaboration and the global common Against this backdrop, the founders good, recognizing that if countries of Bretton Woods identified three core worked together in the common interest challenges of the international mone- and helped each other in times of need, tary system: promoting international then everyone could prosper. This was a monetary cooperation, supporting simple idea, but an immensely powerful the expansion of trade and economic one. It is an idea that has stood the test of growth, and discouraging policies that time, despite the enormous changes that would harm prosperity. have taken place in the global economy The world of today is very different over the past three-quarters of a century. from that of Bretton Woods—in part The principal architects of Bretton because of the shifting economic weight Woods—John Maynard Keynes of the of emerging-market economies and the UK Treasury and Harry Dexter White of rise of private capital that now dwarfs the US Treasury—were deeply influenced official flows. Although the specific by the events of the interwar period, challenges—and correspondingly, the when multilateralism and the liberal Fund’s responses—have changed over

26 | REVITALIZING THE SPIRIT OF BRETTON WOODS time, at their core, the goals of the inter- original Bretton Woods system of fixed national monetary system remain much exchange rates in 1973. This system was the same. designed to restore trust, certainty, and order following the interwar chaos of beggar-thy-neighbor policies. In partic- INNOVATION AND ular, the Fund would provide temporary FLEXIBILITY balance-of-payments support so that Over the seven-plus decades of its exis- deficit countries would devalue their tence, the IMF has focused on these currencies only in cases of “fundamental goals and proven itself to be a highly disequilibrium.” innovative institution that has responded This system served the world well—it to emerging global trends and to the laid the foundation for strong and shared challenges confronting its member- growth underpinned by a remarkable ship. This 75th anniversary of Bretton run of financial stability. Yet it came Woods provides an opportune moment increasingly under strain in the late to reflect upon how the institution has 1960s and broke down irreparably in the evolved in the past—and must continue early 1970s. The IMF adapted quickly to evolve in the future—to adapt to the to this new reality, recognizing that its changing world order. From a small mandate for global financial stability band of 44 countries huddled in a small remained as relevant in the new order New Hampshire town in 1944, the IMF as in the old. In response to the 1973 now has a near global membership of oil price shock, the Fund updated its 189 countries—a testament to its con- lending instruments to help members tinued relevance. adjust to the changed global envi- From the very beginning, the ronment, creating both the Extended IMF helped countries address major Fund Facility (for more protracted bal- new challenges through collaboration. ance-of-payments problems than could Complementing the Marshall Plan, we be handled by its traditional Stand-By helped Europe rebuild from the rubble Arrangement) and the Oil Facility for of war. Our loans gave countries breath- countries facing the sticker shock of ing space to stabilize their economies in massively higher energy import bills. difficult times and implement policies to With the onset of the developing-­ promote growth. As the postwar years country debt crisis in 1982, the Fund progressed, the IMF helped the newly again had to adapt its policies, proce- independent countries of Africa and dures, and facilities to help members Asia build their institutions and gain a get back on their feet. During this time, secure foothold in the global economy. the Fund also responded to the specific A major test of the IMF’s flexible needs of its low-income members, offer- mandate came with the collapse of the ing tailored and concessional lending

REVITALIZING THE SPIRIT OF BRETTON WOODS | 27 facilities based on the need to generate The emergence of global imbalances growth and reduce poverty. in the middle of the first decade of As the 1980s drew to a close and the 21st century spurred the Fund to developing countries finally emerged sharpen its exchange rate surveillance from the “lost decade” of the debt crisis, and to achieve greater symmetry in the the IMF took on the unprecedented burden of adjustment between surplus challenge of helping the countries in and deficit countries, and greater even- the former Soviet Union and central handedness in surveillance over fixed and eastern Europe transform them- and floating exchange-rate countries. selves from centrally planned to market The Fund’s Integrated Surveillance economies. This task required numerous Decision provided the necessary legal innovations in the policies and practices framework for a more encompassing of the Fund. And even though the scope oversight of cross-border spillovers, and of reforms was far wider than that of for a more multilateral and cooperative traditional Fund-supported programs, approach to addressing imbalances and the Fund played a major role in helping maladjustments in the international countries adjust and achieve macro- monetary system. economic stability and external viability. The 2008 global financial crisis and The Fund continued to respond to a its aftermath once again led to further changing global landscape as the 1990s innovation at the Fund. Both conces- progressed—including by helping coun- sional and nonconcessional lending tool tries overcome the Mexican peso crisis kits were revised and expanded, includ- and the Asian financial crisis, both of ing strengthening the global financial which reflected the growing size and safety net with the creation of “crisis interconnectedness of the global econ- prevention” contingent financing instru- omy. A proactive response required ments—a reflection once again of the the IMF to develop new facilities and enormous growth in global cross-border policies to provide the exceptionally financial linkages. In the process, the large amounts of financing needed, and IMF deployed its firepower and sup- to introduce new analytical tools and ported its member countries, committing frameworks (such as the balance sheet over US$500 billion to help secure the approach, more rigorous debt sustain- global financial system. Importantly, the ability analysis, and stricter safeguards IMF introduced zero-interest loans on for loans above the Fund’s normal concessional lending to help support credit limits). It also required a funda- low-income countries in the wake of mental rethinking of program design the global financial crisis. We worked and an expansion of surveillance to with our membership to craft stron- better cover financial-sector issues and ger financial-­sector regulations so that, vulnerabilities. together, we could prevent the next crisis.

28 | REVITALIZING THE SPIRIT OF BRETTON WOODS Our lending policies were adapted to among the 10 largest shareholders of provide for a graduated recourse to debt the IMF. In 2016, the Chinese renminbi restructuring for cases in which adjust- was added to the Special Drawing Right ment alone is insufficient to ensure debt basket, joining the US dollar, euro, sustainability. Japanese yen, and British pound. This IMF surveillance was also enhanced development marked yet another mile- with a sharpening of policy advice on stone in ensuring that the fund reflects macroeconomic and macrofinancial the current realities of the global policies, management of cross-border economy. capital flows, and structural reforms. The IMF has also become more To provide greater scrutiny of exter- open, transparent, and diverse than at nal imbalances, a new External Sector any time in its history. Today, IMF Report was introduced, providing a staff represents 147 countries, and over multilaterally consistent assessment of 44 percent of our staff is female. This external positions and policies in the is good progress, but there is certainly major economies. The Fund’s members more work left to do. also approved a framework (the “insti- tutional view”) to guide policy advice on how best to harness the benefits THE NEXT CHAPTER of capital flows while managing the Some of the current challenges fac- associated risks. In addition, requisite ing the global economy today would analytical tools were developed to give have been familiar to our forebears— the Fund cutting-edge technology to including external imbalances, rising identify vulnerabilities and provide early inequality, a perception that the gains warning against emerging risks and from globalization are not being shared possible crises. fairly, anxieties about how technology At the same time, the IMF enhanced affects job prospects, and frustrations its capacity-development efforts and about corruption. Yet other challenges helped governments around the world are entirely new—such as the effects on modernize their economies. Our capaci- growth and financial stability that come ty-building programs now cover a range from digitalization and the looming of areas, from working with central specter of climate change and other banks to modernize financial systems, environmental hazards. And those to training nearly 30,000 individuals at Bretton Woods in 1944 would be through free online economics courses. astounded at the speed with which IMF governance has also changed developments—economic, financial, significantly over the decades; for or political—ricochet around the world, example, the BRIC countries (Brazil, underscoring the need for agility and Russia, India, and China) are now all cooperation.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 29 The flexible mandate of the Fund So as we celebrate the 75th anniver- allows us to adapt continually to chang- sary of the Bretton Woods Conference, ing circumstances. In fact, in addition it is timely to recognize that its genius to offering top-notch advice on fiscal, lay in creating an international cooper- monetary, exchange rate, and finan- ative institution that could, and would, cial policies, the IMF of today is able constantly innovate to meet the evolving to help countries tackle issues such as needs of its membership. I am confident inequality, gender equity, corruption, that as we look back again in another 25 and climate change. We can see that years, at the IMF’s 100th anniversary, we these issues have implications for macro- will have identified a new set of issues economic stability and growth, even if that are barely even on the radar today. I those implications tend to play out over am equally confident that the IMF will a longer horizon. We are also elevating once again be able to meet these new the importance of social spending in challenges, just as it always has. the IMF’s work—because such spend- ing matters for promoting stable and inclusive growth.

30 | REVITALIZING THE SPIRIT OF BRETTON WOODS COMMON PURPOSE ADVANCING DEVELOPMENT 75 Years of Innovation for Progress and Shared Prosperity

DAVID MALPASS President, World Bank Group

The end of the 20th century and the are needed every year to keep up with beginning of the 21st will go down in population growth. Current income history as a consequential era of pov- growth rates will not be sufficient to erty reduction. In 1990, the World Bank achieve shared prosperity and enable published the World Development Report people to reach their full potential. Too focused on poverty. Since that year, broad- many people are not seeing an advance based economic growth and inclusive in their living standards, their skills, or approaches to development reduced their ability to face natural disasters. the number of people living in extreme The World Bank Group is work- poverty by more than 1.1 billion. The ing to address these challenges. Over poverty rate in 2018 was estimated at the last 75 years, the institution has 8.6 percent—the lowest level in history. grown, evolved, and supported innova- Despite this progress, the challenges tion. The World Bank Group of 2019 we face remain urgent. More than 700 has vastly more tools and approaches million people still live in extreme pov- than ever before, and the focus of our erty—that is one in 12 humans alive. work is strong country programs to In sub-Saharan Africa, the number of drive growth, raise median incomes, and people living in extreme poverty is create breakthroughs that improve the on the rise, and 15 million new jobs lives of the poorest and most vulnerable.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 31 These efforts are built on a founda- and safety with one another—whether tion of the ideas and ideals that were they be strong or weak.”1 debated, shaped, and agreed upon at an The 1919 Treaty of Versailles had unprecedented gathering in a small town failed, in part because economic crises below the mountains of New Hampshire helped Nazi ideology to take hold and three-quarters of a century ago. push the world back into war. By 1944, it was clear that peace must be based not just on liberty and safety, but on FOUNDATION OF opportunity and prosperity as well. OPPORTUNITY That was how the delegates found On the evening of July 1, 1944, US themselves in a grand but aging hotel at Treasury Secretary Henry Morgenthau the foot of Mount Washington in the vil- stood before delegates from 44 countries lage of Bretton Woods, New Hampshire. at the Mount Washington Hotel. Across The purpose of the United Nations the Atlantic Ocean, Allied armies were Monetary and Financial Conference was pushing through Normandy, battles to build an entirely new global financial raged in both Europe and the Pacific, system that would stabilize exchange and it was still uncertain who would rates, bridge imbalances of payments, prevail in the largest and deadliest war rebuild countries scarred by war, and in history. promote development in poorer parts Long before the war’s outcome was of the world. In his opening speech, clear, the Allied nations began looking Morgenthau, the chair of the conference, ahead to the world beyond the war. US said the goal was to create “a dynamic President Franklin Roosevelt knew that world economy, in which the people of it would not be enough to shape the every nation will be able to realize their postwar order; he envisioned an effort potentialities in peace … to raise their to build an entirely new system that own standards of living and enjoy, increas- would not just prevent another world ingly, the fruits of material progress.”2 war but ensure lasting peace. Over the next three weeks, the Roosevelt had learned important les- delegates huddled around confer- sons from the aftermath of World War ence tables and bars; they argued over I, when another American president, meals and during late-night technical Woodrow Wilson, argued that peace must sessions. Before the month was over, be based on “the principle of justice to they created a new global financial all peoples and nationalities, and their system and two new institutions: the right to live on equal terms of liberty International Monetary Fund and the

1 Woodrow Wilson, “Fourteen Points” (Speech to joint session of US Congress, Washington, DC, January 8, 1918). 2 Henry Morgenthau, “Opening Address to the Conference” (Speech given at United Nations Monetary and Financial Conference, Bretton Woods, NH, July 1944).

32 | REVITALIZING THE SPIRIT OF BRETTON WOODS International Bank for Reconstruction from shareholder countries, an outline and Development—later known as the began to emerge for its role, not only World Bank. in reconstruction and development, but The new financial system incor- in shaping the new financial system. porated key ideas that the delegates It was a slow start. The Bank’s first discussed on the opening night. The con- president resigned abruptly after only ference itself was based on the conviction six months on the job. Less than two that there are no fixed limits to prosper- months later, the vice president suddenly ity—that all nations could benefit from died. The future of the institution was growth and development. The system uncertain, and the Bank had yet to make that emerged from that conference was its first loan. designed to address challenges that indi- But slowly, the Bank began to define vidual countries could not tackle on their its policies and in early 1947 signed its own. And finally, underpinning the entire first loan—US$250 million for recon- effort was the idea that all people deserve struction in France. In real terms, it is opportunity. “Freedom of opportunity,” still one of the largest loans in the Bank’s Morgenthau said, “is the foundation for history—US$2.85 billion when adjusted all other freedoms.”3 for inflation. Over the last 75 years, the World Looking back, the Bank’s initial Bank Group’s mission has expanded and operations seem remarkably straightfor- evolved, from rebuilding after conflict ward. The French loan application was to alleviating poverty. But above all, the a simple letter that was part of the gov- Bank has worked to harness the power ernment’s outline for its reconstruction of markets, inclusive economic growth, program, asking for US$106 million for and knowledge sharing to improve the equipment, US$180 million for coal lives of the poorest and most vulnerable, and petroleum products, and US$214 a mission that is more urgent today than million for raw materials. Staff at the ever before. time describe learning on the job what kind of investigations to undertake and what questions to ask. “Nobody knew CHARTING A COURSE where to begin. We were inexperi- THROUGH THE RUINS enced,” Richard Demuth, who served The year 1947 was a consequential one as assistant to the vice president, later for the nascent Bretton Woods system. remembered. “Just like any other new As the World Bank started up opera- institution in a new field, at that time tions and collected capital subscriptions we were … finding our way.”4

3 Morgenthau, “Opening Address.” 4 Quoted in “May 9th, 1947—The World Bank’s First Loan,” World Bank Group Archives, accessed May 2019, http://www.worldbank.org/en/about/archives/history/exhibits/the-world-banks-first-loan.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 33 Even as it was finding its way, the more importantly, it invested in the World Bank began to redefine devel- collective will of war-scarred people opment finance by pioneering the way to rebuild their lives. in which development is connected to the capital markets. In July 1947, the bank issued its first bond, raising ADVANCING US$250 million to fund reconstruction DEVELOPMENT and development projects. It lent nearly Much of the conventional wisdom about US$500 million for postwar reconstruc- the World Bank’s early years holds that tion in the Netherlands, Denmark, and the Bank focused squarely on recon- Luxembourg later that summer. struction, and turned to development Through the lens of today’s develop- only after the beginning of the Marshall ment mission, loans to European countries Plan. If the Marshall Plan pushed the may seem out of place. But when the Bank away from the center of rebuilding bank’s staff examined the economies of Western Europe’s postwar economy, Western Europe, they found enormous development was embedded in the need of food, fuel, raw materials, and cap- Bank’s DNA from the very beginning. ital. In 1947, huge parts of the continent The first paragraph of its Articles lay in ruins. Millions had been killed in of Agreement states that one of the six years of fighting, infrastructure was purposes of the International Bank for demolished, and many of those who sur- Reconstruction and Development is vived were refugees. “the encouragement of the development In the winter of 1947, as the Bank of productive facilities and resources began to supply some of that much- in less-developed countries.”6 Recent needed support, economic prospects scholarship also argues that development were bleak. An oral history observed, was a larger part of the deliberations at “It took a bit of stretching for the man- the Bretton Woods Conference than agement to conclude that repayment has previously been appreciated. Eric prospects were reasonable; the economic Helleiner, a professor of international report on France, for example, laid its political economy at the University of stress, not on financial resources or spe- Waterloo, has argued that the develop- cific export prospects, but on the French ment aspirations of emerging powers ‘collective will to recover.’”5 Through its played a large role in the Bretton Woods earliest loans, the World Bank invested discussions. “Far from neglecting inter- in equipment and raw materials, but national development goals,” Helleiner

5 Quoted in “May 9th, 1947.” 6 International Bank for Reconstruction and Development, “Articles of Agreement” (as amended, effective June 27, 2012), http://pubdocs.worldbank.org/en/722361541184234501/ IBRDArticlesOfAgreement-English.pdf.

34 | REVITALIZING THE SPIRIT OF BRETTON WOODS wrote, “the Bretton Woods negotia- INNOVATION FOR tions should be recognized for their OPPORTUNITY pioneering role in incorporating these Over the next few decades, as the needs goals into a liberal multilateral financial of developing countries grew larger architecture for the first time.”7 and more complex, the World Bank That incorporation began in 1948, developed new ways to use capital and when the Bank approved two sovereign expertise to address them. And when loans to Chile: a US$13.5 million loan there was no tool to address a particu- to a government development corpo- lar challenge, the World Bank created ration for power plant equipment and one—including changing its organi- a US$2.5 million loan to import agri- zational structure to what became the cultural machinery. modern World Bank Group. The Bank’s third annual report defined its approach to development as “one of willingness to help its members International Finance to analyze their development problems, Corporation to work with them in mapping out the As early as the late 1940s, it became broad lines along which their develop- clear that private enterprises in devel- ment may be advanced most soundly oping countries were hungry for more and rapidly, and whenever possible to investment than the market could pro- select for initial financing those projects vide. When the International Finance which seem most likely to contribute Corporation (IFC) opened its doors in to such advance.”8 Using that approach, 1956, it was given a difficult mission: the Bank made 68 loans over the next to invest in private projects only “in five years; 64 loans—averaging about cases where sufficient private capital US$14 million each—went to projects is not available on reasonable terms.” that would advance “most soundly and In other words, IFC had to find and rapidly” the priorities of developing invest in projects that weren’t attractive countries. In just half a decade, from enough for private investors but had 1947 to 1952, the Bank’s focus shifted the prospect of advancing a country’s from rebuilding Europe to advancing development priorities. opportunities for people in the devel- IFC found many investments that oping world. qualified. Over the last six decades, it has helped deliver more than US$250 bil- lion to finance businesses in developing

7 Eric Helleiner, Forgotten Foundations of Bretton Woods (Ithaca, NY: Cornell University Press, 2014), 2. 8 World Bank Group, “World Bank’s First Development Loans to Chile, 1948” (World Bank Group Archives No. 057, Washington, DC, World Bank, January 2016), http://documents.worldbank. org/curated/en/308691468185347709/text/104690-WP-PUBLIC-2007-01-World-Banks-First- Development-Loans-to-Chile.txt.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 35 countries, and today it creates markets investors and governments that the in some of the most challenging areas shareholders decided to create a systemic in the world. way to cover mediation. In 1966, the International Centre for Settlement of Investment Disputes (ICSID) opened its International Development doors to facilitate arbitration between Association investors and states. In subsequent During the Bank’s early years, the world’s decades, ICSID has helped settle many poorest countries desperately needed disputes around the world, including capital but could not afford to borrow at several related to the North American the same rates as middle-­income coun- Free Trade Agreement (NAFTA). tries. So in 1960, the Bank’s shareholders created the International Development Association (IDA), a fund for the poorest Multilateral Investment countries, which offers grants and con- Guarantee Agency cessional—close to zero-interest—loans. The idea for a form of political risk Since 1960, IDA, which is replenished insurance emerged shortly after the every three years, has provided more Bank began lending. It did not become than US$360 billion for investments in a reality until four decades later, when 113 countries. an international convention established In 2018 alone, IDA disbursed US$24 the Multilateral Investment Guarantee billion in grants and concessional loans Agency (MIGA) as the newest mem- to projects that create jobs and spur eco- ber of the World Bank Group. Today, nomic growth; help women participate MIGA enables projects, sectors, and fully in the economy; build climate countries to promote development by resilience; and address fragility, conflict, providing political risk insurance and and violence. Also in 2018, IDA issued credit enhancement. a US$1.5 billion inaugural bond that In its first three decades, MIGA will boost the fund’s resources without issued US$45 billion in guarantees to additional money from donors. support more than 800 projects in 111 countries. Last year, MIGA provided US$5.3 billion in political risk insurance International Centre for and credit enhancement, helping finance Settlement of Investment nearly US$18 billion worth of projects Disputes in developing countries. Without lend- The idea for a body of technical experts ing money directly, MIGA has become to settle disputes emerged almost as the third-­largest institution among the soon as the World Bank began lending. multilateral development banks in terms In its early years, the Bank received so of mobilizing direct private capital to many requests for the institution or its low- and middle-income countries. president to mediate disputes between

36 | REVITALIZING THE SPIRIT OF BRETTON WOODS As the mission of the Bank Group on behalf of the poorest and most vul- grew in size and complexity, the institu- nerable. In the summer of 2018, the tion became more decentralized. Today, Bank launched the world’s first legally the World Bank Group has 141 field binding bond operated on a global offices, and staff routinely operate in blockchain platform, called Bond-i. difficult conditions, working in areas Issuing bonds on blockchain and other suffering from fragility, conflict, and distributed ledger technologies is simpler violence. and faster, increases productivity, and The World Bank Group’s innova- reduces cost and risk. tion has reached deep into the finance But the World Bank Group’s inno- sector. In 1981, the Bank pioneered the vation has not been limited to finance. currency swap, swapping US dollars for For decades, the Bank has expanded the Swiss francs and Deutsche marks with collection, analysis, and presentation of technology company IBM. Today, the development information. One exam- market for currency swaps has a notional ple is its annual Doing Business report, value of more than US$25 trillion. which ranks countries on their business In 1989, the World Bank issued the environment—including taxation, con- first globally traded and settled bond that tract law, and start-up regulations. In 15 eliminated pricing disparities between years, Doing Business has inspired more the United States and Europe, and it than 3,180 reforms. Another example convinced a group of 14 banks to reduce is the annual World Development Report, their fees. Together, the improvements which, since 1978, has shown how eco- enabled the World Bank to reduce its nomic growth; investments in health; US dollar borrowing costs. and responding to climate change, The World Bank created its first gender inequality, learning shortfalls, electronic bond in 2000. It was the and the changing nature of work are first bond offered globally on Internet critical to alleviating poverty around platforms, allowing retail investors to the world. invest in the Bank’s development activ- Another example is the Bank’s ities for the first time. Eight years later, Women, Business, and the Law report, the Bank issued the world’s first Green a comprehensive global analysis of Bond, and for the first time, investors laws and regulations that affect wom- could directly support climate projects en’s ability to fully participate in the without incurring the project risk. The economy. Women, Business, and the Law Green Bond helped change the way 2019 includes a new index to provide investors decide how to allocate their insight on the obstacles facing wom- investments for a balance of risk, reward, en’s employment, entrepreneurship, and and impact. full incorporation in the economy, and The Bank’s financial innovation con- how such obstacles impact economic tinues to harness the latest technology outcomes.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 37 With Doing Business, the Bank found anthropologist. The World Bank’s inter- that country rankings put data and evi- disciplinary approach to development dence in front of leaders and invited would become essential as the insti- their attention. We are now also using tution focused on a new mission, one the Human Capital Index, which we that continues with the same urgency launched last year, to objectively mea- to this day. sure the human capital in each country and show how much more produc- tive workers could be with full health, FIGHTING POVERTY, successful learning, and the skills to LIFTING THE POOR compete in profitable activities. In the fall of 1973, the World Bank’s Human capital improvements are fifth president, Robert McNamara, critical to alleviating poverty and thrust into the international conscious- advancing shared prosperity. The Bank ness a word that does not appear in the has tracked the wealth of 141 countries Bank’s articles of agreement: poverty. In over two decades by aggregating nat- his speech to shareholders at the Bank’s ural capital (things like minerals and Annual Meetings in Nairobi, Kenya, forests), produced capital (things like McNamara argued that the Bank’s mis- infrastructure and buildings), and net sion should be to alleviate “absolute foreign assets. Last year, for the first poverty,” which he described as “a con- time, we included human capital in dition of life so degrading as to insult those calculations and estimated that human dignity—and yet, a condition of more than two-thirds of the wealth of life so common as to be the lot of some all nations is in human capital. 40 percent of the peoples in developing Recognizing the complexity of countries.”9 development, the World Bank Group He asked the shareholders, “Are not also expanded its internal expertise we who tolerate such poverty, when far beyond the early focus on finance it is within our power to reduce the and infrastructure. In 1970, the Bank number afflicted by it, failing to fulfill hired James Lee, its first Environmental the fundamental obligations accepted Advisor, and over the course of the next by civilized men since the beginning decade brought on Michael Cernea, its of time?”10 first sociologist; Gloria Scott, the first Partnering with Treasurer Eugene Advisor on Women in Development; Rotberg, McNamara guided a dramatic and Gloria Davis, the Bank’s first expansion in the World Bank’s lending,

9 Robert S. McNamara, “To the Board of Governors” (Address at World Bank Annual Meetings, Nairobi, Kenya, September 1973), http://documents.worldbank.org/curated/ en/930801468315304694/text/420310WP0Box0321445B01PUBLIC1.txt. 10 McNamara, “To the Board of Governors.”

38 | REVITALIZING THE SPIRIT OF BRETTON WOODS financed by borrowing from new capital suffer the most from corruption—in markets throughout the world and inno- funds diverted from life-saving medi- vative financial techniques. Rotberg’s cine, safe roads, and education that gives expertise in the bond market helped people a chance for a brighter future. He double the overall lending program of also pointed to the reality that a corrupt the Bank in just five years, from 1968 environment is much less likely to attract to 1973. development investments, leaving the McNamara made the case that more poor to suffer twice over. of that capital should go to help the Those fights continue to this day. poorest and most vulnerable by focusing Emerging from a period of strong pov- on rural development, increasing access erty alleviation but facing urgent global to public services, and reorienting devel- challenges, the World Bank Group is opment policies to fight inequality. “In a strong financially and well positioned way that was never true in the past, we with the right tools and resources, and a now have the power to create a decent talented and professional staff. The World life for all men and women,” he told the Bank Group today draws a more diverse shareholders in Nairobi. “The extremes pool of talent than ever before. For exam- of privilege and deprivation are simply ple, only 2 of the more than 700 delegates no longer acceptable. It is development’s at Bretton Woods were women. Today, task to deal with them.”11 women make up nearly 53 percent of When McNamara retired from World Bank Group staff, 42 percent of the World Bank Group in 1981, the its managers, and nearly 49 percent of global poverty rate was 42 percent. His the senior management team. challenge, and the Bank Group’s new In the years to come, we will mission, would endure for decades. continue to focus on achieving break- During two terms as president of throughs in developing countries that the World Bank Group, from 1995 to will raise median incomes; create jobs; 2005, Jim Wolfensohn emphasized the fully incorporate women and young urgency of the task. “If we want stabil- people into economies; and support ity on our planet, we must fight to end a stronger, more stable economy for poverty,” he said in 2004.12 It is still the everyone. Those goals—and the neces- challenge of our time. sary cooperation to achieve them—are But Wolfensohn knew that the fight what the Bretton Woods delegates had to end poverty was impossible without in mind from the very beginning. They tackling what he called “the cancer of created strong institutions in which corruption.” He argued that the poor the nations of the world could work

11 McNamara, “To the Board of Governors.” 12 James D. Wolfensohn, “Opening Address by the President of the World Bank Group,” in Summary Proceedings of the Fifty-Eighth Annual Meeting of the Board of Governors (Washington, DC: IMF, 2004), 16.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 39 together to address the most urgent more of the world’s poor live in areas challenges and improve the lives of suffering from conflict, violence, and people all over the world. the effects of climate change. Leaders On July 22, 1944, when negotiations need to focus on liberty and safety, as were complete, Secretary Morgenthau well as on opportunity and prosperity. closed the Bretton Woods Conference. Creating equality of opportunity is “The Conference at Bretton Woods the key challenge of our time, and that has erected a signpost pointing down mission is more urgent than ever. If we a highway, broad enough for all men set out together, men and women, and to walk in step and side-by-side,” he use our powerful tools for the poor- told the delegates. “If they will set out est and most vulnerable, we can end together, there is nothing on earth that extreme poverty and advance develop- need stop them.”13 ment and shared prosperity around the Today, the pace of innovation is world. Walking with a common pur- accelerating, and millions continue to pose, in step and side-by-side, nothing escape poverty. But the world is also can stop us. more fragile than in recent decades, as

13 Henry Morgenthau, “Closing Address to the Conference” (Speech given at United Nations Monetary and Financial Conference, Bretton Woods, NH, July 1944).

40 | REVITALIZING THE SPIRIT OF BRETTON WOODS STRENGTHENING THE WTO FOR THE FUTURE

ROBERTO AZEVÊDO Director-General, World Trade Organization

International cooperation has proven to THE WHERE AND WHY be an essential ingredient for growth, OF THE WTO development, job creation, and ulti- To appreciate how far the WTO has mately, peace. The 75th anniversary advanced, it is important to remem- of the Bretton Woods Conference is ber where—and why—it began. At a timely moment to remind ourselves its root, today’s system was a response of the importance of international to the economic chaos of the 1930s. cooperation, and to strengthen our Escalating protectionism, rival trade efforts to that end. blocs, and competitive currency deval- The World Trade Organization uations fueled the economic insecurity (WTO) is a clear example of inter­national and international tensions that led to the cooperation in action. The WTO is ulti- Second World War. In the aftermath mately the result of governments around of that devastating conflict, the ini- the world being willing to cooperate tial plan was to create an International on trade. Its creation and subsequent Trade Organization—alongside the success reflects the growing realization then recently established International among more and more countries that Monetary Fund (IMF) and World opening trade can lead to growth and Bank. The goal was to rebuild an open development; that agreed-upon rules can and prosperous global economy as an strengthen, not weaken, sovereignty; and essential foundation for world peace. that advancing national interests increas- As President Truman said in 1947, ingly depends on advancing our collective “peace, freedom, and world trade … interests.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 41 are inseparable. The grave lessons of the about the movement of goods across past have proved it.”1 borders, dealing mainly with tariffs, In fact, the creation of the Inter­ quotas, and other border measures. By national Trade Organization proved too creating the WTO, trade negotiators ambitious, and the more limited General took on a much wider array of issues, Agreement on Tariffs and Trade (GATT) looking at the cross-border movement was established. GATT grew over subse- of not only goods but also of services, quent decades until, in 1995, the WTO capital, ideas, and people. was created, with 128 members. This This system also reflected a more body was the realization, in an updated multi­polar and globalized world. form, of the original Bretton Woods Consider the system’s widening member­ vision to create a global trade body. The ship. Whereas GATT started with just new WTO was given the same legal and 23 members in 1947, the WTO now organizational standing as other inter­ has 164—a fifth of whom have joined national organizations, including the IMF since its creation in 1995. With the acces- and the World Bank. It thereby signaled sion of China in 2001, in the biggest reform and expansion of the 2005, and Russia in 2012, all of the international trading system in history. world’s major economies are now part The WTO ushered in a more open of a single economic system—covering and integrated global economy. The around 98 percent of global commerce. Uruguay Round of negotiations, The WTO is the custodian of a truly which established the organization, global trade system. It provides the only had resulted in global tariff reductions forum where all countries, including of 40 percent and led to the liberaliza- the most powerful, can cooperate on a tion of new sectors, such as agriculture, growing number of global trade issues textiles, and services. The WTO also that demand global solutions. The system assumed new responsibilities. Besides has provided stability and predictability in administering the existing agreements global trade—holding firm even during on trade in goods, the WTO over- the financial crisis. Everybody stands to saw new agreements on services and benefit from WTO work. More members intellectual property, the trade policy have access to information, not just about review process, and notably, the dispute national trade policies, but about inter- settlement body. These new functions national trade relations as well, through marked a significant evolution. For most the WTO’s transparency and surveillance of the GATT period, and before that, mechanisms. In addition, more members trade was understood to be exclusively are using WTO councils, committees, and

1 Harry S. Truman, “Address on Foreign Economic Policy, Delivered at Baylor University, March 6, 1947,” in Public Papers of the Presidents of the Unites States: Harry S. Truman, 1947, vol. 3 (Washington, DC: US Government Printing Office, 1963), 167.

42 | REVITALIZING THE SPIRIT OF BRETTON WOODS working groups to coordinate policies could reduce trade costs globally by and head off disputes. an average of 14.3 percent. By 2030, it could add 2.7 percentage points per year to world trade growth and more THE WORK OF THE WTO than half a percentage point per year to When solutions cannot be found, mem- world GDP growth. bers can call on the WTO’s dispute WTO members have struck deals settlement system, helping to ensure in a number of other areas as well. In that trade disputes do not spiral into 2015, at our Ministerial Conference in larger conflicts. This system is one of Nairobi, they abolished export subsi- the fundamental pillars of global eco- dies for agricultural goods. This was nomic governance—and it is highly the biggest reform in agriculture trade effective. Many disputes are resolved in 20 years, and it delivered a key ele- before they reach the litigation stage, ment of UN Sustainable Development but when they do proceed to that stage, Goal 2, zero hunger. At the same time, compliance with rulings is very high, a group of WTO members struck a at around 90 percent. However, at the deal to eliminate tariffs on a range of time of writing (October 2018), some new-generation information technol- members have been raising concerns ogy products. Trade in these products about the way the dispute settlement is worth around US$1.3 trillion each system works. We are striving to deal year. That is bigger than global auto- with these issues and advance a dialogue motive trade. In addition, members that will improve this essential system. have made decisions to help least devel- Another important feature of the oped countries better integrate into the WTO’s work is our role in negotiating trading system; taken steps to improve and updating our rules. Although for food security; and brought into force a long period little progress was made, the amendment to the Agreement on in recent years we have delivered a Trade-Related Aspects of Intellectual number of important trade agreements, Property Rights (TRIPS Agreement), with significant economic benefits. In which helps developing countries access 2013, at our Ministerial Conference generic medicines at more affordable in Bali, WTO members agreed to the prices. Together, these deals represent first multilateral deal of the organi- the biggest trade reforms in a generation. zation: the WTO Trade Facilitation The latest step in this journey was our Agreement. This deal came into force Ministerial Conference in Buenos Aires in 2017 and aims to streamline, simplify, in 2017. Although no final agreements and standardize customs procedures. By were reached this time, important prog- doing so, it will help to cut trade costs ress was made. On fisheries subsidies, for around the world. Estimates show that example, members committed to secur- full implementation of the agreement ing a deal to limit harmful subsidies by

REVITALIZING THE SPIRIT OF BRETTON WOODS | 43 the end of 2019. Success here would Trade-Related Assistance for the Least deliver on Sustainable Development Developed Countries, and the Trade Goal 14.6, sustainable fisheries—and it Facilitation Agreement Facility. These would be a major achievement for the are partnerships that provide vital help WTO membership. to poorer countries, enabling them to better take advantage of trade oppor- tunities. And of course, we have the THE FUTURE OF Aid for Trade initiative to ensure that THE WTO developing countries receive targeted All of these steps are very positive. But assistance to improve their trading infra- they are not enough. Progress in many structure. This work does not occur in key areas has been stalled for some years, isolation. We cooperate very closely so we need to keep working. Therefore, with the IMF and the World Bank in a in Buenos Aires, groups of WTO mem- number of these areas. bers announced new initiatives to discuss The extent to which the WTO is issues of emerging economic importance, successful and effective comes down including electronic commerce, invest- to its members. A clear sign of progress ment facilitation, trade participation of is the expansion of world trade. Trade smaller businesses, and women’s eco- volumes have increased by two and a nomic empowerment. This work is not half times since the WTO’s launch— supported by all members, but there is and a staggering 37-fold since GATT’s momentum behind it and only time will creation—easily outstripping growth in tell exactly how it will develop. world output. Trade growth has helped Making sure that the multilateral to fuel growth and prosperity in devel- trading system is relevant and works for oped economies, but it has also benefited all also involves other aspects that may developing countries significantly. Since be less visible but are nonetheless essen- 1995, developing countries’ share of tial. Capacity-building assistance falls global trade has jumped from 28 to 46 squarely into that category. This work is percent, supported by the framework vital to ensure that developing countries that the WTO offers. Whether the receive the necessary practical support future of the WTO is as successful as the to build the necessary capacity and skills past depends on members’ willingness to participate fully in the trading system to continue cooperating. Cooperation and leverage the opportunities that trade is essential to ensure that the WTO can can provide. The WTO runs a range adjust and adapt to challenges of the of training programs, tailored to the present and the future. needs of developing-country officials. At the time of writing, tensions have The WTO is also host to the Standards been escalating rapidly between major and Trade Development Facility, the trading partners, which we are working Enhanced Integrated Framework for night and day to help resolve. At the root

44 | REVITALIZING THE SPIRIT OF BRETTON WOODS of these tensions is the argument that the to the challenges of a changing global trading system is allowing distortive trade economy. The world needs this organi- practices to go unchecked. Therefore, zation more than ever. It represents the the argument goes, the system needs to best efforts of governments around the change to be more responsive to such world, working together for 70 years, to measures. The current crisis is political. It find ways to cooperate on trade issues. requires a political solution. This is why Without it, we would face a future of a high-level conversation about “WTO uncertainty, trade war, lower growth, reform” or “modernization” is beginning lower salaries, higher prices, and dimin- to emerge. Reform is seen as a way to ished job opportunities everywhere—in deal with some of the big trade prob- developing and developed countries lems that some members have identified. alike. So we have to work to safeguard A wide range of important priorities the system and to improve it. and perspectives have been advanced We need trade and the trading system by WTO members in this area. Which to continue playing their positive role in issues are taken forward is for members to the global economy, preserving stability determine. But clearly this reform debate and fueling growth—just as they have is gathering momentum. Many leaders done so effectively for decades. Working have committed to working together on together across the inter­national com- this reform agenda. munity, including the Bretton Woods Whatever the precise answers may institutions, we can ensure that the be, there’s no doubt that we need to WTO continues to serve our econo- redouble our efforts to ensure that mies and communities for generations the global trading system is properly to come, supporting a more prosperous responsive both to members’ needs and future for all.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 45 Conference delegates register at the Mt. Washington Hotel on July 2, 1944.

Source: Bettman/Getty Images MULTILATERAL COOPERATION AND SYSTEMS CHANGE

REVITALIZING THE SPIRIT OF BRETTON WOODS | 47 BUILDING THE NEW COOPERATIVE INTERNATIONAL ORDER

THARMAN SHANMUGARATNAM Senior Minister, Republic of Singapore1

We are at a critical stage in global history. of poverty, raised average living stan- Our central ambition must be to build dards across nations, and provided a new, cooperative international order the foundation for relative peace over for a world that has changed irreversibly. three-quarters of a century. That open We otherwise face a real risk of drift- order remains critical to every nation’s ing into a fragmented world, with rising future. But the system of global eco- economic nationalism and growing rifts nomic and financial governance that in trade, investment, and technology originated in Bretton Woods, despite between major powers and blocs. No having evolved over the last 75 years, one will be the better for it. It will struggles with the realities of a new era. only weaken our capacity to tackle the Nevertheless, the spirit of Bretton challenges ahead, which are larger, more Woods is as relevant as ever. A new, urgent, and more complex than we have rules-based international order must, at seen in decades. its core, be aimed at achieving mutual At stake is the future of the open prosperity in a multipolar world, with and competitive world order that has each nation having a vested interest in brought a large part of humanity out an open order and in the global good.

1 Tharman Shanmugaratnam chaired the G20 Eminent Persons Group on Global Financial Governance, which put forward its proposals in October 2018 for reform to the system of inter­ national financial institutions.

48 | REVITALIZING THE SPIRIT OF BRETTON WOODS RECOGNIZING THE Growth has predictably also accentu- BASIC CONUNDRUMS ated the erosion of the global commons. OF GLOBALIZATION The successful entry of huge numbers into the global middle class, with con- The pushbacks against an open and sumption patterns expectedly similar integrated world order have roots much to those of populations that arrived deeper than the actions of current gov- earlier, has accelerated global warming. ernments. They go back several decades. As with all such externalities, the costs Further, they have not emerged by acci- of adjustment cannot rest on any one dent and, in the main, have not been the group of countries. result of globalization’s having gone too Global governance can and must far. It is, fundamentally, the success of accommodate this greater plurality, the open global order that has spawned without becoming paralyzed by compet- the tensions and contests it now faces. ing national interests or being reduced They reflect globalization’s two basic to an agglomeration of national projects conundrums. with different shapes and objectives. It First, growth through global integra- should develop joint capacity for tack- tion is leading to a world that is more ling risks to collective stability and the multipolar and more decentralized in global commons. It should also seek decision making, but also one that is convergence around agreed-upon inter- vastly more interconnected than just national standards. three decades ago—in trade of goods The second conundrum stems and services, and in flows of finance, from the fact that reduced inequality technology, and data. The plurality in between nations has been accompanied global official development finance is by increased inequality within nations. striking. Bilateral lending by national To be sure, the decline in real wages of development finance institutions (DFIs) less educated workers and the widen- is now much larger than that of the ing of inequality within the advanced multilateral development banks (MDBs) nations began well before the ascent put together. Similarly, bilateral swap of China and the emerging world in lines and regional safety nets, while global markets. Studies locate their pri- uncoordinated, are now two-thirds mary causes in technological change, the of the world’s financial safety net—or decline in workers’ bargaining power, twice as large as the resources of the and slower growth since the 1970s. Still, International Monetary Fund (IMF), the wider divides in the workforce, and which constitute the only global layer between thriving cities and the rest, of the world’s financial safety net.2 have been left to fester for too long in

2 In 2006, the IMF constituted 90 percent of the safety net.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 49 too many places, becoming difficult to institutions—global, regional, and bi­­ dissociate from the subsequent impact of lateral—work together as a system, and globalization. It is therefore not surpris- to ensure that the system is more resilient ing, and not only a matter of political and much stronger than the sum of its expedience, when foreign competition parts. The new multilateralism requires is identified as a cause of domestic losses. mechanisms to ensure transparency and Economic nationalism is gaining complementarity among these different momentum. The prevailing social con- institutions, and to leverage their com- sensus in favor of open markets cannot bined strengths. Doing so will enable be taken for granted. the system to deliver greater and more lasting development impact, reduce the frequency and damage of financial BUILDING THE NEW crises, and enhance our ability to tackle MULTILATERALISM the pressing challenges to the global We must build a credible system of commons. global economic and financial gover- Whether we achieve this shift to a nance to meet the challenges of this new, cooperative international order new era. The present system lacks the also depends critically on how China’s coherence, joint capacity, and effective relationship with the United States and interplay with national strategies that other global economic leaders evolves. are needed to support its most funda- China’s transformation, rise, and inte- mental goals: broad-based and inclusive gration with the rest of the world is by growth, financial stability, and a sustain­ far the most important global economic able global future. development of the last three decades. There is no going back to the old China already takes a fifth of the exports multi­lateralism. There is no single con- of US technology companies, contrib- ductor. There are already several orchestras uting significantly to their growth. It is in play. The world needs a new harmony, the second-largest market for German but that can come about only if everyone exports, and the fastest growing. It is the plays from the same score. largest trading partner for virtually every The new multilateralism must rest on Asia-Pacific nation and a growing source networked leadership, shared responsibil- of investments. And China’s own prowess ities, and common standards in a more in global manufacturing has depended multipolar, yet deeply inter­connected, crucially on foreign companies in China. world. It does not require new multi­ Even so, China’s journey of conver- lateral or supranational­ bodies. Nor gence with the advanced world, and will marginal fixes within today’s insti- its role as a major contributor to global tutions do. We must instead take bold growth, are far from over. China’s aver- and defined steps to ensure that today’s age productivity level remains less than

50 | REVITALIZING THE SPIRIT OF BRETTON WOODS one-third that of the United States, and of national policies and international there is still substantial potential for governance. It must involve several core internal leveling up among its various roles for international economic and provinces. financial governance: Global governance, at the World Trade • To promote mutually reinforcing pol- Organization (WTO) and in multilateral icies between countries and minimize finance, must seek to preserve economic negative spillovers. Policies aimed at interdependence with China—not just growth and domestic financial sta- for the sake of sustaining multi­lateralism, bility are most effective nationally but for the stability and growth all around when they are undertaken widely or that this interdependence brings. It must coordinated internationally. Equally, involve updated rules to reflect China’s international commitments remain growing weight and ensure a level playing necessary to avoid “beggar-­thy- field in trade and investments. But it must neighbor” policies, such as through also involve a sharing of power in global exchange rate depreciation for com- economic and financial governance, with petitive gain, which benefit one China taking greater responsibility for country at the expense of another maintaining an open order. without adding to global growth. However, it is also in the nature A MORE EFFECTIVE of today’s highly interconnected INTERPLAY OF NATIONAL markets that even policies aimed at achieving domestic objectives in AND INTERNATIONAL major economies may have inter- GOVERNANCE national spillovers that constrain We have to get national policies right the policy options of other coun- to achieve inclusive societies as well as tries. An international framework, mutual prosperity globally. Most fun- coordinated by the IMF, is needed damentally, as the Fourth Industrial to mitigate such spillovers and their Revolution gathers pace, the core tasks effects as much as possible. of national governments must include supporting ecosystems of innovation and • To provide credible WTO rules, skills that create future jobs, devising accompanied by a robust system of strategies with their social partners to enforcement, to enable free and fair actively help those displaced get back trade between nations. The WTO’s dis- into employment, and redressing social pute resolution mechanism has been inequities. a successful example of rules-based However, inclusive and sustainable multilateralism, and puts economies growth also requires an active interplay small and large on par. But its speed

REVITALIZING THE SPIRIT OF BRETTON WOODS | 51 and effectiveness must be enhanced. • To build joint capacity and ensure The WTO’s rule book must also be urgent collective action to tackle cli- updated to deal with cross-border mate change and other challenges to the data flows and e-commerce, which global commons. The required dou- are rapidly transforming global trade.3 bling of the world’s infrastructure in the next 15 years to achieve needed • To derive full benefit from the unique growth and jobs highlights the risk roles of the international financial of locking in unsustainable infra- institutions (IFIs)4 as multipliers of structure for the much longer term. development. There is a need to re­­ Collective action is also needed to focus, especially on helping countries stem environmental degradation and build their governance capacity, infectious disease threats, which will including strengthening tax collec- otherwise push large populations into tion and reducing leakages through poverty and an unprecedented scale corruption and waste, and to develop of forced migration. the full potential of human capital regardless of gender, ethnicity, and There is no either-or choice between social status. The IFIs, together with cooperative internationalism and national national development finance insti- strategies to secure growth and finan- tutions, must also shift gears more cial stability. An open, competitive, and decisively toward catalyzing private well-coordinated international order will capital by mitigating investment risks. enable win-win outcomes for nations. Its weakening will lead to lose-lose • To coordinate actions to avoid global outcomes, as global growth and oppor- financial crises. Financial regulation tunities for new jobs are eroded over has been strengthened since the time, and as financial stability and the global financial crisis. However, we global commons become more fragile. do not know where the next crisis Equally, cooperative internationalism will will come from. Hence, we also survive only if it helps the broad base of need stronger collective capacity to nations achieve inclusive growth. detect risks early so that we can con- tain them before they escalate.

3 Australia, Japan, and Singapore have embarked on an e-commerce Joint Statement Initiative, aimed at promoting trust, openness, and transparency in digital trade. 4 The IFIs are the IMF and the MDBs, the latter comprising the African Development Bank (AfDB), the Asian Development Bank (ADB), the Asian Infrastructure Investment Bank (AIIB), the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the Inter-American Development Bank (IDB), the Islamic Development Bank (IsDB), the New Development Bank (NDB), and the World Bank Group.

52 | REVITALIZING THE SPIRIT OF BRETTON WOODS THE AMBITION IS building on the risk insurance capabil- IN THE DOING ities of the World Bank’s Multilateral Investment Guarantee Agency to take on My colleagues and I in the G20 Eminent risk from the MDB system as a whole, Persons Group on Global Financial thus achieving the benefits of a globally Governance (G20 EPG) consulted diversified portfolio. We can similarly widely on these issues and offered spe- build standardized, diversified asset classes cific proposals in October 2018 to enable of developing-country infrastructure to the international community to make attract institutional investors, who have the critical transition to this new, coop- to date been minimally involved. erative international order. Our biggest risk is complacency in The reforms are within our reach. the face of development challenges of We must organize the world’s multi­ unprecedented scale, urgency, and com- lateral development capabilities and plexity in the next decade. The young resources in a new way to achieve populations that will enter the develop- greater and more lasting development ing world’s labor force—many in states impact. There is considerable potential with features of fragility—will be much to be unlocked by governing the system larger than anything seen in past decades. as a system rather than as individual Fifty percent of Africa’s population is institutions, and by achieving much less than 20 years old. Automation and stronger complementarity between other technologies have also narrowed global, regional, and bilateral efforts. the window for countries to grow Effective country platforms, owned through labor-­intensive exports. We by governments, can maximize the must invest urgently to educate and contributions of development partners skill up young people; mobilize private as a group—the IFIs, UN agencies, and public finance to develop critical the increasingly important DFIs, and infrastructure, including transformative other partners. These platforms would cross-border projects that enable the also develop convergence around core growth of regional markets; and embark standards such as debt sustainability; on domestic market reforms to maximize local capacity building; and environ- competition and jobs. The consequences mental, social, and governance (ESG) of failure for this next generation will standards. Importantly, convergence not be simply economic. between official agencies will help pri- Likewise, the grave and multiple vate investment scale up. threats to the global commons demand There is also large untapped potential immediate action. The G20 EPG rec- for joint action to mitigate risks within ommended strengthening joint capacity countries, as well as to diversify risks across to do so, through global platforms that countries, in order to attract new pools bring together the players in each field of private capital. Opportunities include under the coordination of the designated

REVITALIZING THE SPIRIT OF BRETTON WOODS | 53 UN guardian agency (e.g., the World highly uneven across regions and have Health Organization for infectious dis- major components that are untested eases) and the World Bank, which has in crisis. We should not wait for the the broadest reach among the MDBs. next crisis before strengthening the Specific commons will leverage the global safety net.5 We must ensure an regional development banks and other adequately resourced global layer in stakeholders, including the major the IMF and stitch together the cur- philanthropies. rent decentralized structure of global, We need further reforms to avert regional, and bilateral arrangements. We financial crises and to help countries should also put in place a more robust grow without the recurring bouts of and integrated system of global risk instability that are a feature of today’s surveillance through coordinated efforts international monetary and financial by the IMF, the Financial Stability system. We must deepen domestic Board, and the Bank for International financial markets. But we must also Settlements, while preserving the inde- make it possible for countries to benefit pendence of their perspectives. from capital flows and run sustainable Policy thinking on many of these current account deficits, which are reforms has often been shaped by where fundamentally needed at their stage of one sits. We need a new collective development, just as countries such as resolve. It must be shaped by the urgency South Korea and Singapore did until of the challenges the inter­national com- the mid-1980s. munity faces and motivated by the larger It is critical, too, that we build a goal in which every nation has a vested more reliable global financial safety net interest: achieving a co­opera­tive inter- to sustain open markets and avoid the national order to keep the world open need for emerging nations to build up for growth, help achieve the aspirations excessive reserves at the cost of growth. of our citizens everywhere, and serve The multilayered arrangements that the global good. have evolved over the last decade are

5 During the global financial crisis, the US Federal Reserve’s liquidity swaps with selected central banks were a critical intervention. We cannot be assured of such actions in the future. Further, in response to a joint call by the International Monetary and Financial Committee and the G20, a significant group of countries pledged US$450 billion to temporarily augment IMF resources during the crisis. This option of bilateral borrowings remains for future major crises but will require swift mobilization.

54 | REVITALIZING THE SPIRIT OF BRETTON WOODS THE WORLD OF MORE UNPREDICTABLE AND HARDER- TO-UNDERSTAND NATIONAL AND GLOBAL ECONOMIES

MOHAMED A. EL-ERIAN Chief Economic Advisor, Allianz; President-Elect, Queens’ College, University of Cambridge; Advisory Council Member, Bretton Woods Committee; and former Chief Executive Officer, PIMCO

Economies are getting more compli- THE WHAT AND THE WHY cated and harder to predict, and not The global crisis that gripped the world just for economic and financial rea- economy 10 years ago and threatened sons. Moreover, what’s true at the to tip it into a multiyear depression national level is even more so at the was much more than a giant financial global level, raising the possibility of disruption and consequent “sudden self-­feeding dynamics. Fortunately, not stop.” It highlighted deep structural all of these developments are unfavor- fragilities, lagging understanding of the able. Understanding the underlying relationship between economics and drivers and how to manage them better finance, flawed incentive systems, and is the key to more welfare-enhancing an abdication of important management outcomes at the national, regional, and responsibilities in both the private and global levels. public sectors.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 55 No wonder the subsequent economic income and wealth to encompass growth was too low and insufficiently opportunity as well. inclusive, and this despite the massive • Some long-standing economic rela- stimulus provided by central banks. tionships have become less stable and No wonder societies have experienced harder to predict—from wage and an erosion in their trust in institutions productivity developments to the and “expert opinion,” both private and relationship between unemploy- public. No wonder the politics of anger ment and inflation. Accordingly, and increased polarization have become economic policy management has defining themes for so many countries. become more challenging. No wonder regional and international economic relationships have become • Accelerating technological change— more tentative. And no wonder it took including the interactions of rapid so long for the policy mind-sets to evolve progress in big data, artificial intel- away from overrelying on cyclical factors ligence, machine learning, and to embracing more forcefully the criti- mobility—is altering not just what cal structural and secular dimensions of we do but also how we do it. Societies economies. now face a growing number of chal- lenging questions about the nature of work, as well as firm and sector Recognition of Structural Forces organization. Also, recent advances Ten years after the financial crisis, we have not just enabled the good but now understand several factors much also enhanced the ability of “bad better: actors,” state and nonstate, to disrupt • In the lead-up to the financial crisis, the management of national security. governments in most advanced econ- • Technology-related uncertainties omies had wrongly embraced finance are amplified by the potential emer- as the main engine of growth. In the gence of what are effectively two process, they did more than over- major poles—China and the United compete for international financial States—with distinct operating linkages, underregulate the sector, and models, especially when it comes to inadvertently enable irresponsible and their respective governments’ inter- excessive risk taking. Critically, they actions with “big tech.” also underinvested in people, infra- structure, and other genuine drivers • Central bank policy experimenta- of productivity and inclusive, dura- tion, which was crucial to helping the ble prosperity. In that environment, world avoid that damaging depres- existing growth models became less sion, has come with “benefits, costs, effective and concerns about exces- and risks” (a versatile phrase used by sive inequality broadened beyond former Federal Reserve Chairman

56 | REVITALIZING THE SPIRIT OF BRETTON WOODS Ben Bernanke in August 2010 when global fragmentation and exacerbate he signaled the broadening objec- what is already a complex process of tives of the experimental policy policy coordination (and an increas- regime). Having already exploited ingly ineffective one). most of the benefits, we are now increasingly in the phase of navi- Short-Term Amplifiers gating the costs and risks. The structural uncertainties described • Political narratives and parties have above are being amplified by four become a lot less supportive of glo- shorter-­term phenomena. Making things balization, free trade, and several of even more interesting, these four situ- the key institutions that have under- ations are playing out simultaneously, pinned the functioning of the global and they also have interconnections that economy as we have gotten used to it. amplify the scope for spillovers, conta- gion, and multiple equilibria. • With all that comes the gradual and meaningful hollowing out of First, growth patterns around the world the middle of many distributions have become less correlated, and espe- that have helped anchor economic, cially so in the advanced world. Having social, and political stability. emerged from the global financial crisis • The cohesion of regional arrange- with similar challenges, the advanced ments is under greater pressure, economies essentially got stuck in a including that of the European “new normal” characterized by unusu- Union, which now faces a growing ally low growth, notable inequalities, set of challenges on account of declin- and excessive policy reliance on central ing growth momentum with pockets banks as the “only game in town.” This of high debt, Brexit, migration, the atmosphere fueled the growth of a mul- growth of antiestablishment parties, tifaceted antiestablishment phenomenon and the increasing assertiveness of with less predictable outcomes, includ- some central and eastern European ing some that not so long ago would members. have been deemed highly unlikely, if not unthinkable. It also had a host of nega- • Having lost trust in the effectiveness tive implications—economic (such as the and stability of the long-standing downward pressure on growth poten- core-periphery construct of the global tial), political (increased polarization), economy (and many of its key mul- financial (the shifting of debt burdens tilateral institutions), some emerging rather than their genuine alleviation), economies have been devoting more and institutional (less stable anchors). attention (and financial resources) to Yet it had the advantage that comes building alternative setups and institu- with countries’ finding themselves in tions. These actions add to the risks of

REVITALIZING THE SPIRIT OF BRETTON WOODS | 57 the same boat—as unfavor­able as that US Treasuries), US dollar appreciation, was—and therefore more open to multi­ intensifying trade tensions, and greater lateral discussions and coordination. financial volatility overall. More funda- As 2017 came to an end and as 2018 mentally, these developments raise the evolved, many embraced the hope that issue of subsequent convergence. Will this common boat was becoming a lot the United States be pulled down by more favorable. The notion of a “syn- economic weakness elsewhere, or will chronized pickup” in global growth the other countries converge upward? took hold as four important geographic segments of the global economy all Second, policy has become less correlated experienced better expansion prospects among systemically important central at the same time. Unfortunately, the banks. After a period of coordination underlying driving forces for expansion and correlation, there is now greater were quite different in each of these divergence in central bank policies. The segments, including, crucially, in their Federal Reserve is notably advanced in sustainability. its normalization, having stopped its The more durable pickup in one program of large-scale asset purchases, segment, the United States, was pri- hiked interest rates several times, and marily the result of pro-growth policies, embarked on a balance sheet reduction including tax cuts and deregulation. In process. The European Central Bank Europe, it was due more to the natural has announced its intention to exit its healing process, the beneficial impact of stimulus program, first by stopping asset which would likely prove harder to sus- purchases and then by hiking rates, tain without a proper policy handoff. In in what are likely to be much more China, growth remained over­dependent complicated circumstances. The Bank on credit creation in some important of Japan is less advanced, also facing pockets of the economy. And in some the challenge of guiding markets away systemically important emerging econo- from its interest rate ceiling measure mies, it reflected rebounds from one-off in an orderly fashion. And the Bank of “shocks” (such as demonetization in England is having to balance inflation India, political uncertainty in Brazil, and and Brexit considerations, both of which the commodity price decline in Russia). are uncertain. With that fragmentation, the This increased policy divergence advanced world has entered a phase of is likely to be followed by a second, increasing growth divergence and there- also “unusually uncertain,” period. fore policy differences too. The latter Again, there is no established playbook have led to greater dispersion in equity or historical experience for how this market valuations, significant inter- tightening of the global financial con- est rate differentials between the two ditions will impact growth and financial bond benchmarks (German Bunds and stability.

58 | REVITALIZING THE SPIRIT OF BRETTON WOODS Third, fragilities have already been for contagion to emerging countries, exposed in some emerging markets. The whether they have strong or weak fun- immediate uncertainties were amplified damentals. And that is what could expose by the currency crises in Argentina greater fragilities in this asset class that and Turkey, and the contagion risk for will need to be managed skillfully. others. Some halving of the values of these countries’ currencies in the first Fourth, increased risk of trade tensions. eight months of 2018 pointed to more All of this comes at a time when the than vulnerabilities in their fundamen- trading regime has become a lot more tals, such as tentative growth dynamics, uncertain. The United States and its foreign exchange mismatches, and major trading partners, including tra- excessive reliance on external credit. ditional allies, have engaged in a tit for It also highlighted the extent to which tat on both trade tariffs and restrictions technical and liquidity factors have on foreign direct investments. In game become driving forces in markets. After theory terms, a traditionally cooperative all, how could you explain similar moves game has turned uncooperative. for two countries that have responded The risk is that this process will lead quite differently to financial turmoil? to a full-blown global trade war that Argentina followed a traditional crisis tips the global economy into recession, reaction function. It raised interest rates accentuates financial instability, fuels the aggressively, complemented this action politics of anger, and increases geopolit- with a broader set of fiscal and structural ical tensions. Fortunately, this scenario policies, and secured large financial sup- does not dominate the distribution of port from the International Monetary potential outcomes. The most likely Fund (IMF). In contrast, Turkey sought to result is a series of tweaks leading to reinvent the emerging-market approach still free but fairer trade that modern- to a currency crisis by publicly dismissing izes existing trade arrangements and the use of interest rates and interventions addresses genuine grievances related by the IMF. to intellectual property rights, joint The similarities under very different venture requirements, and nontariff reaction functions point to systemic issues barriers. But a global trade war cannot in play. Absent renewed market stability, be ruled out. over the next few months, risks could There is also a probability, though be characterized by the further disen- small, that current tensions could cul- gagement of crossover investors from minate in the trade equivalent of the off-benchmark asset classes (starting with “Reagan moment.” As it did in the mili- emerging markets) and, following the tary buildup race into which it drew the overpromise of liquidity, pockets of desta- Soviet Union in the 1980s, the United bilizing illiquidity. That is what could States is destined to win a trade war, constitute the transmission mechanism provided it is willing to underwrite the

REVITALIZING THE SPIRIT OF BRETTON WOODS | 59 risk of damage and unintended conse- growth, politicians and policy makers quences in the process. The upside would currently have enough information be changes to the global trade landscape available for them to make progress on that would enhance growth in a signifi- such areas as these: cant and durable manner. • Education reform, infrastructure modernization and expansion, skill THE SO WHAT acquisition and retraining, and enhanced labor mobility—all made The result of all of this is not just that we more urgent by advances in technol- operate in a less predictable and hard- ogy and the increasing risk of change er-to-manage physical world. We are and displacement that is likely to also increasingly migrating to a virtual come with it world whose basic modes of opera- tion and behaviors are still evolving, • Rebalancing demand management and whose systemic importance has stances to deal with persistent imbal- developed much faster than govern- ances and, especially in the context ments, households, and companies were of regional economic arrangements, ready for—including the big tech firms to minimize the risk that asym- themselves. Added to that are the risk metrical adjustment processes will of fragmentation at the global level, unnecessarily curb growth significant mistrust in expert opinion and established paradigms (such as the • Strengthening safety nets for the Washington Consensus), and a trend most vulnerable segments of the toward self-insurance. economy This is a world full of both new • As distasteful as this may be, recogniz- opportunities and new risks. The key is ing that in certain extreme cases (such to enhance the former and manage the as that of ), debt forgiveness latter. And this requires adjustments not may be the only realistic way to alle- only in institutions and operating models, viate a liability overhang that erodes but also in mind-sets—including those actual and potential growth that pertain to growth models, the role of finance, and cross-border coordination. Having succeeded in derisking the Continuing with attempts to squeeze banking system and, with the exception higher and more inclusive growth out of a few areas, minimizing the risk of of debt- or leverage-driven growth other systemic shocks from it, there is models won’t work. What is needed is now a need to focus more on three addi- a comprehensive pivot to policies that tional areas: managing the morphing and focus on genuine and durable drivers of migration of financial risk to nonbanks, growth. While the economics discipline ensuring a better “benefits, costs, and may not fully understand the drivers of risks” equation for the evolving fintech

60 | REVITALIZING THE SPIRIT OF BRETTON WOODS efforts, and reducing the general and performance, genuine financial stability, well-ingrained tendency for finance to less inequality, and reduced political and tilt toward value extraction rather than geopolitical tensions. supporting value creation. Such progress is particularly import- These efforts will not yield their full ant in an economic context that is benefits if long-standing challenges in becoming more uncertain and harder multilateral institutions remain only to predict at both the national and global partially addressed. The IMF and World levels. Without it, the world economy Bank cannot operate as effective global will be subject to increased risk of conductors and clearinghouses for best adverse spillovers and multiple vicious practices if their legitimacy and cred- cycles. With time, even the more resil- ibility continue to be undermined by ient and better-managed economies will voice and representation shortfalls and find it hard, using a real estate anal- patchy effectiveness. These institutions ogy, to be good houses in challenged need to become more forward-looking, neighborhoods. more client-centric, and more agile. With better national and multi­lateral policies, these risks can not only be managed well but also give way to CONCLUDING REMARKS an exciting upside—that of virtuous Determined action on these fronts would cycles fueled by technological advances, not constitute the entirety of what is still underutilized resources, and lots of cash only a partially known solution set. But on the sidelines looking for productive it would go a long way toward setting opportunities. the foundation for improved economic

REVITALIZING THE SPIRIT OF BRETTON WOODS | 61 BRETTON WOODS AT 75 Rethinking Multilateral Cooperation for the Modern Era

ARMINIO FRAGA Founding Partner, Gávea Investimentos, and former President, Central Bank of Brazil

The 1944 Bretton Woods Conference and Development) provided support established a multilateral framework for and advice on long-term investment global cooperation on macroeconomic projects for development and reconstruc- stability, trade, and development that tion. And another postwar institution, has endured—despite inevitable dis- the General Agreement on Tariffs and ruptions and adjustments—for 75 years. Trade—expanded and reestablished as We should celebrate and praise these the World Trade Organization (WTO) in achievements. And although this system 1995—provided a framework for advanc- of global economic governance is now ing free trade, based on multilateral rules under serious strain, the Bretton Woods and dispute mechanisms. institutions, together with more recently This global arrangement allowed established international and regional plenty of room for different national and forums, will still have a meaningful regional approaches, as long as policies long-term role to play. did not lead to recurring balance-­of- At the macro level, Bretton Woods payments and inflation crises. Successful was based on fixed but adjustable countries were able to accumulate more exchange rates, and it relied on the newly capital, especially human, and build created International Monetary Fund institutions that made their gains more to monitor the consistency of national permanent. In many ways, the national policies and provide financial support strategies that paid off were conver- to countries facing external shocks. The gence bets—ones that aimed to narrow new World Bank (which began as the productivity gaps with more advanced International Bank for Reconstruction economies.

62 | REVITALIZING THE SPIRIT OF BRETTON WOODS Alongside the economic advances, progress since the Uruguay Round in many commentators saw clear signs 1994. On climate change and the envi- of political convergence toward more ronment—a contemporary existential liberal democratic regimes, culminat- imperative—recent negotiations have ing in the fall of the Berlin Wall and yielded limited results. Global public the collapse of the Soviet Union. The goods remain undersupplied in key areas American political scientist Francis such as security, migration, and global Fukuyama summarized this narrative health. And debt continues to grow in with his famous “end of history” thesis. many countries, often surpassing levels Over time, the Bretton Woods reached in the run-up to the 2008 global regime faced numerous challenges and financial crisis. crises. The move away from explicit Even some of the regional trade exchange rate parities to a system of achievements of the past quarter more flexible currencies in the early century are now vulnerable, such as 1970s marked the end of the origi- the European Union’s single market nal postwar monetary framework, but (assuming Brexit happens), the recently formal and informal inflation targeting replaced North American Free Trade subsequently reanchored the system. Agreement, Latin America’s Mercosur True, many developing countries bloc, and the Trans-Pacific Partnership. suffered far greater inflation and balance-­ In parallel with these economic of-payments problems than did more challenges, there is widespread popular mature economies, but efforts to restruc- frustration at most countries’ inability ture their international debts and deal to deal with the negative social implica- with high or hyperinflation were quite tions of the current global development successful. The World Bank and regional model. development banks adapted to a world In this context, it is no surprise of ever-greater capital needs by playing a that newer forums such as the G7, the more informational and catalytic role in G20, and the Financial Stability Board areas such as infrastructure and institution have partly replaced the formal Bretton building. And despite slow or no progress Woods institutions. Because decisions at the WTO level, many bilateral and made by international institutions often regional trade and investment arrange- carry the force of law, many countries ments were put in place. increasingly prefer to meet in forums Today, however, global economic that issue mostly nonbinding state- coordination has become more diffi- ments (a point often made by the late cult, if not outright impossible in some Tommaso Padoa-Schioppa, a former areas. On trade, despite the prolifera- European Central Bank board member tion of regional arrangements, there and Italian finance minister). has been no meaningful multilateral

REVITALIZING THE SPIRIT OF BRETTON WOODS | 63 Although not as strong as the origi- cooperation constitute a realistic practical nal Bretton Woods design, this evolving response to current challenges. arrangement may indicate that the Third, one must ask whether devel- global system for economic governance oping countries will continue trying to is flexible and can adapt to changing converge with more advanced econo- circumstances. But for the larger coun- mies, and whether the expanded Bretton tries or blocs, such as the United States, Woods family of institutions can remain the European Union, China, and Japan, meaningful stewards of global progress. the formal Bretton Woods system is My answers tend toward yes to both, if no longer central to macroeconomic one takes a long-term view. Developing stability, trade, or finance. countries will aim to emulate the earlier So what can we say about Bretton successes of the Asian Tigers and eastern Woods in a world in transition? Europe. And countries will prefer dialogue First, with the United States less and cooperation to failures like those of dominant and less willing to provide Venezuela and North Korea, which have global economic and financial lead- opted out of the global system. ership, systemic instability is likely to Last, this hopeful vision may now be increase. As the American economic under threat from the disturbing shift historian Charles Kindleberger famously toward illiberal and populist political warned, such a scenario typically occurs regimes around the world. But history in transitional moments when a global shows that liberal politics and economic hegemon is absent. Some signs of such policies have undoubtedly delivered more instability are already visible in trade progress and peace than any other system. and regional tensions, growing leverage, Seventy-five years ago, economic and rising nationalism. policy makers gathered at Bretton Woods Second, “Bretton Woods” should now to create a new financial order for the be seen to include not only the origi- postwar world. Today, their successors nal institutions but also more recently can still draw on some of their achieve- established global forums and regional ments in designing a global economic arrangements. These mechanisms of governance system for the 21st century.

64 | REVITALIZING THE SPIRIT OF BRETTON WOODS HAS GLOBALIZATION PEAKED? Renewing the Prospect and Promise of Global Integration

CATHERINE L. MANN Global Chief Economist, Citi, and former Chief Economist, Organisation for Economic Co-operation and Development

By many metrics, global integration retreat of global integration in the last has peaked. Is this a natural evolu- decade or so has been accompanied by tion—for example, is there a maximum worsening productivity growth and desired share of foreign products in the rising inequalities. The Bretton Woods consumption basket or a maximum institutions played an important role in fragmentation of production into global fostering decades of postwar global inte- value chains that can be achieved?1 Is gration. What role can they play in the this a beneficial outcome—for example, near future to renew the prospect and has global integration gone too far any- promise of global integration’s benefits way, especially financial globalization? while also mitigating its downsides of Considering these issues, the question financial crisis and costly adjustment? really is, If globalization has peaked, is this development to be welcomed or countered? TRADE INTEGRATION As a prelude to the conclusions, it HAS RETREATED is true that global integration has been World trade intensity rose dramatically accompanied by challenging financial in the years following the founding of exposures and adjustment costs for firms the Bretton Woods institutions but has and workers. But it is also true that the stalled in the 21st century. One metric,

1 With thanks to Dane Burkholder, officer analyst, Citi.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 65 exports plus imports as a share of global can be reached, avoiding deeper reforms, GDP, rose fairly steadily at first, and which would generate the greatest gains then at an increasing rate in the 1980s, but also the greatest adjustment chal- about doubling from its level in the lenges.2 That said, sectoral agreements, 1970s, only to stall at about 60 percent such as the first Information Technology of world GDP toward the end of the Agreement, have been successful at first decade of the new millennium. reducing protection for a widening Since then, this measure of integration group of signatories, supporting a signif- has retreated (figure 1). Similarly, the icant increase in trade.3 Yet the middle elasticity of GDP with respect to trade of the last decade saw the peak of trade peaked in the latter part of the 1990s negotiations of all types. before slowing down. By these metrics, Peak trade integration can be linked globalization has peaked. to the changing nature of trade and The decline in trade intensity is of trading partners. To an increas- due in part to stalled progress on trade ing degree, global growth and trade liberal­ization, which in turn is related to growth depend on emerging markets the coverage of trade negotiations and and relate to the services sector. With participants. The last completed multi- respect to changing trading partners lateral round of trade negotiations was and patterns, as trade liberal­ization first the Uruguay Round in 1995, which ush- took hold in the postwar years, trade ered in the World Trade Organization among advanced economies (AEs) rose (WTO) and the General Agreement on as a share of global trade. The oil crisis, Trade in Services (GATS). Since that the end of the gold exchange standard, time, WTO compilations show that high inflation, and subsequent reces- as multilateral negotiations stalled, bi­­ sion years stymied intra-AE trade in lateral agreements skyrocketed, from 1 the early 1970s and 1980s. But by the or 2 per year in the early 1990s to about 1990s, it had recovered to its previous 15 per year in the middle of the fol- peak, accounting for about 60 percent lowing decade; plurilateral agreements of global trade. also flourished. Bilateral and plurilateral However, from that point to the agreements have been described as either present, trade shares have changed again. stepping stones or stumbling blocks to Emerging economies (EEs) boosted more extensive liberalization. Either their role, both as exporters to the AEs way, they stick to sectors where deals (via fragmentation of production into

2 Richard Baldwin and Elena Seghezza, “Are Trade Blocs Building or Stumbling Blocks? New Evidence” (CEPR Discussion Paper 6599, Center for Economic and Policy Research, Washington, DC, 2007). 3 Catherine L. Mann and Xiupeng Liu, “The Information Technology Agreement: Sui Generis or Model Stepping Stone?,” in Multilateralizing Regionalism, edited by Richard Baldwin and Patrick Low (Cambridge, UK: Cambridge University Press, 2009), 182–216.

66 | REVITALIZING THE SPIRIT OF BRETTON WOODS FIGURE 1. GLOBAL TRADE VOLUME AS A PERCENTAGE OF GDP, 1960–2016

Kennedy Round Round Uruguay Round Doha Round

70

60 NAFTA 50 EU Single Market EU Single

40 PERCENTAGE

30

20 1960 1969 1975 1981 1987 1993 1999 2005 2011 2017

World exports plus imports (% of GDP)

SOURCE: Data from World Bank EU = European Union; NAFTA = North American Free Trade Agreement.

global hub-and-spoke networks) and via The changing patterns and intensity intra-EE trade. Now, AE-to-AE trade of trade flows also have implications for accounts for only about 40 percent of competitive pressures among firms in global trade. Because average protec- AEs. Products from AEs increasingly tion measures in AE markets are lower compete with products from EEs. Studies than those in the EEs, a rising share of from the Organisation for Economic EE trade means that a greater share of Co-operation and Dev­elopment (OECD) global trade is burdened by protection, delve deeper into the nature of this com- including behind-the-­border protec- petition, with an important new finding. tion,4 and this is one factor underlying As a starting point, AEs specialize in more peak globalization. complex exports than do EEs. Over time, and as expected, EE products move up in

4 John S. Wilson, Catherine L. Mann, and Tsunehiro Otsuki, “Assessing the Potential Benefit of Trade Facilitation: A Global Perspective” (World Bank Policy Research Working Paper No. 3224, World Bank, Washington, DC, February 2004), https://ssrn.com/abstract=610266.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 67 complexity, and AE products face these in goods, is more globally dispersed new competitors.5 across markets (as compared with the But there is a second dimension to concentration of goods production this competition. As EE products push into “factory” North America, Asia, and into the complexity space, AE prod- Europe), and is more trade cycle resilient ucts compete more with each other (i.e., is less tightly correlated with and within a now narrower product set.6 dampened relative to the business cycle). The research finds that the competitive Trade in services tends to face higher pressure among AEs is greater than barriers than trade in goods, so trade in the competitive pressure from the EEs. services could potentially be rising faster AE firms’ responses to such intensified than it is. The WTO and GATS consti- product competition varies, but they tute an important start to services trade can include outsourcing more compo- liberalization, but there is still a need nents to reduce cost or entering into to institutionalize the presumption of mergers and acquisitions to protect openness in trade in services. To push past market position. An alternative strategy “peak globalization,” deeper liberalization could involve AE firms’ innovating and by emerging markets in goods and by expanding the complexity spectrum; to all countries in services will be needed.7 some degree, this process is underway But is there an incentive to liberalize with technology products. But evidence trade in services? Services account for on the slowdown in productivity growth about 50 percent of the value added in is consistent with the evidence that AE manufacturing exports. Liberalization competition at the complexity frontier enhances the competitiveness of services, is less strong than at some earlier times. which increases the competitiveness of Another feature of recent trade is manufacturing. There are two channels: the rising importance of international reduced input costs and enhanced inter- trade in services. Although accounting firm competition in the services sector.8 for only about 25 percent of global Another facet of the decline in trade trade, cross-border services trade has intensity in recent years is the unravel­ been growing more rapidly than trade ing of global production networks

5 Sonia Araujo, Thomas Chalaux, and David Haugh, “Who’s in Your Export Market? The Changing Pattern of Competition in World Trade” (OECD Economics Department Working Paper No. 1526, Organisation for Economic Co-operation and Development, Paris, 2018). 6 Araujo, Chalaux, and Haugh, “Who’s in Your Export Market?” 7 Bernard M. Hoekman and Aaditya Mattoo, “Liberalizing Trade in Services: Lessons from Regional and WTO Negotiations” (EUI RSCAS No. 2013/34, Robert Schuman Center for Advanced Studies, European University Institute, Fiesole, Italy, 2013); Organisation for Economic Co-operation and Development, Services Trade Policies and the Global Economy (Paris: OECD Publishing, 2017). 8 David Haugh, Alexandre Kopoin, Elena Rusticelli, David Turner, and Richard Dutu, “Cardiac Arrest or Dizzy Spell: Why Is World Trade So Weak and What Can Policy Do About It?” (OECD Economic Policy Paper No. 18, Organisation for Economic Co-operation and Development, Paris, 2016).

68 | REVITALIZING THE SPIRIT OF BRETTON WOODS (so-called global value chains, or GVCs). production networks that disintegrate According to the OECD’s structural on account of protectionist policies GVC indicator, GVCs unraveled over deny productivity improvements and the years 2011–2015 (the latest data) after competitiveness gains to all economies having deepened for the previous two touched by the protection. Global Trade and a half decades. Global production Alert data show measures that stymie networks, as well as managerial and con- trade are on the rise, leaving the stock tractual relationships among firms, are a of protectionist measures higher than source of technology transfer, economies in any recent time period.11 of scale, and cluster economics, all of which support productivity growth.9 OECD firm-level analysis shows that the FINANCIAL most productive firms are those that are INTEGRATION part of global families, linked through HAS STALLED hub-and-spoke networks. This research Cross-border financial flows, as measured finds that exporting to a multinational by the sum of assets and liabilities as a corporation is associated with a greater share of GDP, peaked in 2007 (figure 2). productivity gain than importing from The subsequent retreat has taken place one, which suggests the importance of mostly in AEs. Emerging markets other domestic reforms to get the most from than China stabilized their exposures, global integration.10 leaving China as the country with a ris- The limits of GVCs might have ing financial exposure. The retreat is not been reached within some sectors and completely negative. Reduced financial economies, given enhanced concern for integration could moderate a transmis- supply chain vulnerability and desire for sion channel for economic crisis. On the supply chain transparency. However, other hand, restraining global financial limitations on or, worse, the unraveling markets reduces the gains from diversi- of supply chains before poorer countries fication, trade and investment finance, have a chance to gain a foothold in and intertemporal growth smoothing.12 global trade undermines these countries’ The types of financial integra- prospects for economic integration, in tion have also changed. Bank foreign turn constraining their convergence claims and bonds issued in international to higher living standards. Global

9 Measuring and Analyzing the Impact of GVCs on Economic Development (Washington, DC: World Bank Group, 2017). 10 Chiara Criscuolo and Johnathan Timmis, “The Relationship between Global Value Chains and Productivity,” International Productivity Monitor 32 (2017): 61–83. 11 Global Trade Alert. https://www.globaltradealert.org/ (accessed 02/19). 12 Aida Caldera, Alain de Serres, Fillip Gori, and Oliver Rohn, “Economic Resilience: Trade- Offs between Growth and Financial Fragility,” VOX CEPR Policy Portal (blog), March 28, 2017, https://voxeu.org/article/economic-resilience-growth-and-economic-fragility-trade.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 69 FIGURE 2. TOTAL ASSETS AND LIABILITIES AS A SHARE OF GDP, 1990–2017

60

50

40

30

20

10

% OF GDP 0

-10 AEs

-20 EEs

-30 World

-40

1991 1989 1994 1997 2000 2003 2006 2009 2012 2015 2018

Source: Data from International Monetary Fund balance-of-payments statistics and Citi Research. AEs = advanced economies; EEs = emerging economies.

markets peaked in 2007 and have turbulence, and the nature of networks decreased ever since. Other types of and implicit support is less well known.13 global international claims, including Currency, maturity, and liquidity nonbank financial flows, peaked in 2007 mismatches can be present in nonbank and have been steady ever since. Lower finance. OECD research points to which global connectivity through banks could types of macroprudential policies reduce make contagion and the taxpayer con- the risks of crisis while not limiting the sequences of financial crisis less severe upside gains from financial integration. by reducing government responsibility Portfolio debt flows have been associated for “too-big-to-fail” institutions. But with greater risk of financial crisis and the data suggest that the nonbank pri- so warrant particular attention. Low vate sector may now be the dominant debt-to-income ratios can help avoid channel for transmission of financial excessive exposure to real estate, which

13 “Global Shadow Banking Monitoring Report 2017” (Financial Stability Board, Basel, Switzerland, 2018).

70 | REVITALIZING THE SPIRIT OF BRETTON WOODS FIGURE 3. FOREIGN EXCHANGE RESERVES AND US DOLLAR SHARE, Q4 2015–Q1 2018

80 14

70 12

60 10 TRILLIONS US$

50 8 40 Unallocated (RHS) 6 % OF TOTAL % OF 30 Allocated US$ (RHS)

Allocated other (RHS) 4 20 US$ Share (LHS)

10 2

0 0

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

SOURCE: Data from International Monetary Fund, “Currency Composition of Official Foreign Exchange Reserves” (accessed 02/19), http://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4; Citi Research. RHS = right-hand side; LHS = left-hand side.

tends to be associated with financial as the international reserve currency has crisis in AEs.14 come under question, and compared with International reserves are another the 1980s, the dollar share has trended measure of financial globalization, and lower, albeit with some technical dips they also appear to have peaked. After and rises (figure 3). increasing from about US$0.5 trillion at International reserves are an “insur- the start of the floating rate period, inter- ance policy” against unstable financial national reserve holdings rose steadily flows, although countries use this and then accelerated in the early years insurance policy to offset movements of this century, to peak at US$12 trillion in foreign capital to different degrees. in 2010. Since then, reserves have moved Excess reserves can be viewed as a drag sideways. The US dollar’s preeminence on global demand and on a country’s

14 “How to Restore a Healthy Financial Sector That Supports Long-Lasting, Inclusive Growth?” (OECD Economics Department Policy Note No. 27, Paris, Organisation for Economic Co-operation and Development, 2015).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 71 potential growth, in that they represent Kingdom, for example, if immigration savings rather than demand, and they had been frozen in 1990, real GDP in are invested in low-return financial those economies would have been lower investments rather than productivity-­ by around 155 billion euros and 175 enhancing real investments.15 With billion pounds, respectively, in 2014.17 respect to the rising US dollar share, On the other hand, financial flows some of this increase comes as an out- associated with migration have varied. come of net stabilizing interventions and Remittances associated with migration some from the incorporation of Chinese rose steadily over the 1980s and 1990s, reserve holdings into the “allocated” accelerating in the following decade category.16 before stalling at about US$600 billion in the middle of the present decade, and have since recovered. There are advan- CROSS-BORDER PEOPLE tages and disadvantages to remittance FLOWS HAVE NOT flows. On the one hand, remittances PEAKED increase the private incomes of recipients Increased migration and global tourism that can be used to finance education mean that, unlike products or finance, or entrepreneurship without incurring flows of people around the world aren’t debt. On the other hand, remittance slowing down. According to OECD flows might undermine incentives for and World Bank data, the stock of doc- economic activity among recipients, umented migrants rose from about 150 and they could harm fiscal balances million in 1990, about equally from (through tax avoidance) and thus limit advanced and emerging markets, to capacity to fund investment in large- about 250 million in 2017. In the last scale public projects. decade, the bulk of the increase in the Temporary flows of people—through stock of migrants is within the AEs. international tourism—have boomed, This stock of migrants accounts for more than doubling since 1995 to about about 3 percent of the global popula- 1.2 billion people in 2016. Tourism arriv- tion. Increased migration is beneficial als in the Asia-Pacific region rose the to economies over the long run and most, but the bulk of tourist arrivals conducive to native and aggregate pros- are in the European Union. The finan- perity. In Germany and the United cial flows associated with tourism are

15 “Assessing Reserve Adequacy,” International Monetary Fund, accessed November 20, 2018, https://www.imf.org/external/np/spr/ara/. 16 Anna Wong, “Measuring and Inference in International Reserve Diversification” (Working Paper Series 07-6, Peterson Institute for International Economics, Washington, DC, 2007). 17 Ian Goldin, Andrew Pitt, Benjamin Nabarro, and Kathleen Boyle, “Migration and the Economy: Economic Realities, Social Impacts & Political Choices” (Citi Global Perspectives & Solutions, Citigroup, New York, 2018).

72 | REVITALIZING THE SPIRIT OF BRETTON WOODS increasing too. World Travel and Tourism Post–financial crisis, although the Council and World Bank data calculate average rate of GDP growth has nearly the direct contribution of tourism to recovered to its longer-term trend, global GDP at about 3 percent in 2017, about 15 percent of global GDP was increasing at about 4 percent per year in lost, apparently permanently: policies real terms. The indirect contribution to never supported a strong enough boom GDP (via local services such as restau- to recover the output loss. As well, the rants and hotels) is more than double the rate of GDP per capita growth slowed: direct contribution.18 average GDP per capita growth from 2008 to 2018 was 2.3 percent year over year, compared with 4.7 percent from GLOBALIZATION, 1990 to 2007 (figure 4). This fall was PRODUCTIVITY, AND most pronounced in high- and upper-­ INEQUALITY: POSITIVELY middle-income countries, whereas for OR NEGATIVELY lower-middle-income­ and low-income CORRELATED? countries, GDP per capita growth increased. Rather than convergence up, What other considerations are rele- there appears to have been convergence vant for whether to cheer or bemoan down. Sluggish global integration is both global integration in retreat? The global a cause and an outcome of the loss in financial crisis exposed and exacerbated output and the divergence in growth brewing macroeconomic, societal, and prospects in terms of GDP per capita. geographic troubles, including increas- The slowing into retreat of globaliza- ing debt burdens, rising inequalities, and tion is correlated with the evolution of deteriorating productivity growth. Are labor productivity. Productivity growth these troubles caused by globalization, has been weak since the financial crisis, such that a retreat from globalization although it was already sluggish. Labor will help to remedy them? The return productivity in OECD countries has to global growth since the financial grown at about half the rate of the crisis has not improved the trajectories precrisis period. Productivity growth of debt, inequality, or productivity, but has slowed across most industries, par- globalization has stalled. So the problem ticularly manufacturing, although the may be not too much globalization, growth in manufacturing has outpaced but too little globalization. What is the that in services. Research cited above evidence on the relationships between confirms the links between GVCs, globalization, productivity growth, and global­ization, and productivity. It should inequalities? be no surprise that all are in retreat

18 “Travel and Tourism Power and Performance Report,” World Travel & Tourism Council, https:// www.wttc.org/publications/2018/power-and-performance/.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 73 FIGURE 4. DIVERGENCE IN GDP PER CAPITA GROWTH Avg. YoY % change in GDP per capita

1990–2007 2008–2018 10

8

6

4

2

0 Global High Upper Lower Low income middle middle income income income

SOURCE: Data from World Bank and Citi Research.

together. A recommitment to policies But imports of intermediates are pos- that support deeper integration is a key itively associated with manufacturing ingredient in the recipe to improve employment, consistent with the results productivity growth. of studies of GVCs. Investment in infor- But inequality has risen; isn’t this mation and communication technology due to globalization? There are multi- and in machinery, both GVC intensive, ple dimensions of inequality—within has tended to be positively associated with and across generations, within and across manufacturing employment. Further, in regions. Globalization is often cited as a AEs, losses in manufacturing employment cause of lost manufacturing employment, are correlated with changes in consump- a factor related to income, intergener- tion preferences toward services rather ational, and regional inequalities. A than goods.19 closer look at changes in manufacturing Regional inequality has increased. employment highlights that certain kinds Successful economic clusters based on of trade do matter for manufacturing job manufacturing can crowd out other sec- loss, but also that factors other than trade tors by attracting human resources and are at work. Research shows that imports paying them well. But if the core of the for final consumption are negatively asso- cluster weakens, the whole cluster may ciated with manufacturing employment. fail, potentially leaving the associated

19 “How to Make Trade Work for All,” in OECD Economic Outlook (Paris: OECD Publishing, 2017), 63–106.

74 | REVITALIZING THE SPIRIT OF BRETTON WOODS FIGURE 5. SLOWED INCOME GAINS ACROSS GENERATIONS Earnings versus age for generations born in a given year

28,000

26,000

24,000

22,000

20,000 BIRTH YEAR 18,000 1940 Data cover 24 countries in the Organisation for 2010 US$ PPP 16,000 1950 Economic Co-operation 14,000 1960 and Development. The 1970 series shown are derived 12,000 for each cohort from a 1980 specification controlling 10,000 for country and age fixed 8,000 effects. 20–24 30–34 40–44 50–54 60–64 70–74 AGE

SOURCE: Organisation for Economic Co-operation and Development, Preventing Ageing Unequally (Paris: OECD Publishing, 2017). PPP = purchasing power parity.

region worse off. Changing patterns point to the need for policy strategies of trade and technology have put some at the subnational level. A policy recipe clusters in AE regions at risk. But the that develops place- and person-based research that uses a regional perspective initiatives of education, diversifica- yields the same conclusion as research tion, and mobility services is needed. based on a national perspective: techno- A retreat from globalization is not part logical change dominates trade shocks of that recipe. in triggering inequality.20 Across generations, the brunt of the Regardless of the type of shocks, output loss and the change in labor because firms and employment are productivity has been borne dispro- regionally concentrated, technology and portionately by younger generations globalization shocks will have localized (figure 5). Usually real income rises implications, and localized implications over a lifetime, but this has not been

20 Elena Rusticelli, David Haugh, Axelle Arquie, and Lilas Demmou, “Going Local: A Regional Perspective on How Trade Affects Labour Markets and Inequality” (OECD Economics Department Working Papers No. 1530, Organisation for Economic Co-operation and Development, Paris, 2018).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 75 true for recent cohorts. For those born and economic well-being. The retreat in the 1960s, income growth falters in from the principles of Bretton Woods their peak earning years (in their 50s). has coincided with a retreat from global- The situation for the 1970s-born cohort ization, stagnant productivity growth, is worse: their income growth falls in and widening inequalities. A renewed their formative years (their late 30s). In partnership between the Bretton all, these generations will be challenged Woods institutions and the objectives to achieve their own dreams while sup- of domestic policies is needed to renew porting their fiscal commitments to the prospect and promise of global inte- the health and pensions of their par- gration to benefit all. ents. How is this predicament related to The following outlines a plan for global­ization? The earlier cohorts grew renewing the partnership for the next up in an environment of deepening 75 years: globalization and rising productivity 1. Renewing prospects for globalization: growth, whereas their children live in a period in which both are in retreat. a. Trade negotiations. Trade nego- tiations have stalled, whether multilateral, plurilateral, or even CONCLUSIONS bilateral. The Bretton Woods Global integration—whether through institutions need to continue to trade and production networks, financial explore open sectoral approaches flows, or migration and tourism—is a whereby a core set of countries process. Consumers, firms, and workers can reach agreements to further are all part of that process. The benefit liberalize trade. Such approaches of the process is productivity growth, create momentum and catalyze which is the source of durable economic participation by other economies. well-being and helps protect an econ- omy in the face of financial volatility. b. Engaging emerging-market econo- The challenge of the process is in the mies. Because emerging markets adjustments that face workers and firms. are a rising share of global trade, a Policy choices and business decisions can challenge for the Bretton Woods help create an environment in which institutions is to convince EEs of firms and workers are resilient and able the benefits of globalization and to turn the process to their benefit. to reduce barriers facing not only In 1944, the Bretton Woods insti- AE-to-EE trade but, importantly, tutions were set up to promote trade trade between EEs. and global integration and to support c. Services. Because trade in ser- transformation with the objectives of vices is growing quickly and is increasing global and national growth often the comparative advantage

76 | REVITALIZING THE SPIRIT OF BRETTON WOODS of AEs, and because services are 2. Renewing the promise of globaliza- key to competitive goods trade, tion: the liberalization of services a. Competition, innovation, and trade needs to be reinvigorated. globalization. A new agenda for The WTO and GATS need to the Bretton Woods institutions embrace a negative list approach should focus on innovation and (similar to that of the earlier competition as part of the man- General Agreement on Tariffs date to deepen globalization, and Trade, or GATT), whereby which would renew the promise services sectors are presumed to that globalization and productiv- be open on a most-favored-nation ity growth go hand in hand. basis unless specifically derogated. b. Domestic strategies to meet global- d. Financial integration. Reviving the ization and inequality challenges. role of the Bretton Woods insti- A new agenda for the Bretton tutions of supporting financial Woods institutions recognizes integration while reducing the fear that the promise of globalization of crisis could reduce excess inter- will not be met unless domestic national reserves holdings, with a policies, including those at the potential benefit of real investment subnational level, are deployed to to support potential output, pro- ensure that gains from globaliza- ductivity, and growth. Reassessing tion are more widely shared. types of financial integration to maximize real investment and gains is an important task.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 77 TOWARD A NEW ECONOMY OF TRUST

PHILIPPE AMON Chairman and Chief Executive Officer, SICPA Holdings SA

Our economic well-being depends The wholesaler might inquire, Am I on ever more complicated and inter- certain of the origin of the milk? Can I trace connected transactions and decisions it throughout the supply and distribution that cross over traditional borders and chains? The retailer wants to know, Can sovereignties. This interdependence I be sure the milk has not been adulterated forms a delicate network of interactions. or diluted? Am I on a level playing field Trust at each stage is crucial, but the with my competitors? The authorities ask, balance can be fragile. When it is lost, How do we ensure that economic actors are the impact can be wide-reaching and paying the correct taxes or receiving the right perhaps irreparable. The “economy of subsidies? How do we facilitate compliance trust” is about using modern technology with health standards? and innovations, empowered by the concept of “trust by design,” to reinforce and sustain this network. TRUST IS ESSENTIAL Day-to-day transactions generally The questions set out above are distinct, involve questions. For example, a con- but what they have in common is their sumer will ask, Can I enjoy my milk with reliance on trust. Every day, economic confidence? Can I trace it “from farm to and social actors make a myriad of deci- fork”? Behind such questions posed by sions based on the trust they have in their consumers lie a number of other related transaction partners, in the transactions queries voiced by all those engaged themselves, in their governments, and in supplying milk. The farmer may even in the global environment. Trust at wonder, Is the cow feed free of harmful a micro level has an impact at a macro constituents? Where does the feed come from? level, as well as on the global stage. This Can I track the milk after it leaves my farm? simple example of the glass of milk is

78 | REVITALIZING THE SPIRIT OF BRETTON WOODS replicated millions of times daily, in more in spending decisions. For governments, or less complex situations. trust can facilitate the collection of taxes When this trust is compromised, eco- needed to finance necessary public ser- nomic activity suffers and social cohesion vices. For citizens, it can ensure that the is undermined. In the past, breaches in government and the private sector are the supply and distribution chains of seen as legitimate actors making good food products have resulted in signifi- use of limited resources. cant economic costs—loss of human lives, destruction of livestock, damage to the reputation of companies, and ulti- BUILDING A NEW mately, changes in consumers’ habits. ECONOMY OF TRUST In other contexts, trade in illicit goods “Enforcing trust” must give way to and services may support the financ- “enabling trust.” Governments, busi- ing of criminal enterprises and terrorist nesses, consumers, and citizens have organizations. The underdeclaration relied over time on many ways to gen- of tax due hinders domestic revenue erate trust. In some circumstances, a mobilization, challenging the efficiency handshake might be sufficient to cement of governments and feeding a sense of a deal. Governments often take steps to unfairness. Identity theft undermines enforce trust through regulations and online sales, drives the darknet, and more programs, such as hiring quality and ominously, facilitates human trafficking. tax inspectors to scrutinize production Unprotected voter rolls endanger the sites and tax returns, or imposing pen- credibility of elections and democratic alties on those who misbehave. Such an systems. Lack of trust may even play a approach is never completely success- role in the perceived sense of loss of ful and entails significant costs. The government sovereignty and in doubts rapid development of new technologies about the continued improvement in is opening up a new, more efficient living standards. approach that benefits all stakeholders, When trust is enabled, the benefit is whereby enforcing trust can be replaced substantial. Enabling trust in economic by enabling trust. relations is a key driver of growth and The technology-driven enabling of can transform business relationships. trust underpins the economy of trust and Trust is needed to promote an econ- ultimately acts as a tool of prevention. omy that is inclusive, transparent, and This change of paradigm is facilitated by accountable. Trust promotes efficiency, innovation, the combination of digital facilitates company relations with sup- and material technologies, advances in pliers and customers alike, and reduces data analysis and artificial intelligence, administrative costs. It can increase and the ability to create trust by design. consumer confidence, a key ingredient Digital solutions have major roles to

REVITALIZING THE SPIRIT OF BRETTON WOODS | 79 play: enabling products and transactions product—the “product passport”—is to be seamlessly and securely identi- created, using automated verification fied, authenticated, tracked, and traced equipment and processes. Step two: throughout the product life cycle; safe- Unique authentication marks are applied guarding intellectual property rights; to the product or its packaging. They assuring the correct application of tax could take the form of a secure label policies; protecting the integrity of per- or stamp affixed to the packaging, or a sonal identity; and promoting citizens’ direct mark on it. Physical security fea- well-being. tures are combined with a digital data Trust is strengthened by third-party bearer, such as a two-dimensional bar validation. Governments are increas- code. Step three: The product’s journey ingly challenged by the evolving nature to the consumer is tracked, with key of borders and the virtual world created events recorded. Consumers can check by the Internet. In response, they have the digital marks of any product they classically adopted the “trusted trader” purchase thanks to applications on their model, based on risk profiling, self-­ smartphones. Through their reporting of regulation, and self-declaration. But suspicious products, consumers contrib- what happens when it fails? What if ute to the fight against illicit trade and are producers or distributors cheat? Looking actively empowered to build an economy for fraudulent behavior is like looking of trust. Step four: The data generated for a needle in a haystack. A third-party in the previous steps can help build a validator tasked with guaranteeing the “digital twin” version of the product legitimacy of supply and distribution that can be exploited thanks to business chains can ease the burden on stretched intelligence. At a broader level, these governments and deter rogue operators. product-specific data can be linked to or integrated with data from multiple other sources, facilitating interagency DIGITAL SOLUTIONS data exchange. Secure markings repre- DESIGNED TO ENABLE sent court-admissible evidence for the TRUST prosecution of offenders. Secure track and trace (T&T) solutions Governments are increasingly deploy- open up a wealth of opportunities. They ing secure T&T systems to manage can ensure that we know where a prod- high-risk situations, such as combating uct and its constituent components come tax fraud. A wide range of excisable prod- from, that production conditions were ucts are covered by these systems, such as prescribed, and that its journey from as tobacco, beer, wine, spirits, mineral manufacturer to consumer is identi- water, soft drinks (increasingly relevant fied and recorded. There are four steps with the imposition of health-driven to T&T. Step one: The identity of the “sugar taxes”), and CDs and DVDs.

80 | REVITALIZING THE SPIRIT OF BRETTON WOODS Early adopters were Brazil, , deposit. To guarantee these proper- and Turkey. They were joined by coun- ties and enable trust, digital integrity tries such as Chile, Ecuador, Georgia, solutions need to incorporate several Kenya, Morocco, and Tanzania. Using layers of tech­nologies that mutually SICPATRACE® solutions, they have reinforce each other, including cyber- optimized their collection of tax reve- security, cloud computing, encryption, nue and enhanced their capacity for tax digital identity, artificial intelligence, a administration. They have also protected digital-physical link, and blockchain. the legitimate economy, created a level In Estonia, blockchain secures a large playing field, improved public health, number of digital records and databases and empowered citizens. Similarly, in to make them immutable and tamper-­ the health sector, the serialization of proof. Blockchain further secures the pharmaceutical products helps create traceability and auditability of data, trust that a pack of pills is genuine. In making people accountable for their the oil sector, the injection of a secure interventions. But again, a single tech- molecular marker into the fuel ensures nology—even blockchain—will not be that gasoline bought at the filling station sufficient to solve all issues. is unadulterated, does not damage the Digital solutions will facilitate the vehicle, and fully respects tax laws. collection of data, but the use of these Emerging digital integrity solutions data must be appropriately regulated. will strengthen current solutions to On the one hand, the generation and bolster trust. To be effective, digital effective exploitation of data and digi- integrity solutions need to deliver on tal technologies (such as tracking illicit multiple levels, ensuring the integrity, financial flows) can help combat crime, immutability, and security of data; generate value for consumers (i.e., the freedom from tampering and coun- data can be monetized), and deliver effi- terfeiting; confidentiality, privacy, and ciency gains for businesses. Digitalization right of consent; sovereignty; trace- of identity has the potential to unlock ability, auditability, and accountability; access to banking and social safety nets, device integrity; and system resilience. and more broadly, to assure economic Importantly, data must be protected gains for all. On the other hand, however, from hacking and from leaks. Those digitalization can endanger the right of transacting in the digital world must individuals to privacy, which in some own their own data and the proof cases might even be life threatening. of their transactions, independently That is why so many governments are from those who manage the system. addressing the issue of digitalization, data Transaction proof can take the form privacy, and ethics. of a “digital receipt,” equivalent to “Enabling trust” is likely to provide the old bank receipt received after a the most favorable cost-benefit ratio for

REVITALIZING THE SPIRIT OF BRETTON WOODS | 81 all actors. It is clear that digital solutions shifts continue, there will be increased have a cost in terms of research, devel- incentives to ensure that technologies are opment, and implementation. However, inclusive. It is vital that the full range of the cost of alternative solutions—we technologies, be they material or digital, mentioned posting tax inspectors inside and their benefits be accessible to the production plants—is clearly higher. vast majority. New technologies must The Kenya Revenue Authority reported not be resource greedy and must help that its new digital tax stamp system was us make better, indeed the best possi- much cheaper than the previous control ble, use of the world’s scarce resources, system, that cost reduction was a key promoting a healthy and sustainable driver of choosing a digital solution, environment.­ Digitalization and data will and that digitalization had improved modify governments’ approach to legis- efficiency. Ultimately, the cost of digital lation and regulation. Governments will solutions must also be balanced against need to strike the right balance between the option of not adopting measures to technology-specific­ measures and simple create the economy of trust. Common solutions that are globally compatible. sense dictates their adoption. As technology evolves and digitali- zation deepens, new trends will emerge. THE ROLE OF THE “Digital twins” that mirror real trans- INTERNATIONAL actions and assets are becoming more COMMUNITY common. The gap between physical The economy of trust is vital in sup- and digital transactions will become porting achievement of the Sustainable increasingly blurred. For government, Development Goals (SDGs) by 2030. this development means that the decla- None of the 17 goals directly aims to ration process used for taxation will be promote trust, yet nobody expects that replaced with transaction-by-­transaction any of them can reasonably be achieved monitoring based on trust by design. without strengthening trust. Goal 1.A Governments will move away from being mandates the significant mobilization enforcers of standards and taxes, with all of resources by governments to imple- the cost and complexity that this role ment policies to end poverty in all its traditionally entails, to become certi- dimensions. The adoption of secure fiers of trusted third-party technology T&T solutions can help substantially agents. The free-market economy will with domestic resource mobilization. continue to drive technology solutions Goal 14.6 mandates that countries imple- that create value and generate benefits for ment international instruments to combat businesses, consumers, and the govern- illegal, unreported, and unregulated fish- ment—provided governments facilitate ing. Fish traceability systems can enable an enabling environment in which inno- trust among all actors in a sector fraught vation can thrive. As global demographic with challenges. And that is not to forget

82 | REVITALIZING THE SPIRIT OF BRETTON WOODS that the measurement of progress toward of digital T&T solutions for tobacco the SDGs requires trusted data, which in products and dictates that such systems most cases can be generated and collected be developed by third-party agents, not by using digital technology. the tobacco industry itself. For its part, the The mandate of the International Organisation for Economic Co-operation Monetary Fund (IMF) and the World and Development has taken the lead on Bank to provide policy advice, pro- disseminating knowledge about digital gram financing, and technical assistance technologies, including blockchain. The means that these two institutions have a staff of the World Bank and the IMF key role in the economy of trust. Public would benefit from a deeper understand- support for the continuing role of inter- ing of such digital technologies. Finally, national institutions such as these two technical assistance given by both Bretton depends on their relevance in a global- Woods institutions—often assessed by ized world. These institutions emphasize recipient countries as the most beneficial good governance and the rule of law. support they receive—is still largely lim- These key pillars to enabling trust could ited to training officials and supporting be supplemented by these institutions’ the design of institutions and internal lending support to the full range of governance systems. Relatively little tech- available technologies. nical assistance is given in terms of advice To keep up with the evolving and provision of concrete technology economic landscape and pace of dig- solutions to help authorities strengthen italization, both institutions need to their processes and move up the tech- be well informed about the charac- nology ladder. This gap is waiting to be teristics of technological progress, the filled and presents an opportunity for linkages between technological prog- both institutions. ress and economic outcomes, and the The relevance of the mandate of the technology standards set by other inter- Bretton Woods Committee is undeni- national institutions. Both institutions able. Bringing together representatives of are becoming more open to interacting international institutions, governments, with providers of technology solutions. and the private sector, and promoting the Recognizing the need for such solutions, cross-fertilization of ideas and innovation the World Bank has launched the Global to address current and upcoming chal- GovTech Partnership, bringing together lenges, are essential. We strongly support governments and the private sector for this ambition. The Committee should digitalization. The IMF and World Bank continue to stimulate discussions on must also fully leverage the work done emerging topics linked to innovation by other international institutions. For and technology through organizing sem- example, the World Health Organization inars as well as including these topics at Protocol to Eliminate Illicit Trade in its Annual Meeting and International Tobacco Products mandates the adoption Council Meeting. It should extend this

REVITALIZING THE SPIRIT OF BRETTON WOODS | 83 discussion beyond the financial sector, Thanks to these discussions and linkages, addressing innovation, technology, and the committee will contribute to pro- the economy of trust in the context moting a better understanding among of the real sectors of the economy, the actors and demonstrating the value of increasing cross-border activities, and the international economic cooperation spread of public-private partnerships. based on trust.

84 | REVITALIZING THE SPIRIT OF BRETTON WOODS BETTER BUSINESS WITH BRETTON WOODS

MYRON BRILLIANT Executive Vice President and Head of International Affairs, US Chamber of Commerce

GARY LITMAN Vice President of Global Initiatives, US Chamber of Commerce

In business, past performance is not a a major beneficiary of the expansion of guarantee of future returns. This caveat global markets and the rise in purchasing also applies to the future returns on power around the world. Consequently, investment in the Bretton Woods archi- in the daily competitive struggle, our tecture. While the efficiency of Bretton businesses should never lose sight of Woods is open to debate, its overall the complex machinery of global mar- positive impact in advancing market ket support that undergirds economic economies, funding reconstruction, and growth and of which, for 75 years, the guiding structural reforms around the Bretton Woods institutions have been world is beyond doubt. Equally clear is an indispensable part. Current economic the fact that the United States has been and political trends raise the question, playing a leading role in the governance however, of how to achieve better syn- of Bretton Woods and in under­writing ergies between the public and private its success. The post–World War II sectors at both global and local levels. American business community has been

REVITALIZING THE SPIRIT OF BRETTON WOODS | 85 COMMON GROUND guidance for structural reform, and the BETWEEN BUSINESS WTO set clear and reliable rules for AND THE BRETTON inter­national commerce. Yet when the most recent finan- WOODS INSTITUTIONS cial crisis broke out at the heart of the International business predates multi­ advanced economies, all major govern- lateral institutions by centuries and ments, starting with that of the United therefore does not regard them as States, resorted to national institutions indispensable. Each generation of and elevated the G20 to the position entrepreneurs legitimately gauges likely of economic policy coordinator among returns on political and financial cap- them. The IMF, the World Bank, and the ital invested in the global bodies, and WTO each helped moderate the impact questions their value accordingly. To of the recession. However, at least from find common ground, international the vantage point of the private sector, institutions and business should better the Bretton Woods system looked ill understand each other’s capacities and equipped to provide a coherent response constraints and find new ways of serving to the new challenges, let alone prevent global economic growth and sustainable the next crisis. Confidence in Bretton development. Woods ebbed. Over the coming few The World Bank, the International years, international financial institutions Monetary Fund (IMF), and the global (IFIs) and the WTO need to rebuild their trade body known initially as the General credibility through reform and a better Agreement on Tariffs and Trade (suc- communication strategy. A successful ceeded by the World Trade Organization, reform will be possible only if the main or WTO) emerged as part of the major shareholders, starting with the United powers’ response to the challenges of States and other G20 members, recover postwar reconstruction as well as the their commitment to multilateralism. As Cold War. A little later, this system sprang the unfolding Brexit demonstrates, no into action to support postcolonial nation one’s membership in the Bretton Woods building, with arguably mixed results. In system should be taken for granted. the late 1980s, the much larger and less coherent Bretton Woods system ush- ered postsocialist states into the market. THE ROLE OF THE In each instance, the Bretton Woods PRIVATE SECTOR programs increased the share of the IN STABILITY private sector in the economies they For business in developed and devel- touched. American companies have done oping countries to continue to provide especially well where markets followed vital support for the Bretton Woods IMF prescriptions for macroeconomic agenda, the complex international con- management, the World Bank Group struct needs to demonstrate its agility. provided long-term financing and

86 | REVITALIZING THE SPIRIT OF BRETTON WOODS Absent a robust dialogue with the pri- development models, which manifests vate sector, the IMF may find that its itself in the rise of competing multi- prescriptions increasingly suffer from lateral sources of development finance unintended consequences, the World that sit outside the Bretton Woods Bank will discover that its loans are architecture altogether. So far, the new buying yesterday’s solutions, and the development banks and funds are happy WTO will be undermined by bilateral to model themselves after the Bretton deals that get more support than multi­ Woods stalwarts and hire economists lateral negotiations. and managers from the same talent Dialogue with business will not come pools. However, they clearly do not naturally to the venerable institutions. share the same roots and frameworks Whereas the international bodies are the for policy prescriptions, nor the same guardians of economic stability and pro- risk management approaches. That is moters of steady development, today the not surprising. Even such sister orga- most successful companies are frequently nizations as the Asian Development disruptors of the markets. The demand Bank and the European Bank for for stability itself is evolving because Reconstruction and Development have instability is coming from new sources, their own procedures, policies, and per- including members of the Organisation spectives that add to the complexity of for Economic Co-operation and the multilateral architecture. One can Development. To the familiar economic argue that the rise of new multi­national meltdowns, natural disasters, and post- development banks, such as the Asian conflict reconstructions, one has to add Infrastructure Investment Bank and the such relatively new factors as the scale New Development Bank, adds resources of the global financial markets, the speed for development and spurs healthy com- of economic swings, the concentration petition with the Bretton Woods IFIs. of wealth, and demographic and labor On the other hand, it is also possible that fragilities. The technological and digital we will see a fault line emerge between disruption already challenges most met- countries that are comfortable receiving rics and economic models. The rise of support from the Bretton Woods insti- new forms of finance, from crowdfunding tutions and those that choose to resort to initial public offerings using digital exclusively to the new banks and adhere tokens, is a business reality that IFIs are to a new set of rule books. Companies only beginning to grapple with. All of that seek to work with diverse parties these changes demand a continuous re­­­­­ will need to fight to keep everyone assessment of the Bretton Woods tool kit. focused on shared goals and practical Another threat to the stability solutions. Extraordinary agility will be mandate of Bretton Woods is the ero- required from all stakeholders. sion of the political consensus about

REVITALIZING THE SPIRIT OF BRETTON WOODS | 87 NEEDED REFORMS TO of handling new forms of commerce, BOOST ENGAGEMENT and preventing and resolving disputes. WITH THE PRIVATE SECTOR International Monetary Fund Emerging tensions in the system demand The IMF may find it more difficult to from Bretton Woods leaders a renewed secure business support and, by exten- commitment to moving beyond their sion, the support of governments that proud record of stabilization and recon- put a premium on the interests of the struction. The overarching imperative for private sector. To quote one of its recent Bretton Woods is to reform itself now board members, the IMF is “an organi- in order to reflect profound changes in zation at the heart of America’s vision of the private sector, which is the ultimate an open global economy founded upon creator of the wealth of nations. multilateral cooperation.”1 Following recent economic shocks and political upsets, the IMF has to prove again to its World Trade Organization major shareholders the value of institu- The outline for reforming the WTO tionalized cooperation. The IMF speaks has long been clear, including stron- the language of the bond markets and ger measures to enforce commitments public finance. Outside the traditional and faster procedures of dispute adju- financial sector, its interaction with dication. Bilateral and regional trade Main Street firms has to be strengthened agreements are sitting awkwardly on in quiet times as well as in the middle top of the WTO foundation, which is of economic crises. Its loan condition- why everyone has a stake in making alities are occasionally opaque or appear this foundation stronger. The “bicycle” to be based on debatable assumptions. paradigm, that the WTO has to be con- Private-sector confidence in the IMF’s stantly in motion to avoid a fall, does not capacity has to be restored. Companies work anymore. Trade rules need a major know that the Fund’s rescue packages tune-up in order to respond to new come with severe constraints on pub- technologies. At the same time, they lic spending and private purchasing ought to provide more predictability, power until recovery is safely in hand. rather than produce constant haggling The loss of the market to domestic and across almost 200 jurisdictions. If WTO international business is immediate, members address these structural issues, while the promise of recovery hangs the organization will again be capable

1 Mark Sobel, “The United States and IMF Resources—A Path Forward?,” Center for Strategic and International Studies, July 12, 2018, https://www.csis.org/analysis/united-states-and-imf-resources- path-forward-0.

88 | REVITALIZING THE SPIRIT OF BRETTON WOODS on continuing confidence in the IMF’s Business can also share with the IMF prescriptions and local execution. real-time, sector-­specific data that will The global financial safety net supplement official statistics and help the provided by the IMF would be more Fund sharpen its understanding of the credible if the private sector were more economies it tries to stabilize. Examples systematically engaged in discussing of useful data include advance orders for investment prospects, tax implications, automobiles and other major consumer trade, and labor rules. The IMF should products, express delivery bookings, and also consider how it can better add to paid app downloads. To avoid any appear- the transparency and integrity of mar- ance of conflicts of interest, appropriate kets through its various products and in safeguards must apply. specific lending programs. Business out- reach to the IMF can take the form of World Bank much more substantive regular sessions Out of the three Bretton Woods bod- based on perceived needs. Exchanges of ies, the World Bank Group works the views might be more frequent during most with the private sector and faces crisis periods, when both economic and the toughest challenges in keeping up business conditions are changing rapidly. with it. The Bank is constantly looking It is noteworthy that in the moment of to build a pipeline of “viable projects the financial crisis and during its after- attractive to private sector investors,” math, the G20 found it useful to build which suggests that the private sec- interactions with business despite being tor is not clamoring to work with the hampered by the rotation of its chair. Bank.2 Entrepreneurs have other issues As an essential contributor to G20 on their mind than finding ways to deliberations, the IMF can also benefit fit their business plans into the World from dialogue with economic actors. Bank’s agendas. Ten years after a major If the Main Street private sector feels global recession, business executives are that the IMF is responsive to its input, looking ahead to make sure they will executives and experts from both donor not be caught flat-footed again. They countries and distressed economies will are absorbing an avalanche of data and respond more eagerly to the IMF’s analysis to spot the trends and anticipate inquiries, particularly when the Fund the new challenges. They also continue enters a new market or policy space. to grapple with the still unresolved issues Corporate perspectives would enrich from a decade of drastic public involve- the “business environment” section in ment in shoring up private markets. The country reports and reduce the risk of competition for who gets to the best groupthink among the IMF’s economists.

2 “From Billions to Trillions: MDB Contributions to Financing for Development” (World Bank, Washington, DC, July 2015), 5.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 89 natural, human, and financial resources needs to bring companies to the table first, and uses them up the fastest and from the stage of identifying borrow- most fully, is intensifying. At the same ing needs and find tools to keep them time, society expects companies to abide engaged. Since the World Bank needs by ever tougher requirements while also to lend in order to function properly, better explaining their strategies, gov- it must develop the most sophisticated ernance, and social and environmental and efficient way of working with the footprints. global and local companies that are Facing all these pressures, business the true stakeholders in its mission of finds it difficult to follow the World poverty reduction. The Bank’s recent Bank’s lead. It cannot easily operate public procurement reform was a good on the Bank’s timeline and abide by example of the benefits of listening to all the requirements imposed by the businesses from both creditor and bor- Bank and its borrowers. Returns on rower nations. It also boosted confidence Bank-involved projects are rarely much in the integrity of the Bank’s project better than on those without the Bank’s pipeline. That is a great value in itself engagement. The political derisking of that should not be squandered. projects is less attractive when higher In addition to ensuring the integrity returns can be achieved in less volatile and transparency of its own project economies. Furthermore, the Bank’s pipeline, the World Bank can set high project pipeline also turns out to be global benchmarks and use its own vulnerable to geopolitical risks, electoral experienced corps of experts to drive politics, and pressure groups in advanced efficiency, probity, and quality in the economies as well as in the borrowing most difficult markets. The Bank’s role states. What the Bank offers in risk as the custodian of many focused and management it takes away in efficiency potentially nimble trust funds can also and vulnerability to politics. The World set an example of highly competent Bank Group’s claim that it “creates and execution on a specific agenda. In this expands markets”3 where private capital capacity, too, the Bank would benefit is reluctant to do so does not comport from a more vigorous exchange with the with the business world’s views of how private sector at earlier stages of trust market forces take root. fund operations. In its self-­proclaimed Unlike governments, entrepreneurs vision to become a “bigger and better” everywhere are an impatient bunch who organization, the World Bank Group will not wait for the World Bank’s most recognizes that “the private sector is … thorough country diagnostics paper and the only mechanism able to productively most polished mission report. The Bank and sustainably create the millions of

3 Development Committee, “Forward Look: A Vision for the World Bank Group in 2030” (DC2016-0008, World Bank, Washington, DC, September 2016), 5.

90 | REVITALIZING THE SPIRIT OF BRETTON WOODS monthly new jobs that the growing and engaging with the new generation working-age populations demand” and of business executives. The WTO has points to a “US$100 trillion global pool to prove its value amid new patterns of of savings” to invest.4 Surely the scale trade, new centers of production and of both challenges and opportunities consumption, emerging frictions, and represented by this number would jus- analytical gaps. The IMF has to con- tify rethinking how to engage with the tinue reassessing its own prescriptions private sector. and procedures to include input from nonfinancial sectors. And the World Bank has to play to its strength as the most CONCLUSION patient and socially sophisticated lender In the interconnected world, experienced on the planet. It has to resist the temp- public institutions that span the world tation of being all things to all people. and integrate insights with extraordinary It has to remember that it is first and resources can have an outsized positive foremost a bank and, accordingly, apply impact if they manage to resist isola- its substantial resources only to problems tion and rigidity. In the next few years, whose answer is capital. The time to the Bretton Woods leaders will need to shore up the Bretton Woods architecture demonstrate a much higher level of com- with new thinking and stronger business mitment to using new economic models support is now.

4 Development Committee, “Sustainable Financing for Sustainable Development: World Bank Group Capital Package Proposal” (DC2018-0002/P, World Bank, Washington, DC, April 2018), 6.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 91 TRANS-SOVEREIGN NETWORKS China’s Role in the New Global Order

KEYU JIN Associate Professor of Economics, London School of Economics and Political Science

The world is increasingly character- Competition and substitution, empha- ized by networks: technologies, firms, sized in traditional economic thinking, banks, global supply chains, even the are gradually giving way to notions English language. It is impossible to of complementarity, connectivity, and understand the workings of the modern-­ cooperation. With greater interdepen- day economy without grappling with dence comes the need for a rethinking the intricacies of how shocks prop- of the international politico-economic­ agate through networks, how firms architecture that takes into account net- conduct business via networks, how works of a transnational nature. There is infrastructure connects countries into also a series of questions to ponder: Will networks, and how productivity gains networks supersede sovereign relations? are accrued from networks. The world Will they render the concept of hege- as a whole also works as a network. mons obsolete, or at least less relevant? Whether it is the Red Cross, an agree- Will networks of the transnational sort ment to tackle global climate change, need fostering, or will they just emerge or international financial systems and without design? If they do need shep- global supply chains, these efforts are herding, who will play that leadership of a trans­national nature. Even looming role? challenges such as technology displacing This century and the subsequent ones jobs or AI outsmarting humans are issues are likely to be centuries of expanding not between states but across them. networks, but the current era is also

92 | REVITALIZING THE SPIRIT OF BRETTON WOODS one in which China will rise and assert on its path to prosperity; it has achieved itself as a global leader. What will be the economic growth not by sheer forces defining characteristics of its leadership? of the market but instead with signifi- This will likely be a key question of our cant state intervention. It is on its way time. Seventy-five years ago, China to becoming the largest economy in was one of the 44 Allied nations to the world, yet it is still a developing have participated in the founding of the country, marked by backward finan- Bretton Woods system. Ever since, it cial development and ailed by a myriad has transformed itself from an economic of deep-seated economic distortions. It backwater to one of the most connected has cutting-edge technological capacity components in the global economy. despite its low income levels. It’s seen an China has experienced seismic changes, income growth of more than 15 times in the same way that the global economy since 1990, and this was all achieved has radically transformed itself by weav- without being a Western-style democracy ing a web of interconnected, interrelated and arguably even without a proper set components. But what hasn’t changed at of incentives-enabling institutions. a similar pace is the design and thinking But there seems to be a “silver bullet” on international economic and financial absent from the conventional set of expla- architecture. nations for China’s success. Yes—factor The main argument of this essay is accumulation has been important, and that in a world of global economic net- reforms that have removed distortions works, new economic relationships and have so far led to efficiency gains. But linkages warrant a new type of economic China’s ability to transform itself rapidly leadership, one that supplants traditional from an economic back­water to one of notions of power and hegemony. China, the world’s most vibrant economies in a by living through its own experience matter of three decades seems to hinge of building networks that succeeded on something else. Forty years ago, China in jump-starting development, is poised was a centrally planned economy, absent to become a global network leader. In a properly functioning marketplace. The that role, the most central and connected state set production targets and prices, nation enables and propels the networks; with virtually all daily necessities and it does not seek to dominate the system many other consumer goods rationed. but instead strives to ensure the smooth But over a short period of time, the functioning of the networks, as well as government was able to coordinate the their safety and sustainability. various elements in the nation and set China, the second-largest economy development in motion. The coun- today, doesn’t easily fit into a category try leveraged its ability to accumulate of historical and nascent superpowers. resources and mobilize them—rapidly China has defied conventional wisdom building infrastructure that connected its

REVITALIZING THE SPIRIT OF BRETTON WOODS | 93 various regions, people, and complemen- transportation networks, electricity, tary inputs. It worked as a network, with and so on. Problems with any input can firms and industries enabling other firms substantially reduce the overall output. and other industries, and productivity What China has managed to achieve is gains were maximized as the networks to build up the business and transporta- were built and expanded. tion networks that have connected these The idea of building linkages to inputs fairly rapidly—further increasing foster economic development goes back the value of the inputs and, in turn, the to Hirschman.1 By building forward and incentive to produce them. Whereas backward linkages, development can it took the West a hundred years to be self-reinforcing, propelling a virtu- create and link markets, China did it ous cycle. A straightforward example in a matter of two decades. illustrates that this mechanism extends beyond simple scale economies: if, for example, the transportation sector is NETWORK EFFECTS ON inadequate, then output in many other A GLOBAL SCALE activities, including truck manufac- The same idea of network effects and turing and highway construction, will self-reinforcing linkages carries over to be hampered, in turn further reducing the global economy. There is substantial output in the transportation sector and evidence, first, that inputs across coun- in the rest of the economy. This vicious tries have become complementary. For cycle engenders a multiplicative effect. example, Japanese earthquakes in 2011 The same goes for a virtuous cycle, in are shown to have caused substantial dis- the opposite direction. ruptions for parts of the US economy.2 If intermediate goods are comple- Moreover, switching costs in global supply mentary in nature, then forging and chains tend to be high.3 In the world strengthening these linkages is ever of financial networks, interdependen- more important. For instance, tex- cies among governments, central banks, tile producers require raw materials, investment banks, and firms, through machines, a trained workforce, technical cross-border exposures in bonds, equities, expertise, security, business licenses,

1 Albert Hirschman, The Strategy of Economic Development (New Haven, CT: Yale University Press, 1958). 2 Christoph Boehm, Aaron Flaaen, and Nitya Pandalai Nayar, “Input Linkages and the Transmission of Shocks: Firm-Level Evidence from the 2011 Tōhoku Earthquake” (Unpublished working paper, University of Michigan, Department of Economics, Ann Arbor, MI, 2014); Vasco M. Carvalho, Makoto Nirei, and Yukiko Saito, “Supply Chain Disruptions: Evidence from the Great East Japan Earthquake” (RIETI Discussion Paper Series No. 14035, Research Institute of Economy, Trade and Industry, Tokyo, 2014). 3 Jean-Noël Barrot and Julien Sauvagnat, “Input Specificity and the Propagation of Idiosyncratic Shocks in Production Networks,” Quarterly Journal of Economics 131, no. 3 (2014): 1543–92.

94 | REVITALIZING THE SPIRIT OF BRETTON WOODS housing, and capital flows, can lead to Brexit is a major disruption in cascading defaults and failures. networks. The calculable cost is still Technology has precipitated more unknown. And the UK’s rupture with intense specializations around the world. the EU is mainly regulatory rather than Examples abound in which specific physical. The chaos we have already wit- countries’ resources and inputs can real- nessed at the border points between the ize their full value only in a world with UK and France indicates that in the linkages: cheap labor in developing coun- present-day world, the networking in tries became an important asset when terms of policy, regulation, and other technology advanced and trade costs nonphysical issues is no less crucial than fell; oil from Middle Eastern countries the tangible and visible connectivity. was useless 150 years ago but is a crit- Whether it is a hard Brexit, a soft Brexit, ical input to the world’s output today; or a blind Brexit, Britain’s tendon, deep rhodium and lithium are now valuable under the skin, is snapped, and all of only because the world needs batteries to the unprepared-for consequences are produce electric cars. The networks and all of a sudden apparent to the naked linkages make country-­specific inputs eye. Already, the English Channel looks and products more valuable, which in like an artery clogged up by cholesterol. turn makes the networks and linkages It is reported that trucks now back up more valuable, and so on and so forth. for miles outside the tunnel’s entrance This cycle makes the importance and passengers have to wait to board of connectivity, both physical and dig- Eurostar trains. Slow and longer processes ital, ever more crucial in this modern in clearing trucks, cars, and passengers at day and age. Ideas feature economies ports, train stations, and the tunnel link- of scale. Physical infrastructure makes ing Britain with France and the rest of markets larger; digital infrastructure and Europe is expected to be routine. Even technology makes ideas display greater though both the UK and France have economies of scale. And because ideas substantially increased customs officers, are now of more value than ever before, security staff, and other employees, things infrastructure serves an even greater pur- will get worse yet after Brexit. Breaking pose in connectivity. The connectivity connectivity and networking, physical makes the inputs more important, in turn or nonphysical, is no joke. heightening the benefits of connectivity. If linkages are crucial, will every As crucial as these notions may seem, nation do its part to build these linkages they are not described nor fully captured and internalize its own externalities by simple measures of cross-border goods on the network? Take again the exam- and financial flows, bilateral or multilat- ple of infrastructure, which connects eral arrangements—but that is where the countries via roads, railways, power current international economic policies transmission lines, and gas pipelines. It and thinking lie. may well be that China would like to

REVITALIZING THE SPIRIT OF BRETTON WOODS | 95 build connections of its hitherto isolated within nations. Cross-border frictions hinterlands to Europe. But if neigh- and distortions abound—be they politi- boring countries such as Kyrgyzstan cal, regulatory, informational, or due to or Tajikistan cannot build railways and unaligned incentives. In this instance, highways that link them with their sur- should there be a supranational actor, or rounding nations, then the transport a lead sovereign actor, that plays the role linkages that China builds with this pur- of coordinating nations and mitigating pose in mind are of no substantive value. these frictions? If the traditional hege- Similarly, Kenyan ports are modern and mon was a great power strong enough efficient, but in the absence of a railway to force the other countries to follow link that connects Angola to the coastal the rules it had created, the new power areas, these ports fall short of achieving of a network leader should be that of a their potential, and Angola’s precious connected and central participant that resources remain beneath the earth. initiates, creates, and expands networks. The more connected the entire The concept behind such a leader should network is, the more valuable is each be different from that of a hegemon, link. Only when the global network and so should its behavior. of infrastructure is constructed with But who will play this new role, and relative completeness is its externality how much should each nation contrib- the greatest, are its productivity gains ute? The question of burden sharing the largest, and does each segment of the among states in the global provision of infrastructure linkage reach its great- public goods is a time-dated contro- est value. In this sense, the actions of versy. It goes back to the classic problem each sovereign nation have considerable of how much rich countries such as externalities at a global level. the United States should contribute to NATO spending. Olsen and Zeckhauser provided a theory as to why it makes CHINA: AN ENABLER? sense for large, rich countries to shoulder If governments do not fully internal- a disproportionate amount of defense ize these externalities, efforts to build spending while allowing smaller and and maintain networks will be sub­ poorer allies to enjoy a free ride.4 In optimal. Moreover, when it comes to 1980, the United States’ contribution to small countries, there is not only an issue NATO was around a 75 percent share of willingness but also one of capacity. (68 percent in 2016), larger than what After all, building links across nations is required for its relative GDP size is more difficult than building them and larger than the estimated relative

4 Mancur Olson Jr. and Richard Zeckhauser, “An Economic Theory of Alliances,” Review of Economics and Statistics 48, no. 3 (1966): 266–79.

96 | REVITALIZING THE SPIRIT OF BRETTON WOODS benefits it derives (around 35 percent).5 the failure of a single inexpensive rubber The flip side of this argument is that by seal (O-ring) that killed the entire crew. getting other countries to contribute China’s Belt and Road Initiative, the to some of the defense spending, the grand plan to connect Asia, Africa, and United States can avoid paying for 100 Europe, aims to connect and build net- percent of it. works. In infrastructure networks, there Global networks and public goods are some “critical nodes”—occupied by share some similarities but are still distinct countries in important geographic and concepts and require different thinking strategic locations. But some of these on international cooperation. Building countries may be too small and too linkages to form a network is different poor to build cross-border infrastruc- from contributing to public goods. Efforts ture. Moreover, they may not be able in the latter are often more substitut- to handle the range of risks that infra- able, while those in the former are more structure entails—uncertainty associated complementary. If countries spend less with the long gestation period, regula- on building military alliances or sup- tory changes, disruptions in financing, porting international organizations, other operational glitches, and the like. In this countries can compensate by spending case, the active participation of a larger more. But in the case of many networks, nation with capacity and scale, capable of reduced efforts in one country can sub- mitigating or absorbing such risks, may stantially affect the entire network. In the be critical. But why is China the large extreme case, in which each country’s nation incentivized to bear the brunt of inputs are “critical,” then the failure of the burden on this project? Arguably it can one nation’s contributions to the network derive more private benefits from this par- will lead to the collapse of the entire ticular network than can, say, other large system. In this scenario, the network is economies. It occupies a more central only as strong as its weakest link.6 When position geographically, and it also relies the space shuttle Challenger broke apart more on trade with other countries and 73 seconds into its flight in 1986, it was is more dependent on resources in Africa.

5 Todd Sandler and Keith Hartley, “Economic of Alliances: The Lessons for Collective Action,” Journal of Economic Literature 39, no. 3 (2001): 869–96. 6 Michael Kremer, “The O-Ring Theory of Economic Development,” Quarterly Journal of Economics 108, no. 4 (1993): 551–76; Charles I. Jones, “Intermediate Goods and Weak Links in the Theory of Economic Development,” American Economic Journal: Macroeconomics, 3, no. 2 (2011): 1–28.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 97 CHINA: A GLOBAL understands the power of networks better NETWORKER than China. Guanxi, or “connections,” has been a linchpin of socioeconomic In today’s world, being at the center of and political life for centuries, and all a network and becoming its most con- the way up to the present day. The rise nected component has some substantial through the ranks of the political hierar- privileges. The power derived from chy relies on guanxi; conducting business such positions in networks is nowhere and undertaking projects requires con- better illustrated than in the histori- nections to the local party cadres; even cal example of the rise of the Medici finding the right doctor requires guanxi. family in 15th-century Florence. At Even from a historical point of view, the outset, the Medicis were not the China has been a purveyor of networks. wealthiest family, nor did they have the The ancient Silk Road, begun in the most political clout. The Strozzi family second century BC, aimed to connect was more financially powerful and had Asia and Europe. It stretched about more seats in the legislature. But by 7,000 kilometers from Chang’an, the marriage, the Medici family was the ancient capital in China, to Athens and most connected component of a net- Constantinople. The lasting legacy of work of intermarried families, economic the Silk Road is as much about bridg- relationships, and political patronages. ing cultures and people as about trade. Cosimo de’ Medici consolidated polit- Merchants learned the languages and ical and economic power by leveraging customs of countries to which they trav- the family’s central position, allowing eled, and the knowledge helped with the Medicis to become the “godfathers negotiation and commerce. The process of the Renaissance.” of making paper was propagated world- China is currently fashioning itself wide via the Silk Road network, and into a successful global networker. By the same is true of the printing press participating in various areas of global technology. effort—whether it is building truly international institutions with sound corporate governance, coordinating A LEADER IN THE AGE global infrastructure projects, or build- OF NETWORKS ing relationships with developing and emerging economies—it is turning itself The growing connectedness of the into the central and most connected world is a key fact of our economic and component in them.7 Perhaps no country political life, but if the field of vision is

7 According to the American Institute, some US$340 billion will be spent on infrastructure as part of the Belt and Road Initiative. In 2018, during the Beijing Summit of the Forum on China- Africa Cooperation, Chinese leaders pledged about US$60 billion in financial assistance to African nations, and the country’s aid reached US$3 billion in 2018.

98 | REVITALIZING THE SPIRIT OF BRETTON WOODS confined to the traditional economic of policy coordination and cooperation lens, the world will still be viewed as a in addressing debt problems and finan- collection of discrete and separate enti- cial crises, as well as cofinancing for ties. Developing intellectual frameworks physical infrastructure projects. that capture a global web in which ele- Forums such as Asia-Pacific Econ­ ments are connected, overlapping, and omic Cooperation (APEC) and the enmeshed has become imperative. So G20 have been playing a big role in have policy prescriptions that reflect such international cooperation. China sets global realities. More work needs to be great store by getting involved in these done on measuring the interconnected- multilateral networks in a proactive ness of nations, the structure of various way. Some China watchers in the West networks, and the propagation of shocks seem to be concerned, even with a bit across these networks. of trepidation, over China’s potentially The three major pillars for a global dominant role in multilateral institu- economy in the post–World War II era, tions and forums. It seems that China namely, the International Monetary knows its limitation and has no super- Fund, the World Bank, and the World power pretensions in the American way. Trade Organization, manifest the Nevertheless, the country will try to play importance of networking. China has a bigger role in global affairs. Whether consistently been a vocal advocate for a China is an existential threat to other multilateral approach to addressing for- nations or a constructive player in the midable challenges facing the world. A international networking scheme will change of representation at the Bretton be determined by its actions. Perhaps Woods institutions in 1980 rendered the country should have the ambition it possible for China to participate in to shoulder greater responsibility and deliberation on global macroeconomic learn to be a global leader. Cicero said, situations, macroeconomic surveillance “You do not have to convince me. Your of individual members, broad policy authority convinces.” China’s potential coordination, and development inter- ability to claim such authority depends ventions, among other issues discussed on what it does and will do, step by step, in the multilateral institutions. Being a over years, and maybe decades, by right beneficiary of the international financial intention and right execution. order established in 1945, China has A resilient network can’t be hege- reiterated that it has no intention what- monic in the conventional sense. It needs soever of upsetting the international governance to reflect multi­polarity. It order that has served the post–World also needs to permit others to mobi- War II world well, albeit with room for lize. China needs not only to play a improvement. Bretton Woods institu- greater role but also to encourage other tions and all institutions that follow suit members of the international commu- work well as network builders, in terms nity to do the same, if the established

REVITALIZING THE SPIRIT OF BRETTON WOODS | 99 leading nations decide to pull out and and rewards inherent in designing such abdicate their crucial responsibilities on an architecture that enables others to the global stage. In this sense, China’s flourish as it has flourished, that permits great destiny is not only to become the greater integration as it has integrated, largest economy—and a rich one to and where one country’s success begets boot—but also to recognize the duties another’s.

100 | REVITALIZING THE SPIRIT OF BRETTON WOODS RESHAPING MULTILATERALISM AS A TOOL FOR GLOBAL ECONOMIC PROSPERITY

JOSÉ ÁNGEL GURRÍA Secretary-General, Organisation for Economic Co-operation and Development, and former Minister of Foreign Affairs and Minister of Finance and Public Credit of Mexico

The Organisation for Economic Co-­ benchmarks, and peer learning to level operation and Development (OECD) the playing field and help policymakers and the Bretton Woods institutions deliver better policies for better lives. share a common history. We emerged Over the decades, our institutions from the ashes of World War II to repair have grown and evolved. The OECD the economic, political, and social dev- has become a “do tank,” helping astation caused by the most destructive govern­ments compare experiences and global conflict in modern history. Until seek answers to common problems, as 1961, the OECD was known as the well as coordinate and implement poli- Organisation for European Economic cies—informed by our multidisciplinary Co-operation (OEEC) and was focused expertise, data, and tools, and our on implementing the Marshall Plan to rational, rigorous, and evidence-based reconstruct Europe. policy analysis. We have also become From the outset, international one of the most important sources of cooperation has been the backbone advice on structural reforms, focusing of our respective work—to overcome on their design and implementation for political differences, to foster long-term inclusive and sustainable growth. Across geo­political stability, and to secure sus- the OECD, including in our substantive tained growth and development. At the and specialized committees, working OECD, international cooperation has groups, and expert groups, we strive helped to establish ground rules, standards, for consensus-based solutions.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 101 Cooperation remains a central pillar THE OECD: A STAUNCH of the OECD’s work, framed around an DEFENDER OF adherence to market economy princi- MULTILATERALISM ples and the pursuit of openness—free trade in goods, services, and capital, and AND INTERNATIONAL strong and fair international competi- COOPERATION tion. We count the World Bank and the The OECD has been engaged in a International Monetary Fund among longstanding reflection on these issues, our closest allies and key collaborators. prompted by the greatest economic crisis Together, we strive for joint values: of our lifetimes. We’ve been asking our- openness, inclusiveness, sustainability, selves hard questions about what went peace, and prosperity. Our collective wrong, why we missed the signals, how results are a testament to the efficacy, our thinking contributed to creating impact, and value of multilateralism. the conditions for the crisis to happen, But today, multilateralism is at a and how we can cooperate better with crossroads. Many people have grown others to avoid repeating these issues. To frustrated and angry about uneven increase our relevance, we’ve revised and opportunities and outcomes, high modernized our economic analysis and unemployment, and job insecurity. advice. And we have engaged in a radical They are concerned about global pres- rethinking of our work, our economic sures including rapid digitalization, models, and our assumptions. migration, and climate change. Some In 2012, we launched the New observers are questioning the ability of Approaches to Economic Challenges multilateralism to deliver timely and (NAEC) initiative to reflect on the effective responses to these challenges. lessons from the crisis, challenge our Is a system established more than 70 assumptions, identify the shortcomings years ago still fit for purpose? The of our analytical models, and develop shifting wealth of nations, the speed new policy tools and data. The only way of technology and digitalization, the to be relevant is to adapt constantly to intensification of global flows (people, a fast-changing world and improve our goods and services, money, data, ideas) knowledge and skills. That was what we are quickly reshaping our world, started doing with NAEC. with unpredictable consequences. Today, NAEC is transforming our Do we have the tools of multilateral ways of seeing and acting about the econ- cooperation needed to confront these omy, the environment, and society as a challenges? whole system. We are looking at the world through a multidisciplinary lens, which is helping us identify and understand

102 | REVITALIZING THE SPIRIT OF BRETTON WOODS interconnected policy linkages. We are proposed actions to help countries pro- doing better at using smart data and mote green growth and significantly behavioral insights. We are also progressing cut emissions. More recently, we estab- in our understanding of complexity and lished a Framework for Policy Action systems thinking. NAEC is filtering into on Inclusive Growth, comprising 24 our policy analysis and advice, becoming indicators to help governments sustain a “state of mind” across the OECD. We and more equitably share the gains of are building on the core lessons of NAEC economic growth by investing in people to develop a new economic narrative and places that have been left behind, that delivers new stories of growth and supporting business dynamism and inclu- inclusion, a new social contract, and a sive labor markets, and building efficient new idealism. In 2018, we established and responsive governments. an NAEC Innovation Lab to foster We have also taken great strides to whole-of-organization collaboration and become more global, including stepping exchange, and facilitate experimenta- up our work to address major global tion with agent-based modeling, machine challenges and develop global solutions. learning, big data, and behavioral eco- This work has delivered! Our work on nomics across policy areas. taxes (the Inclusive Framework on Base At the same time, we have embarked Erosion and Profit Shifting, or BEPS), on a transformation to refocus the Automatic Exchange of Information organization to make our work more (AEOI), education (the Programme inclusive and more sensitive to the needs for International Student Assessment, of the bottom 60 to 70 percent. We have or PISA), anti-corruption (the Anti- given priority to one supreme target: bribery Convention), responsible business human well-being. We’ve confronted conduct, export subsidies, and steel and challenged some of the central excess capacity, among other topics, has assumptions and theories of traditional been transformational and innovative, economics: we started a new reflection bringing real improvements to people’s on the limitations of GDP as an indica- lives and leveling the playing field for tor of economic progress; we explained companies. We are actively engaged in how the benefits of growth were not the implementation of landmark global trickling down; we measured the increase agreements, including the 2030 Agenda in inequalities in our member countries for Sustainable Development, the Addis and produced evidence to show that they Ababa Action Agenda, and the Paris were hurting growth; we launched an Agreement. Inclusive Growth Initiative and intro- In this global spirit, we have also taken duced new analysis on the nexus between important steps to increase our own productivity and inclusiveness; and we global reach. We started new accession

REVITALIZING THE SPIRIT OF BRETTON WOODS | 103 processes and welcomed six new mem- RESHAPING bers: Chile, Estonia, Israel, and Slovenia MULTILATERALISM AS in 2010, Latvia in 2016, and Lithuania in A TOOL FOR GLOBAL 2018, with Colombia also due to join us later this year. Many other countries— ECONOMIC PROSPERITY including Argentina, Brazil, Bulgaria, All of this activity has helped to strengthen Croatia, Peru, and Romania—have for- multi­lateralism. Multilateralism is the mally applied for membership. We have only way forward if we are to address also launched an Enhanced Engagement today’s multifaceted challenges adequately. Initiative to strengthen our cooperation But for multilateralism to succeed—for with our five key partners among emerg- international organizations, including ing economies (Brazil, China, India, the OECD and the Bretton Woods Indonesia, and South Africa) and help institutions, to succeed—we need a multi­ them come closer to OECD standards. lateralism that is more responsible, more In addition, we have consolidated our effective, more inclusive; we need a multi­ regional programs—covering Eurasia, lateralism that delivers tangible benefits Latin America and the Caribbean, the for people; we need a multilateralism­ Middle East and North Africa, and that is calibrated to the challenges of the Southeast Asia—and expanded our 21st century. country programs to enhance our under- In June 2018, the OECD’s annual standing of shared challenges and ensure Ministerial Council Meeting (MCM) that our work and advice are tailored to brought together members and part- diverse contexts. ner countries to discuss the theme Finally, we have strengthened the “Reshaping the Foundations of Multi­ OECD’s presence in the global gov- lateralism for More Responsible, ernance architecture through more Effective, and Inclusive Outcomes.” The active participation in the G20, the MCM was conducted with France as G7, Asia-Pacific Economic Cooperation chair, and Latvia and New Zealand as (APEC), the Pacific Alliance, and the vice chairs. It was opened by President Ibero-American Summits. This out- Macron, with the leaders of Colombia reach has allowed us to globalize our and Lithuania—our new members— standards in areas such as taxes, invest- in attendance. It took a deep dive into ment, anti­corruption and integrity, small multilateralism across four dimen- and medium enterprise financing, state- sions—economic, financial, social, and owned enterprises, responsible business environmental—and focused specifically conduct, consumer policies, the digital on current challenges, such as addressing economy, and development finance. the digital transformation, strengthening international taxation, promoting inclu- sive growth, financing the Sustainable Development Goals, and facilitating

104 | REVITALIZING THE SPIRIT OF BRETTON WOODS international trade and investment, and growth and well-being. However, how the OECD can continue to support these are uncharted waters. These Members and partners in addressing these technologies can also generate dis- challenges. The OECD’s 2018 MCM ruptions and challenges in trade, allowed an open and frank discussion employment, regulation, security, that captured the objective and spirit of safety, privacy, and consumer protec- the Bretton Woods@75 Compendium: to tion, among other areas. We need to recalibrate multi­lateralism as a fundamen- open new multi­lateral channels to tal force for global peace and prosperity. address these challenges together. Our 2018 MCM was a call to action • Third, we must also do more to tackle for all international organizations, market-distorting practices and subsi- including the OECD and the Bretton dies. Overcapacity is an area in which Woods institutions. We need to work multilateral cooperation is the only better together to reduce overlap, har- way forward, as demonstrated by the ness synergies, and ensure consistency OECD Global Forum on Steel Excess between our respective programs of Capacity. Now we need to make work. In this context, I would like to progress in sectors such as aluminum, share the MCM’s key conclusions: high technology, and others. • First, we must deliver an open and level • Fourth, we need to maintain the playing field and well-governed markets impressive momentum of the OECD’s that put healthy competition, integrity, BEPS project and the global standard and responsible business conduct at on AEOI by looking in depth at the their heart. The OECD is leading challenges of taxing the rapidly chang- these efforts with multilateral tools ing digital economy. We also need to such as the Anti-bribery Convention, tackle the “dark side” of global flows, the Due Diligence Guidance for from bribery and corruption to cyber Responsible Business Conduct, insecurity, counterfeiting, piracy, and and the OECD/G20 Principles on human trafficking. All of our coun- Corporate Governance. These tools tries and citizens stand to gain from a are critical to restoring citizens’ trust robust and collective response. in the fairness and transparency of government and institutions, includ- • Fifth, we have to strengthen our efforts ing at the multilateral level. to promote inclusive growth. Doing so requires more effective social safety • Second, we need to be particularly nets, better education and skills, vigilant in emerging sectors such as quality affordable health care and digital technologies. New technolo- housing, and sustainable infrastruc- gies, such as fintech, blockchain, and ture. New approaches found in the artificial intelligence, are emerging, OECD PISA Global Competence with important potential to support

REVITALIZING THE SPIRIT OF BRETTON WOODS | 105 Framework, the Jobs Strategy, and the proliferation of plastic waste in the OECD’s new Framework for our oceans. It is shocking that by the Policy Action on Inclusive Growth middle of the century, the ocean could are equipping citizens for today and have more plastic than fish by weight! 2 tomorrow. Alongside these efforts, reducing the intergenerational trans- mission of disadvantage by focusing CONCLUSION: on children’s well-being, piloting MULTILATERAL measures to facilitate migrant and COOPERATION IS refugee integration more effectively, THE ONLY FUTURE! and redoubling our efforts to tackle Together, the OECD and the Bretton entrenched gender gaps and advance Woods institutions highlight the profound women’s empowerment are ongoing benefits of international cooperation. Our priorities. The importance of bridg- collective work is helping to build a better ing spatial inequalities—between world. Cooperation is the only future. leading and lagging regions, and While we have achieved a lot, including urban and rural areas—should also the Paris Agreement, the 2030 Agenda not be underestimated. for Sustainable Development, and the • Finally, we must green multilateralism. tax-related agenda, we continue to face The OECD’s report Investing in complex global challenges. But we have Climate, Investing in Growth1 shows both the duty and the opportunity to that climate-compatible policy pack- shape the kind of multilateral cooperation ages can be engines of inclusive, that such global challenges demand. sustainable growth at a time when By its very nature, multilateralism is we are still not on course to reduce always a work in progress. In this spirit, global warming to well below 2°C. the OECD looks forward to continuing We need to step up our joint efforts to our work with the Bretton Woods insti- promote green budgeting and green tutions to ensure that we design, develop, investment, measure climate finance, and deliver better policies for better lives protect biodiversity, and tackle new to promote peace, well-­being, and the environmental emergencies, such as protection and preservation of our planet.

1 Organisation for Economic Co-operation and Development, Investing in Climate, Investing in Growth (Paris: OECD Publishing, 2017), https://dx.doi.org/10.1787/9789264273528-en. 2 “Feature: UN’s Mission to Keep Plastics out of Oceans and Marine Life,” UN News, April 27, 2017, https://news.un.org/en/story/2017/04/556132-feature-uns-mission-keep-plastics-out-oceans-and- marine-life.

106 | REVITALIZING THE SPIRIT OF BRETTON WOODS THE BRETTON WOODS REGIME IN A CHANGING WORLD ORDER

TOYOO GYOHTEN Honorary Advisor, Institute for International Monetary Affairs, and former Vice-Minister for International Affairs of Japan

BIRTH OF THE BRETTON A new international institution, the WOODS REGIME International Monetary Fund (IMF), was created, and its members pledged to It was a big stroke of good luck for the fix their respective currencies’ exchange world that we could promptly establish rates vis-à-vis the dollar and to liberalize a new world order, dubbed the Bretton their trade. Woods regime, at the end of World The IMF was assigned the role of War II. The historic exercise was made guardian of the Bretton Woods mone- possible by the strong leadership of the tary regime, which was built upon two United States. The United States had pillars, the gold-dollar standard and the triumphed almost unscathed, and when fixed exchange rate. The IMF conducted the war was over, it was the singular surveillance over members’ economic hegemonic power. The United States and monetary policies, and provided excelled in the world in all national recommendations. If necessary, the IMF powers of the economy, the military, provided short-term financial assistance diplomacy, technology, culture, and to enable members to maintain exchange ideology. Particularly important was rate stability and free trade. the role of the US dollar as the global Another important element of the key currency. The United States guar- postwar US leadership was the doctrine anteed the dollar’s convertibility into of democracy, freedom, and human gold and championed the multilateral rights. After the defeat of Nazism in freedom of current account transactions.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 107 Germany and militarism in Japan, there between the dollar and other curren- was a broadly shared view in the world cies was discarded. The Bretton Woods that the American ideology itself may be monetary regime collapsed. the most palatable ethos for humanity. It is interesting to recollect that Americans, on their part, were con- when we saw the demise of the postwar vinced of the supremacy of their creed monetary regime, many of us feared the and preached for others to follow it. collapse of the dollar’s value and chaos All in all, the quarter century after in the world financial market. It did not World War II was the heyday of the happen, however. The dollar remained Bretton Woods regime. Regardless of the the key currency for international trans- undercurrent of the Cold War; regional actions and reserves. The world kept conflicts such as the Korean War, the using the dollar just as it did before. Vietnam War, and wars in the Middle The reason was not too difficult to find. East; and occasional currency turmoil, Although the United States suffered a mainly in Europe, the world as a whole certain eclipse of its prominence, there obviously enjoyed one of the most is no doubt that it was still by far the stable and prosperous eras in history. most powerful country in the world. The American dollar, the American mil- Furthermore, there was no country that itary, and American ideology supported dared to challenge American leadership. the fortune of the world. The Bretton The Soviet Union was not friendly to Woods regime was a synonym for Pax the United States, but everybody knew Americana. it had no ability to replace the United States. Germany and Japan were rising, but they had no ambition to become COLLAPSE OF THE global leaders. China was still nonexistent BRETTON WOODS as a global power. REGIME In other words, although the Bretton Good days could not last forever. The Woods monetary regime collapsed, in US balance of payments started to the real world, the system composed of deteriorate. American households kept the gold-dollar standard and the fixed consuming too much, and American exchange rate was replaced by the new consumer goods manufacturers lost their system, composed of the dollar standard competitiveness against peers in Asia and and the floating exchange rate. In hind- Europe. The US trade deficit mounted, sight, however, when the two pillars that and the United States became a net supported the original Bretton Woods external borrower. Gold reserves were monetary regime crumbled, the IMF depleted. By the early 1970s, the con- should have been overhauled. vertibility between dollar and gold was The IMF was created as defender of suspended, and the fixed exchange rate the Bretton Woods monetary regime,

108 | REVITALIZING THE SPIRIT OF BRETTON WOODS but by the 1970s the regime itself had In the socioeconomic world, revo- collapsed. There was no longer an object lutionary US-originated progress was to defend. The IMF had lost its mission. made in two areas: information and We should have devised a new role for communications technology (ICT) and the IMF. Indeed, various efforts were financial services. The capacity of com- made to install some sort of new inter- puters was multiplied at astronomical national monetary regime. Multilateral speed. All sorts of new terminals were discussions took place on the premises invented. Billions of people around of the IMF. However, international the world could now engage in inter- enthusiasm evaporated without any tan- active communication. Big data were gible result. The world realized, with a assembled, and they enabled artificial certain sense of relief, that without any intelligence to beat human wisdom. The formal regime, business could continue free and open sharing of information as usual under a de facto dollar standard among people had made it inevitable for and floating exchange rate. The IMF corporations, societies, and governments thrived as an international agency that to modify the style of their governance. provides financial support to troubled While the progress of ICT affected countries on an ad hoc basis. all areas of human activity, the strongest impact has been felt in the financial services. Historically, finance was a kind EPOCHAL EVENTS of public service to facilitate the real AT THE END OF economic activities, such as produc- THE CENTURY tion, consumption, investment, and During the last quarter of the 20th trading. Thus, financial activity was century, after the collapse of the orig- not necessarily large compared with inal Bretton Woods monetary regime, the size of other economic activities. the world witnessed several episodes During the last quarter of the 20th cen- of great consequence in both the geo­ tury, however, there was an enormous political and the socioeconomic arenas. expansion of financial liquidity due to Geopolitically, the Soviet Union dis- the increasing global trade imbalance integrated, and the West triumphed in and the universal implementation of the Cold War. Deng Xiaoping quashed easy monetary policy. Excessive accu- a student demonstration in Tiananmen mulation of financial liquidity forced Square and launched the country’s people to scramble for higher yield. This Reform and Opening Up policy. The is where ICT married financial services. United States intensified its intervention A new department of science, called in the Middle East, a case of imperial financial engineering, was born. Using overreach. European Union countries esoteric techniques, engineers came up made significant strides toward a single with all sorts of new financial services market and currency unification. and commodities, such as securitization,

REVITALIZING THE SPIRIT OF BRETTON WOODS | 109 derivatives, and the like. They claimed THE 21ST CENTURY: their inventions could produce higher UNRAVELING THE yields while minimizing risk. DILEMMA OF THE Financial services, which had pre- viously played a modest role in public BRETTON WOODS goods, became a huge and dominant REGIME industry, with financial assets today sev- The Bretton Woods monetary regime eral times bigger than the total GDP of was made both possible and success- the world. Indeed, the financial service ful by the stable world order of Pax industry produces huge income and Americana. When the formal regime generates considerable employment. At collapsed in the early 1970s, the world the same time, however, it is difficult pretended that there was still a regime to refute that the world is now more because the United States was behaving contaminated by greed and recklessness. as a hegemonic leader. However, the In hindsight, these events, such as dilemma became conspicuous with the the West’s triumph in the Cold War advent of the 21st century, prompted by and the dominance of both ICT and two momentums, one generated in the finance, produced a short holiday from United States and the other in China. history. There was a broadly shared view On the US side, Pax Americana has that political democracy and a market become costly and burdensome for many economy were two norms that would Americans. A persistent trade deficit is eventually prevail throughout the world. viewed as evidence of unfair practices by The so-called Washington Consensus trading partners. America’s share of the became a global standard. burden in multilateral engagements was There was, however, a downside to made exorbitant because other countries the euphoria. In a new society in which enjoyed freeloading. Many Americans ICT and finance are major players, mer- feel unhappy that they are neglected in itocracy and competitiveness become a society dominated by smart and rich key words. They are the source of social people. They are sick and tired of play- dynamism. At the same time, they upset ing the venerable role of global leader. the traditional stable and conservative The United States, they feel, should society by making a clear distinction be more egocentric, just like others. between those who have succeeded It should secure its interests through and those who have failed. Widening bilateral negotiation without wasting inequality can easily become a social its goodwill on multilateral follies. In issue because the populace is much more other words, there is an emerging sen- vocal now, thanks to ICT. timent in the United States itself that does not cherish the world order under Pax Americana.

110 | REVITALIZING THE SPIRIT OF BRETTON WOODS Another momentum against Pax THE FUTURE OF THE Americana is coming from China. In BRETTON WOODS hindsight, China was on the verge of REGIME disintegration when Mao Zedong passed The legitimacy and viability of the away, leaving debris from the disastrous Bretton Woods regime were insured by failure of the Cultural Revolution behind the stable world order of Pax Americana. him. Deng Xiaoping saved the country. If we are going to lose a sound world With the hands of a genius, he launched order, then we will have to live through the policy of reform and opening. He intermittent moments of instability. knew with certainty that the people of We may be able to survive only if we China had to live better. He knew that can manage to devise policy collabora- would be possible only through the work tion among major countries by way of of a market mechanism. He welcomed mutual concession. In fact, during the foreign money and foreign technology, 1970s and 1980s, when we had many and combined them with Chinese labor. contentious issues in the area of inter- He did not mind discarding Communist national finance—including exchange ideology. He declared that it does not rate, balance of payments, capital flows, matter if a cat is black or white as long as macroeconomic policies, and so on—we it catches a mouse. However, the crux of tried policy collaboration at such forums his genius was the decision to maintain as the G5 and G7. Sometimes we suc- the Communist Party as the dictato- ceeded, sometimes we failed. What we rial ruler of the country. Under Deng’s learned from this experience was rather leadership China made phenomenal straightforward. We could succeed only development, never before witnessed when there was common recognition in the history of humanity, to become about what the global benefit was, and the second-biggest country in the world we could succeed only when everybody at the beginning of the 21st century. felt that burdens and merits were being Deng was succeeded by Xi Jinping, who fairly shared. Only with such a common is more vocal and assertive. Xi boldly set recognition could we convince ourselves aside Deng’s shrewd strategy of “hide and that we needed to initiate a common bide” and announced his determination effort to secure the desired benefit. to restore China’s historic glory and make It should be broadly recognized that it a global power. In other words, Xi Bretton Woods institutions such as the declared that China does not acquiesce IMF are useful public infrastructure that to America’s singular hegemonic role in can play a valuable role in accomplishing the world. He made China the first open substantive policy collaboration in a challenger to Pax Americana. multipolar world. For that purpose, the IMF needs major restructuring:

REVITALIZING THE SPIRIT OF BRETTON WOODS | 111 • First, the voting structure should be Having said that, we must sober our- overhauled. Members’ voting share selves up. In today’s world, or in the should be allocated based upon the foreseeable future, two superpowers, the objective size of their respective United States and China, are openly economies. competing to shape and run the world as each sees fit. There is no sign of hope • Second, there should be no veto pro- that they will come to collaborate by cedure. Decisions should be made by accepting partial surrender of sovereignty. simple majority. On the contrary, there is a looming sign • Third, there should be an infor- of a historic clash of civilizations. Beyond mal forum for consultation and that, the future is totally unknown. negotiation, composed of five or six major-currency countries. The forum should be independent from THE ROLE OF THE the IMF but should establish close BRETTON WOODS contact with the managing director COMMITTEE of the IMF. Against the background of the global situ- • Fourth, the IMF should be given a ation described above, the prospective role mandate to initiate discussion and of the Bretton Woods Committee cannot negotiation among major-currency be easy. There are, however, a few steps I countries to restore stability in the would propose. The Committee should global currency market. expand its membership, particularly to a non-American constituency. It should also • Fifth, within the IMF there should endeavor to establish and widen channels be a workable and effective dispute of communication with the leadership of settlement mechanism. The IMF major countries, particularly the United cannot force member countries to States and China. These efforts may not take action, but it can exercise strong produce immediate results, but somebody moral pressure. must start with something, even if it is a raindrop in the ocean.

112 | REVITALIZING THE SPIRIT OF BRETTON WOODS Some folks think that the problems of the world were made to be solved in a day or in one conference. That can’t be. We must have cooperation, collaboration; utilize the machinery, the instrumentalities, that have been set up to provide succor to those who are hungry and ill; to set up, establish instrumentalities that will stabilize or tend toward stabilization of economies of our world.

—U.S. Delegate Fred Vinson at the 1944 Bretton Woods Conference

REVITALIZING THE SPIRIT OF BRETTON WOODS | 113 Keynes (left) chats with Dr. H. H. Kung, China’s Minister of Finance, in the dining room of the Mt. Washington Hotel on July 2, 1944.

Source: Bettmann/Getty Images EVOLVING GLOBAL ECONOMIC AND FINANCIAL ARCHITECTURE

REVITALIZING THE SPIRIT OF BRETTON WOODS | 115 TRUE FINANCE

MARK CARNEY Governor, Bank of England, and former Chair, Financial Stability Board

The 75th anniversary of the Bretton But we will forfeit these gains if we Woods Conference comes a decade after fail to maintain the new institutional the global financial crisis, two decades frameworks created since the global after the Asian crisis, and three decades financial crisis. We know we cannot rest after the Latin American debt crisis. on our laurels. We must remain vigilant, Despite the past decade of financial resist the three lies of finance, and rein- reform—and despite the achievements force some core financial truths. of the International Monetary Fund (IMF) and World Bank since their inception—many are asking whether THE THREE LIES anything has really changed. OF FINANCE Such fatalism is at odds with reality. The first lie of finance is the four most The radical program of G20 reforms expensive words in the English lan- has made the global financial system guage: “This time is different.”1 This safer, simpler, and fairer. These measures misconception is usually the product of are creating a system that can serve an initial success, with early progress households and businesses in bad times gradually building into a blind faith in as well as good. These changes are help- a new era of effortless prosperity. ing fulfill the objectives of the Bretton It took a revolution in macro- Woods founders. They are creating a economic policy to help win the battles system that can deepen financial inclu- against high and unstable inflation. But sion, better meet the needs of aging these innovations did not deliver lasting populations, and help fund the transition macroeconomic stability. Price stability to a low-carbon economy. was no guarantee of financial stability.

1 For an extensive survey, see Carmen M. Reinhart and Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly (Princeton, NJ: Princeton University Press, 2009).

116 | REVITALIZING THE SPIRIT OF BRETTON WOODS An initially healthy focus would become consequences.5 First, if markets always a dangerous distraction. Against the clear, they can be assumed to be in serene backdrop of the so-called Great equilibrium—or, said differently, to be Moderation, a storm was brewing as “always right.” If markets are efficient, total nonfinancial debt in the G7 rose then bubbles can neither be identified by the size of its GDP. nor their potential causes addressed. Most importantly—and this is the Such thinking dominated the practical lie—complacency among individuals indifference to the housing and credit and institutions, fed by a long period of booms before the crisis.6 macroeconomic stability and rising asset Second, if markets always clear, prices, made this remorseless borrowing they should possess a natural stability. seem sensible.2 Captivated by the myth Evidence to the contrary must be the that finance can regulate and correct itself product of either distorted or incomplete spontaneously, authorities retreated from markets. During the Great Moderation, their regulatory and supervisory respon- this view became an organizing prin- sibilities.3 When the crisis broke, policy ciple for financiers and policy makers. makers quickly dropped the received But markets clear only in textbooks. wisdoms of the Great Moderation and In reality, people are irrational, econ- scrambled to relearn the lessons of the omies are imperfect, and nature itself Great Depression.4 is unknowable. When markets don’t The second lie, the belief that “mar- clear, agents may be surprised to find kets always clear,” has two dangerous what they own. When those surprises

2 This emphasis on the endogenous tendency of financial systems to become unstable is reminis- cent of Hyman Minsky’s “financial instability hypothesis”: Hyman P. Minsky, “The Financial Instability Hypothesis” (Working Paper No. 74, Jerome Levy Economics Institute of Bard College, Annandale-on-Hudson, NY, 1992). 3 For a review of this broader phenomenon, see Tommaso Padoa-Schioppa, “Markets and Government Before, During, and After the 2007–20XX Crisis” (The Per Jacobsson Lecture, Per Jacobsson Foundation, Basel, Switzerland, June 2010). 4 See, for example, Paul Krugman, The Return of Depression Economics and the Crisis of 2008 (New York: Penguin, 1999, updated and reissued 2008). 5 See also Adair Turner, “Market Efficiency and Rationality: Why Financial Markets Are Different” (Lionel Robbins Memorial Lectures, London School of Economics and Political Science, London, October 2010). 6 Such naïveté is striking given that evidence of disequilibria abounds in markets for goods and labor. In goods markets, there is “sluggishness everywhere.” Left to themselves, economies can go for sustained periods operating above or below potential, resulting, ultimately, in excessive or deficient inflation. Yet efficient market forces “should” bring about changes in prices sufficient to equate demand with potential, leaving inflation as a purely monetary phenomenon. In labor markets, there is “rigidity everywhere.” Rather than fluidly adjusting to equate the demand for labor with its supply, periods of deficient labor demand can persist, sustaining mass unemployment and joblessness. Yet efficient market forces “should” eliminate these disequilibria by having wages adjust to ensure full employment always and forever. Monetary policy is not only a response to these rigidities; it is made effective by them.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 117 are—or are thought to be—widespread, TRUE FINANCE panic ensues. In the end, the belief that This time is no different. Markets don’t “markets are always right” led policy always clear. And we can suffer from makers to neglect their proper roles in their amorality. moderating those tendencies in pursuit What to do with such knowledge? of the collective good. And how to retain it? The third lie, that “markets are always To resist the siren calls of the three moral,” takes for granted the social lies of finance, policy makers and market capital that markets need in order to participants must bind themselves to the 7 fulfill their promise. The crisis showed mast. That means building institutional that if left unattended, markets can be frameworks that make it easier to resist prone to excess and abuse. In finan- the lies as they regain their seductive cial markets, means and ends can be power. If we can, we will build True conflated too easily. Value can become Finance, an enduring platform for strong, abstract and relative. And the pull of sustainable, and balanced growth. the crowd can overwhelm the integrity Let me begin with the global reforms of the individual. Repeated episodes of that have addressed the third lie: “Markets misconduct—such as the LIBOR and are moral.” In the cycle of scandal, foreign exchange scandals—called into response, integrity, drift, and new scan- question the social license that markets dal, potential solutions have oscillated 8 need to innovate and grow. between the extremes of light-touch The crisis reminded us that real regulation and total regulation. There are markets don’t just happen; they depend problems with each. By undervaluing the on the quality of market infrastructure importance of hard and soft infrastruc- for their effectiveness, resilience, and ture to the functioning of real markets, fairness. Robust market infrastructure light-touch regulation led directly to the is a public good in constant danger of financial crisis.9 Market standards were under­provision, not least because the poorly understood, were often ignored, best markets innovate continually. This and always lacked teeth. Yet a system reli- risk can be overcome only if all market ant on total regulation and large ex post actors, public and private, recognize their sanctions is similarly bound to fail because responsibilities to the system as a whole.

7 Mark Carney, “Inclusive Capitalism: Creating a Sense of the Systemic” (Speech given at Conference on Inclusive Capitalism, London, May 2014). 8 The scale of misconduct impaired banks’ ability to function fairly and effectively. Global banks’ misconduct costs have exceeded US$320 billion, capital that could otherwise have supported around US$5 trillion of lending to households and businesses. More worrying still, in a system in which trust is fundamental, it ought to be of grave concern that only 20 percent of UK citizens now think that banks are well run, compared with 90 percent in the 1980s. 9 Hard infrastructure refers to the way in which markets are organized. Soft infrastructure refers to the standards and norms, including regulation, market standards, and codes, by which markets operate.

118 | REVITALIZING THE SPIRIT OF BRETTON WOODS it promotes a culture of complying with The UK Senior Managers Regime the letter of the law, not its spirit, and (SMR) gives teeth to voluntary codes because authorities will inevitably lag by incentivizing firms to embed them developments in fast-changing markets. and by reestablishing the link between A more comprehensive and lasting seniority and accountability.13 Under solution combines public regulation with the SMR, the most senior decision private standards and then buttresses both makers of banks, insurers, and major with incentives to increase materially investment firms can now be held indi- the understanding and accountability vidually accountable if they fail to take of individuals. In the UK, new laws reasonable steps (including training or and regulations are doing just that.10 proper oversight) to prevent regulatory Compensation rules now align risk and breaches in their areas of responsibility. reward, with a significant proportion The Financial Stability Board (FSB) of variable compensation deferred for has identified a similar menu of tools up to seven years across the banking for its members under its Misconduct industry. Regulatory references mean Action Plan. Thus far, however, action to that the histories of those with a record promote good conduct has varied widely of misconduct will be known to anyone across the G20.14 The FSB’s compensa- considering hiring them.11 tion standards have been written into Authorities have also used their con- G20 regulatory rules but not yet fully vening powers to encourage market deployed.15 Although adjusting in-year participants to develop standards of pay is common, clawing back bonuses market practice, such as the new global later on is not, even though it typically foreign exchange code and the new takes several years for evidence of mis- standards for fixed income, currencies, conduct to emerge. And few jurisdictions and commodities (FICC) markets from have put in place either formal mecha- the FICC Markets Standards Board.12 nisms to ensure that boards and senior managers are explicitly responsible and

10 “Fair and Effective Markets Review—Final Report” (HM Treasury, Bank of England, and Financial Conduct Authority, London, June 2015). 11 Bank of England Prudential Regulation Authority, “Strengthening Individual Accountability in Banking” (Supervisory Statement SS28/15, Bank of England, London, May 2017). 12 See Global Foreign Exchange Committee, “FX Global Code” (Global Foreign Exchange Committee, n.p., 2018); and Mark Carney, “Turning Back the Tide” (Speech at FICC Markets Standards Board, London, 2017). 13 Terry Allen, “Strengthening the Link between Seniority and Accountability: The Senior Managers and Certification Regime,”Bank of England Quarterly Bulletin, Q3 (2018). 14 FSB, “Strengthening Governance Frameworks to Mitigate Misconduct Risk: A Toolkit for Firms and Supervisors” (Financial Stability Board, Basel, Switzerland, April 2018). 15 FSB, “Implementing the FSB Principles for Sound Compensation Practices and Their Implementation Standards: Fifth Progress Report” (Financial Stability Board, Basel, Switzerland, 2017).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 119 accountable for what happens at their percent of new OTC single-currency regulated firms, or regulatory references interest rate derivatives are now centrally to stop those with poor conduct records cleared in the United States. And an addi- from moving from firm to firm. tional US$1 trillion of collateral is now Absent a more comprehensive held globally against all derivative trades. response, it is hard to see how we will Central counterparties (CCPs) reduce prevent the ethical drift that periodi- systemic risk, provided they meet the cally undermines market integrity and highest standards of resilience, recover- impairs finance’s ability to function ability, and resolvability. That is why G20 effectively.16 And most fundamentally, reforms have significantly increased the without greater individual responsibility, standards to which CCPs are held, rang- it is hard to see how social capital can ing from higher margins and liquidity be fully regained. to better operational and cyber resil- ience.17 To finalize its policy work, the • FSB reported to G20 leaders on the need The recognition that markets don’t for guidance on CCP financial resources always clear has spurred major reforms for resolution.18 to make markets less complex and more A decade on from the financial crisis, robust. A decade ago, over-the-counter a series of measures are eliminating the (OTC) derivative trades were largely fragile forms of shadow banking while unregulated, unreported, and bilater- reinforcing the best of resilient non- ally settled. When Lehman Brothers bank financial intermediation. The toxic fell, uncertainty about such exposures forms of shadow banking at the heart sparked panic. of the crisis—with their large funding Since then, the FSB has designed a mismatches, high leverage, and opaque series of reforms to make these mar- off-balance-sheet arrangements—no kets safer and more transparent by such longer represent a global stability risk means as requiring trade reporting and (figure 1). encouraging central clearing of OTC Other, more constructive forms of trades. These reforms are having their nonbank finance, including money desired effects. Supervisory authorities market funds and repurchase agree- and market participants can now readily ment markets, are subject to new policy monitor activity and exposures. Ninety measures that reduce their risks and

16 For examples of misconduct over two centuries, see FICC Markets Standards Board, “FMSB Annual Report 2017” (FICC Markets Standards Board, London, 2017). 17 See Committee on Payments and Market Infrastructures and International Organization of Securities Commissions, “Principles for Financial Market Infrastructures” (Bank for International Settlements, Basel, Switzerland, 2012). 18 Mark Carney, “To G20 Finance Ministers and Central Bank Governors” (Letter, Financial Stability Board, Basel, Switzerland, March 13, 2018).

120 | REVITALIZING THE SPIRIT OF BRETTON WOODS FIGURE 1. SHADOW BANKING HAS TRANSFORMED INTO RESILIENT MARKET- BASED FINANCE

RESILIENT SHADOW MARKET-BASED BANKING FINANCE 45

40

35

30 Reforms to Investment and reduce 25 money market run risk* funds 20

15 US$ TRILLIONS US$

10 ‘Toxic’ and other shadow banking Toxic shadow banking 5 gone with reforms for the remainder** 0 2007 2016

SOURCE: Financial Stability Board, Global Shadow Banking Monitoring Report 2017 (Financial Stability Board, Basel, Switzerland, 2018). * Financial Stability Board asset management recommendations and money market fund reforms (notably in the European Union and United States). ** Securitization reforms, market intermediation reforms.

reinforce their benefits. This develop- we can create an antifragile system that ment is bringing welcome diversity to is robust to both the intensification of the financial system. known risks and the unknowns.19

• An antifragile system requires Finally, let us turn to the lie we resilient banks. began with: “This time is different.” If the experience of the financial A decade ago, major banks were woe- crisis teaches us anything, it’s humility. fully undercapitalized, with complex We cannot anticipate every risk or plan business models that relied on the for every contingency. But we can, goodwill of markets and, ultimately, and must, plan for failure. That is how taxpayers. Banks can now stand on their own. The world’s largest banks must

19 Antifragility, the tendency to grow or gain strength from shocks, rather than suffer harm, was first described by Nassim Nicholas Taleb, Antifragile: Things That Gain from Disorder (New York: Random House, 2012).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 121 hold 10 times more equity than before the run-up to the crisis before socializ- the crisis. And to protect the system ing the losses when the music stopped. from risks we think are low but prove To bring back the discipline of the not to be, banks are subject to a simple market and end reliance on public funds, minimum leverage ratio, which is robust FSB members agreed on standards to to model risk. ensure that global systemically import- Regulation has made banks less ant banks (G-SIBs) can safely fail in the complex and more focused. Business future.21 These banks have had to make strategies that relied on high leverage, themselves easier to resolve. They must risky trading activities, and wholesale now hold sufficient debt that in the funding are disappearing, as intended. event of failure, a bank’s successor can Trading assets have been cut in half, be recapitalized to support the continued and interbank lending is down by one- operation of its most important activities. third.20 Banks lend less to each other and The powers and tools authorities more to the real economy. need to deal with failing banks have In response to new global liquid- been fully implemented in the UK. ity standards, banks have fundamentally Our major banks have ring-fenced their changed their funding models, relying domestic activities. They already hold more on deposits, long-term borrowing, total loss-absorbing resources (TLAC) and capital, and less on flighty short-term of 25 percent of their risk-weighted debt. UK banks have increased their con- assets, well within sight of the 2022 tingent liquidity tenfold since the crisis. requirement of 28 percent.22 As a con- sequence, market discipline is back, with the public subsidy enjoyed by the An antifragile system requires UK’s largest banks having fallen by 90 ending “too big to fail.” percent (figure 2). Higher capital and liquidity require- ments are necessary but not sufficient. Banks must also be able to fail without An antifragile system must be as systemic consequences. robust to operational failures as A decade ago, large, complex banks to financial ones. operated in a “heads I win, tails you While past crises had their roots in lose” bubble. They privatized profits in financial losses, in our digital era

20 Both of these figures are as a proportion of the exposures of the 30 banks identified by the FSB as being global systemically important banks (G-SIBs). 21 FSB, “Key Attributes of Effective Resolution Regimes for Financial Institutions” (Financial Stability Board, Basel, Switzerland, October 2014). 22 Across the G20 as a whole, more than 80 percent of all G-SIBs already hold TLAC that meets the 2019 requirement of 16 percent, and 60 percent already meet the 2022 requirement of 18 percent of risk-weighted assets (excluding capital buffers).

122 | REVITALIZING THE SPIRIT OF BRETTON WOODS FIGURE 2. MARKETS NO LONGER RELY ON GOVERNMENT SUPPORT

Uplift in bank credit ratings due to sovereign bailout subsidy

6 Peak ratings uplift Current ratings uplift 5

4

3 UK banks’ average credit 2 rating uplift has now been 1 reduced to .04 notches. 0 UK US Germany France Switzerland Japan

SOURCE: Moody’s and Bank calculations.

systemic shocks can also come from FSB will report next year on a project nonfinancial sources, including cyber to develop effective practices relating to attacks. To improve firms’ cyber a financial institution’s response to and defenses, the largest banks and the mar- recovery from a cyber incident. ket infrastructure at the core of the UK financial system are subject to penetra- And an antifragile system tion tests (known as CBEST) and are requires a comprehensive required by their supervisors to address macroprudential framework. any deficiencies uncovered. In parallel, we are literally planning Macroprudential frameworks encourage for failure. Many authorities have begun authorities to meet the next challenge, setting standards for how quickly critical not simply fight the last war. They financial institutions must be able to prompt exploration of “what could restore vital services following a suc- happen,” not the false comfort of being 23 cessful cyber attack. We will conduct ready for what is most likely to happen. cyber stress tests of firms’ ability to Macroprudential authorities must con- meet our impact tolerances in “severe sider the safety of the financial system but plausible” scenarios and prescribe as a whole. That requires both compre- remedial action plans if they fail. The hensive and varied stress testing of the core as well as regular examination of

23 Alex Brazier, “How To: MACROPRU—Five Principles for Macroprudential Policy” (Speech, Financial Regulation Seminar, London School of Economics, London, February 2017).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 123 the risks that may lie beyond the regu- We will forfeit the gains made since the latory perimeter. crisis if we once again fall under the spell Macroprudential policy should be of the three lies of finance. To resist their countercyclical, building resilience siren calls, we must maintain the new when risks are increasing and drawing institutional frameworks created in the on that resilience when risks crystallize. wake of the last crisis. And it must address the macrofinancial And this brings me back to Bretton implications of major imbalances in Woods. The IMF and International Bank the real economy, whether in housing for Reconstruction and Development markets or the balance of payments. were established to provide the infra- structure for postwar development and recovery: to rebuild and to provide CONCLUSION international frameworks for coopera- Eight hundred years of economic history tion and better policy making. The teaches us that financial crises occur Bretton Woods founders recognized that roughly once a decade—a frequency many economic problems—until then that reflects in part the short institutional seen as domestic—could be addressed memories in finance. only with an international approach. We Our citizens have not forgotten the will not abolish crises (which have their last crisis. roots in changes to the real economy as The reforms of the past decade have well as irreducible uncertainty). But we put in place a new financial system that can reduce their frequency and lessen could, with time, regain people’s con- their impact. By resisting the three lies fidence. However, the challenge for of finance and by voicing truths seldom policy makers is that, when it comes to told, we can build True Finance to financial stability, success is an orphan. better serve our citizens in bad times As memories fade, complacency sets in as well as good. and pressure to compromise reemerges.

124 | REVITALIZING THE SPIRIT OF BRETTON WOODS THE BANK FOR INTERNATIONAL SETTLEMENTS If It Didn’t Exist, It Would Have to Be Invented

WILLIAM C. DUDLEY Senior Research Scholar, Griswold Center for Economic Policy Studies at Princeton University; Advisory Council Member, Bretton Woods Committee; and former President, Federal Reserve Bank of New York

In a volume that commemorates the come to play an essential role in the 75th anniversary of the Bretton Woods global financial system. In a global Conference, one might ask, why include economy that does not respect national an essay on the Bank for International borders, it is critical that national cen- Settlements (BIS)?1 After all, the BIS tral bankers, supervisors, and regulators predates the Bretton Woods Conference. understand what each is seeing and Moreover, one of the decisions made at doing, and that their actions be well the Bretton Woods Conference was to communicated and coordinated. The BIS close down and liquidate the BIS, even plays an important role complementary though, fortuitously, this plan was never to that performed by the two institu- implemented. tions established by the Bretton Woods It’s appropriate, however, that the Conference: the International Monetary BIS should be included in this volume Fund (IMF) and the World Bank. of essays. That’s not simply because it Initially as head of the Markets escaped the fate of being closed and Group of the Federal Reserve Bank of liquidated, but instead because it has New York, and then later as the bank’s

1 My thanks to Sandra Lee of the Federal Reserve Bank of New York for her helpful comments in preparation of this essay.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 125 president, I had the opportunity to ROLE OF THE BIS IN participate actively in the BIS’s work, CENTRAL BANK POLICY including as a member of the Markets By way of background, the BIS was Committee (2007/08), which focuses established in 1930 to administer on global financial market developments Germany’s World War I reparation and the execution of monetary policy; payments. But as part of its mission, it as chair of the Committee on Payment was also given the statutory authority and Settlement Systems (2009–2012), to provide banking services to central which focuses on payments and financial banks and other international authori- market infrastructure issues; as chair of ties, and to serve as a place where central the Committee on the Global Financial bankers could exchange views and coor- System (2012–2018), which has a finan- dinate their activities. When German cial stability orientation through its reparation payments were suspended focus on developments within the global in 1931 and then abolished in 1932 as financial system; as a member of the part of the Agreement, the Economic Consultative Committee BIS did not fold up its shop but instead (2009–2018), which acts as the steering continued to provide banking services committee for policy work and discus- and act as a forum for central bankers. sions at the BIS; as a member of the BIS Over time, as the process of globaliza- board of directors (2009–2018), which tion has continued, the role of providing is responsible for oversight of the BIS a forum for central banker discussions management and business strategy; and has, in my judgment, become the most as a member of the Steering Committee significant activity of the BIS. Today we of the Financial Stability Board (2009– operate in a global financial system, with 2018), which is hosted and supported large systemic financial institutions that by the BIS, and responsible for moni- do business in many different countries, toring and making recommendations but within a regime in which monetary about the global financial system.2 My policy and bank supervision are still con- experiences in these capacities, as related ducted on a national basis. Thus, there is in this essay, underscore the important a need for a place where central bankers role that the BIS plays in relation to the can exchange information about recent IMF and the World Bank. and prospective monetary policy devel- opments, and where best practices can be established to help ensure greater con- sistency in the way banks are regulated and supervised on a cross-border­ basis.

2 I also served as a member of the Group of Governors and Heads of Supervision, which is responsible for approving the work of the Basel Committee on Banking Supervision, and as a member of the BIS audit and risk committees.

126 | REVITALIZING THE SPIRIT OF BRETTON WOODS This role of providing a forum for discussions about the US experience central bankers adds value in several ways. with balance sheet normalization will Importantly, it improves understanding undoubtedly inform the choices made of why policy is evolving in the way it by policy makers in other countries is in particular countries and regions; it when they start the process. provides insights into significant lessons The bimonthly discussions about that can lead to better policy making monetary policy and the economic in the future; it helps coordinate and outlook in Basel, and the work of the improve bank regulatory and supervisory various BIS committees, also serve standards; and it facilitates the devel- another very valuable purpose. They help opment of personal relationships and build important professional relationships trust, which become particularly valuable across the central banking community. during times of crisis. These relationships, in turn, build the In my experience, US policymakers trust and common understanding that have used visits to the BIS to explain helps to facilitate international policy innovations in US monetary policy that coordination when it is needed. potentially have implications for global In my 11½ years at the New York capital flows, financial asset prices, and Federal Reserve, I made the trip to policy elsewhere. For example, in 2017 Basel more than 50 times, each time and 2018, the balance sheet normaliza- meeting with colleagues tasked with tion process that the US Federal Reserve similar responsibilities in other central had commenced received considerable banking organizations.3 These trips pro- attention. Similarly, US policy makers vided me with the personal contacts have learned about the advantages and and relationships that proved critical disadvantages of negative interest rate in responding to some of the important policies from the experience of other international dimensions of the finan- countries that have implemented them. cial crisis. In particular, during the fall Discussions at the BIS of the lessons of 2008, these personal relationships from these experiences have also helped helped facilitate the rapid deployment of guide policy. For example, the expe- a system of coordinated dollar auctions rience of Japan following the collapse by the European Central Bank, the of its real estate bubble informed US Bank of England, the Bank of Japan, and policy makers that they needed to ease the Swiss National Bank in few short monetary policy aggressively following weeks.4 It took only a few conference the collapse of the US housing bubble. calls for us to agree on all the details, In the same vein, I expect that ongoing ending up with auctions conducted with

3 Typically, once a year—usually in March—the BIS meetings are held elsewhere. 4 Although the Federal Reserve also established swap lines with a number of other countries, the coordinated auctions of dollar liquidity were undertaken with just these four central banks.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 127 similar terms and conditions around the Although the work of the BCBS world. These auctions of dollar funding is well known, the other Basel com- were backstopped by foreign exchange mittees also play important roles in swap agreements that each central bank financial stability. For example, when had executed with the Federal Reserve I chaired the Committee on Payment System. They were a significant com- and Settlement Systems (CPSS) during plement to the Term Auction Facility 2009–2012, the main focus of our work in the United States in providing dollar was to strengthen the standards that liquidity to foreign commercial banks should be applied to critical financial that had impaired access to traditional market infrastructures with respect to dollar funding markets. At their peak, issues such as oversight, governance, these foreign dollar auctions extended a liquidity, and risk management. This total of more than US$500 billion. By work, which we did jointly with the facilitating the flow of dollar liquidity to International Organization of Securities the global banking system, they helped Commissioners (IOSCO), was par- to stabilize bank funding following the ticularly urgent in two respects. First, failure of Lehman Brothers. The rela- the prior standards were out of date, tionships established at the BIS helped were not comprehensive, and lacked make this process go smoothly. teeth—being more in the form of rec- ommendations than standards. Second, the agreement among the G20 coun- ROLE OF THE BIS IN tries to mandate the central clearing of FINANCIAL STABILITY over-the-counter derivatives transac- The BIS also plays an important role in tions increased the importance of global the realm of financial stability. Because financial market infrastructures. A con- we operate in a global financial system sistent global approach was necessary. with a high degree of interconnectivity, The CPSS-IOSCO work resulted no central bank can ensure financial in the Principles for Financial Market stability through just its own actions. Infrastructures (PFMI). Not only do the Thus, there is a need for a multinational PFMI provide a guide to the conditions entity to play a significant role in this that financial market infrastructures area. The BIS fills this role in a number need to meet in order to operate effec- of ways. First, it provides a forum and tively and safely, but they have become the infrastructure (including permanent the global basis for the implementation staff) to work on issues that are relevant of regulatory standards on a country-­ to financial stability. Such work includes by-country basis. that of the Basel Committee on Banking Similarly, the successor committee to Supervision (BCBS) to develop liquid- the CPSS, the Committee on Payments ity and capital standards for systemic and Market Infrastructures (CPMI), banking organizations. which I chaired, has played a pivotal

128 | REVITALIZING THE SPIRIT OF BRETTON WOODS role in a number of important payments prescient in his analysis of emerging issues—some of which are relevant to financial stability risks.5 financial stability. For example, after As part of this work, the BIS has evaluating the Bangladesh cybersecu- played a valuable role in highlighting rity theft, the CPMI took a number the potential use of macroprudential of actions to make the international tools to address financial stability risks. payments system safer. In particular, For example, the Committee on the the CPMI—with my wholehearted Global Financial System has produced encouragement and support—worked a number of papers that document what to clarify the responsibilities of those has been achieved to date and some of involved in global payment chains—the the issues that make the use of macro- party initiating the payment, the pay- prudential tools difficult. While this is ment infrastructure provider, and the still a subject in its infancy, over time I party clearing and settling the payment. expect that macroprudential tools will The CPMI also worked to institute an prove to be an important complement effective assurance regime so that par- to microprudential tools, such as bank ticipants in global payments could be regulation and supervision, in helping confident that all the other participants to foster financial stability. in the payments chain met a minimum The BIS is also vital in developing set of global standards. and compiling international banking On the financial stability front, the data. For example, the BIS system- BIS also plays a vital role in a number atically keeps track of cross-border of other ways. It hosts the Financial banking capital flows and global deriv- Stability Board, which has been a leader atives activity. It also maintains a secure in assessing the emerging risks in the database of supervisory information on global financial system and coordinating systemic banking organizations. Both international work on numerous topics, of the databases are important tools for such as the resolution and recovery of assessing the risks to the global financial systemically important banks and finan- system and determining appropriate cial market infrastructures. Moreover, prudential standards, such as capital and the BIS research department has done liquidity requirements. pioneering work on financial stability Finally, the BIS provides financial issues for several decades. For example, services and assistance to central banks before the onset of the financial crisis, and other international authorities. As the head of the BIS research depart- a provider of banking services, the BIS ment at the time, Bill White, was quite has a reputation for high-quality service,

5 See, for example, Claudio Borio and William White, “Whither Monetary and Financial Stability? The Implications of Evolving Policy Regimes” (Working Paper No. 147, Bank for International Settlements, Basel, Switzerland, 2004).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 129 safety (due to its low-risk balance sheet Providing more insight into the and high level of capitalization), confi- development of these types of inter­ dentiality, and security. Especially when national standards and the other activities times are uncertain, the strength of the of the BIS would presumably increase the BIS balance sheet and its operational perceived legitimacy of these efforts. At a capabilities help support international minimum, it would help quash conspir- financial activity and enhance financial acy stories about what the BIS central stability. banker cabal is up to! Transparency might I think it should be apparent that I also be enhanced by greater outreach as am a big fan of the BIS. Nevertheless, well as more detailed published agendas there are some areas in which improve- and minutes of the activities of the var- ments could make the BIS even more ious BIS committees. effective. Obviously, there is a limit to how far transparency should go. Too much transparency might prove counter- AREAS FOR productive by inhibiting candor and IMPROVEMENT willingness to exchange sensitive infor- First, the BIS should strive toward mation on a confidential basis. But I greater transparency about its role and don’t think the BIS is close to that limit. responsibilities. Transparency is partic- In my opinion, the perception that it ularly important at a time when many is a secretive organization outside the established institutions are viewed with control of elected governments serves suspicion and hostility. For example, to undercut its mission. some observers in the United States The second area for improvement believe that the BIS imposes inter­ is for the BIS to continue to broaden national capital standards on US its membership and provide a greater banking institutions. Nothing could role for emerging-market economies. be further from the truth. The Basel When the BIS was established, it had a capital standards are voluntary and were predominantly European focus because developed via consensus. US central administering the German World War bankers and bank regulators view the I reparations was its primary purpose. Basel standards positively because they Although the European role has lessened help establish a floor on capital require- over time as important emerging-­ ments around the world, helping to market economies such as China and prevent a “race to the bottom.” This India have begun to play greater roles, mechanism benefits the United States, European countries still have outsized where national bank capital standards representation relative to their role in are generally higher. the global economy. For example, they

130 | REVITALIZING THE SPIRIT OF BRETTON WOODS have a large number of members on Bank. In my own experience, the BIS the key BIS committees and its board works well with these two institutions. of directors. Representatives from the two groups are While there is more to do in this often included in BIS working groups, area, the BIS is moving in the right and the IMF regularly participates in the direction. For example, in 2019, the Global Economy Meeting at the BIS, composition of the BIS board of direc- which focuses on international economic tors is changing in a fundamental developments. In addition, the Financial way—several European countries are Stability Board’s Standing Committee losing their second board seats, and the on Assessment of Vulnerabilities includes proportion of non-European directors representatives of the IMF and the World is increasing, even as the total number Bank, and works closely with the IMF of board members shrinks to 18 from on ongoing assessment of emerging 21. Similarly, it is gratifying to see offi- financial-­system risks and vulnerabil­ cials with an emerging-market country ities. But it is not always clear where the background taking on key roles in BIS boundaries are or where they should be, management. For example, Agustín and this obscurity, at times, can lead to Carstens, former head of the Bank of tensions between the institutions and Mexico, is the first BIS general manager redundancy of work efforts. Obviously, from an emerging-market country. because it takes two to tango, this is not The third area for improvement is to an issue that the BIS can address on its increase diversity and inclusion in the own. It also requires a commitment from BIS management. Currently, for exam- the IMF and the World Bank. ple, women are very underrepresented, with most of the major management positions of the Bank held by men. CONCLUSION While one can argue that the under- In conclusion, I believe that globalization representation of women and minorities of the economy and financial system is also true for central banking more has generated huge benefits for peo- generally, the BIS could do better and ple around the world, literally lifting show greater leadership in this area. hundreds of millions of people out of Put simply, for the BIS to be viewed poverty over the past few decades. In as fully credible, the composition of its such a world, there is a critical role for leadership needs to be more diverse. international organizations like the BIS— A final area for focus—and this goes to provide a forum for central banks to back to the earlier issue of transparency discuss and debate, to provide a coordi- and communication—is to clarify how nation mechanism to establish coherent the work of the BIS fits in, relative to global international banking standards, the activities of the IMF and the World and to provide an independent voice in

REVITALIZING THE SPIRIT OF BRETTON WOODS | 131 analyzing those issues that may impinge of funds between savers and borrowers. on the ability of the global financial These are very important functions that system to function efficiently in allo- complement the roles played by the IMF cating risk and intermediating the flow and the World Bank.

132 | REVITALIZING THE SPIRIT OF BRETTON WOODS GLOBAL FINANCIAL COOPERATION AS A LEGACY OF BRETTON WOODS

RANDAL K. QUARLES Vice Chair for Supervision of the Board of Governors, US Federal Reserve System, and Chair, Financial Stability Board

The Bretton Woods Agreement reflected by providing loans to countries facing a commitment of its members—led balance-of-payments­ problems. Such by the United States and the United liquidity support was expected to reduce Kingdom—to promote greater global the likelihood that countries would have openness and economic cooperation to sharply tighten monetary and fiscal following the inward-looking policies policy to maintain exchange rate stability, adopted during the Great Depression.1 which had been the standard recourse The agreement envisioned an inter­ under the gold standard and an important national monetary framework that would factor intensifying the Great Depression. allow countries much greater latitude to The belief that international eco- achieve domestic economic objectives, nomic cooperation could help countries including full employment, than under advance their national interest was not the gold standard. International coopera- limited to economic and financial con- tion was regarded as an essential building cerns. The greater economic stability block for achieving those domestic aims, that the Bretton Woods framework with the newly created International was expected to secure was regarded as Monetary Fund (IMF) playing a key part vital for world peace and the stability of

1 I am grateful to Christopher Erceg of the Federal Reserve Board for his assistance. The views expressed in this essay are my own and not necessarily those of the Federal Reserve Board or the Federal Open Market Committee.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 133 democratic institutions, both of which While most countries had abandoned had been undermined by the Great gold by the mid-1930s, the open global Depression. trade and financial system that had The spirit of Bretton Woods—that prevailed over much of the previous domestic goals can be advanced by inter- century was radically altered as countries national cooperation—remains very turned to more inward-looking policies. much alive today. My contribution begins The architects of Bretton Woods with a short retrospective on Bretton aimed to devise a monetary system Woods that emphasizes this important that not only would help avert the cat- message. It then discusses the benefits astrophic developments of the Great to the global economy of international Depression—including global deflation cooperation to build a more stable global and financial collapse—but would also financial system and, finally, highlights give countries much greater ability to the key role of international institutions achieve domestic policy objectives such in that undertaking. as full employment.2 Moreover, they wanted the new system to facilitate the eventual return to a more open system BRETTON WOODS of global trade, which they regarded as Following the disastrous experience key for rebuilding war-ravaged Europe of the Great Depression, there was as well as buttressing support for dem- widespread recognition of the need to ocratic institutions around the world. overhaul the global monetary system. The Bretton Woods system retained The gold standard—which had emerged some of the features of the classic gold as the dominant monetary framework standard, including fixed exchange rates in the 19th century and remained in relative to the US dollar, which served as force through the early Great Depression the major reserve center currency, and years—required central banks to keep a the use of gold as the ultimate nominal singular focus on maintaining the pari- anchor for the system. However, the ties of their currencies against gold. This Bretton Woods system differed in several meant that central banks had to tighten key respects, in order to give countries policy sharply when flight-to-safety more latitude to pursue domestic goals. concerns induced a scramble toward First, the link to gold was far weaker gold during the Depression, even as than under the gold standard, allowing banks collapsed and unemployment the United States substantial latitude topped 20 percent in many countries. to pursue monetary policy directed

2 For excellent overviews of the Bretton Woods system, see Michael D. Bordo, “The Bretton Woods International Monetary System: A Historical Overview,” and G. John Ikenberry, “The Political Origins of Bretton Woods,” chapters 1 and 3, respectively, in A Retrospective on the Bretton Woods System, edited by Michael Bordo and Barry Eichengreen (Chicago: University of Chicago Press, 1993).

134 | REVITALIZING THE SPIRIT OF BRETTON WOODS toward domestic goals, including max- rollback of trade barriers that fueled a imum employment and price stability.3 progressive expansion of world trade. Second, Bretton Woods supported per- Of course, the Bretton Woods vasive capital controls to give countries system had many shortcomings that some degree of monetary policy inde- contributed to its early demise after pendence (even under fixed exchange only a quarter century of operation. rates) as well as reduce the risks posed Expansionary monetary and fiscal policy by volatile capital flows. Finally, Bretton in the United States in the late 1960s Woods regarded international coopera- was an important catalyst for the break- tion as playing a vital role in supporting down. Countries such as Germany that the system. Rather than forcing coun- wanted greater monetary independence tries experiencing balance-of-payments to keep their own inflation rate low deficits to adopt highly contractionary found that capital controls didn’t provide monetary and fiscal policies, as under the a sufficient buffer, given the progressive gold standard, Bretton Woods allowed development of global capital markets. them to borrow from other members For countries experiencing balance- to ease the adjustment burden. The IMF of-­payments problems, greater capital was established as the key conduit for mobility meant that larger loans were such borrowing, though cooperative required from the IMF and its trading efforts eventually assumed many forms, partners—a development that eventually including direct loans and swap lines helped undermine international support between sovereigns. for the Bretton Woods system.5 The Bretton Woods system contrib- The breakup of Bretton Woods uted to far better economic outcomes marked the beginning of a long period than those of the interwar period.4 Many in which the United States and other countries achieved very low unemploy- major economies experienced high ment rates, in the 2 to 3 percent range or inflation—unprecedented in peace- even lower, while also keeping inflation time—and those economies struggled reasonably in check. The stable eco- to reanchor inflation at a level consis- nomic environment encouraged a gradual tent with price stability. Sparing the

3 Balance-of-payments concerns appeared to play little role in influencing US policy through much of the Bretton Woods period, at least outside of the late 1950s and early 1960s. See Michael D. Bordo and Barry Eichengreen, “Bretton Woods and the Great Inflation” (NBER Working Paper 14532, National Bureau of Economic Research, Cambridge, MA, 2008). 4 Bordo, “The Bretton Woods International Monetary System: A Historical Overview.” 5 Barry Eichengreen discussed ways in which weaknesses in the Bretton Woods system spurred efforts to expand international backstops beginning in the early 1960s; he argued, however, that the problems with the system were too pervasive for these efforts to be successful. See Barry Eichengreen, “International Policy Coordination: The Long View,” in Globalization in an Age of Crisis: Multilateral Economic Cooperation in the Twenty-First Century, edited by Robert Feenstra and Alan Taylor (Chicago: University of Chicago Press, 2014), 43–82.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 135 many—and familiar—details of how among monetary authorities during this this reanchoring was achieved, the new period centered around exchanges of system that emerged was vastly different information and viewpoints rather than from the Bretton Woods system that actual policy coordination. preceded it. Flexible exchange rates gave On the second question, the role of major central banks the latitude to set the IMF generated considerable debate, interest rates as they desired to achieve and even the IMF’s many supporters saw domestic policy objectives, hence per- its future role as likely to be focused on mitting much greater autonomy than macroeconomic stability in the devel- under Bretton Woods. But the new oping countries, including providing environment raised two key questions liquidity support to such countries con- that policy makers have wrestled with fronting economic crises. I believe that since the success of the new mone- such intervention on the part of the tary framework in holding inflation in IMF should be as limited and as rules- check became apparent several decades based as possible, given the moral hazard ago: First, is cooperation among central of increased sovereign risk taking and banks, governments, and international diminished market discipline that ensue policy institutions still necessary to from such intercession. But that is quite achieve domestic policy goals? And different from denying the usefulness second, are the international policy of appropriately structured interven- institutions themselves still necessary, tion in severe cases. The overuse or and for what purposes? mis­application of antibiotics can create systemic pathologies, but in appropri- ate cases, these drugs remain essential INTERNATIONAL medicine. COOPERATION AND The global financial crisis provided POLICY INSTITUTIONS a clarion call for heightened inter­ The consensus view that emerged during national cooperation to support a stable the Great Moderation period seemed global economy and build a more resil- to lean strongly toward no to the first ient financial system. This rationale of these questions, at least with regard for cooperation is different than that to the conduct of monetary policy. The under Bretton Woods, which relied on high degree of success of major central inter­national cooperation to support a banks in achieving their monetary pol- monetary system based on fixed exchange icy objectives, including low and stable rates. In my view, it remains desirable for inflation, reinforced confidence in the central banks in the United States and benefits of a decentralized approach. other floating-rate economies to for- Despite some exceptions, such as the mulate policy independently to achieve Plaza and Louvre Accords, discussions domestically mandated objectives, leaving

136 | REVITALIZING THE SPIRIT OF BRETTON WOODS explicit monetary policy cooperation to global level. In addition, achieving a level exceptional circumstances (such as those playing field for financial market partici- that prevailed during the crisis). pants is crucial. Given strong cross-border The crisis, however, did make very financial linkages, the effectiveness of apparent the importance of financial prudential policies, both micro and stability for monetary policy to operate macro, in any particular country—say, effectively. Because financial stability is, the United States—depends on the stan- in many respects, a global good, inter- dards adopted in other countries. The national cooperation can help countries United States would have little incen- better achieve their domestic objec- tive to raise standards if other countries tives—a theme very much in the spirit failed to follow suit: doing so would put of Bretton Woods. its own financial institutions at a com- While building a stronger financial petitive disadvantage and possibly even architecture has many dimensions, it is undermine global financial stability by useful to focus on two key elements.6 encouraging regulatory arbitrage toward First, the crisis highlighted the need to other economies with weaker standards. share information about the cross-border International institutions must play a activities and linkages of major financial central role in these cooperative efforts. institutions. These linkages were the In the early wake of the crisis, the lead- springboard for the rapid propagation of ers of the G20 countries expanded the crisis, but regulators in the United and transformed the earlier Financial States and abroad had far too little Stability Forum into the more mus- information about the complex inter- cular Financial Stability Board (FSB) connections between firms. The second to help provide the collective action and perhaps most salient need was to required to build a much stronger and ensure that financial firms, including more resilient global financial system. large and globally inter­connected firms The FSB includes central banks, finance as well as others outside the usual reg- ministries, and regulators from 24 coun- ulatory perimeter, build up sufficient tries and the European Union, as well capital and liquidity buffers to withstand as international organizations such as severe shocks. the IMF and key global standard-setting International cooperation is vital both bodies. The wide representation, includ- for facilitating the sharing of information ing that of emerging-market­ economies, about financial firms and their activities, helps ensure that countries with large and for enforcing uniform capital and financial sectors have input into build- liquidity standards for financial firms at a ing and refining the global regulatory

6 Randal K. Quarles, “Getting It Right: Factors for Tailoring Supervision and Regulation of Large Financial Institutions” (Speech at American Bankers Association Summer Leadership Meeting, Salt Lake City, Utah, July 18, 2018).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 137 architecture. The FSB has worked con- recommendations to ensure that they certedly to help identify vulnerabilities are having the intended effects. A key of the financial system and to formulate goal of the FSB in the future will be macroprudential standards—including a regular review to make sure that our standards for bank capital and liquid- tools are effective and, even if so, to assess ity—that apply across countries. whether we can achieve desired stability From a broad perspective, the FSB objectives in a more efficient way that may be regarded as developing voluntary minimizes regulatory burdens on firms guidelines for the global financial system. and consumers. While some may view these efforts as threatening to national sovereignty, such fears are misplaced. The FSB, in fact, CONCLUSION can only provide guidance, not impose The cooperative approach taken by the rules: it has neither legal authority to architects of Bretton Woods helped pave command its members to do anything the way for the strong and sustained nor any enforcement powers. Indeed, expansion of the global economy in the United States and other members the postwar period. These cooperative of the G20 founded the FSB to help efforts—in both the economic and for- serve their national interests by creating a eign policy spheres—helped countries stronger global financial system. Members achieve their domestic goals far better benefit from getting a seat at the table to than the inward-looking policies of the help ensure that their national interests interwar period. We are now living in and perspectives are taken into account. a moment when the usefulness of the Ultimately, all countries can benefit Bretton Woods institutions, and the bene- when each country does its fair share fits of international economic cooperation to promote financial stability, including generally, are being questioned by influ- adhering to well-chosen guidelines. ential voices in many countries. In my Even so, it’s important to underscore own country, critics who share my view that the FSB, as well as other rule-setting that government action should be as bodies, needs to be responsive to a rapidly transparent and rules-based as possible changing global financial system. The argue that IMF intervention in sovereign development of new financial technol- financial crises creates moral hazard that ogies will likely have a transformative ultimately makes the system less stable, impact on banking and the payments and they have added the criticism that system in coming years, which raises FSB cooperation on financial regulation exciting possibilities but also important threatens US national sovereignty. risks that the regulatory framework must As someone who shares those critics’ be suited to contain. Moreover, it is also fundamental world view, my experience critical for these regulatory bodies to has shown me that the first criticism, conduct an ongoing critique of their while important, can be overstated, and

138 | REVITALIZING THE SPIRIT OF BRETTON WOODS the second is misplaced. IMF support cooperation is critical for ensuring a policies can be appropriately structured stable global financial system on which to limit moral hazard while recognizing the attainment of national goals, includ- the stabilizing role that such support can ing full employment and price stability, play, and FSB coordination of regula- is clearly predicated. In the spirit of tory policy serves its members’ sovereign Bretton Woods, international institu- interests in maintaining a stable financial tions—including the IMF, the FSB, and environment in which to pursue domes- others—will remain cornerstones of tic objectives. Continued international these cooperative efforts.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 139 COORDINATION IN THE FUTURE REGULATORY ENVIRONMENT

AXEL A. WEBER Chair of the Board of Directors, UBS Group AG and UBS AG, and former President, Deutsche Bundesbank

Following the Great Financial Crisis, to keep pace with a rapidly changing regulators and banks have engaged in environment. considerable efforts to enhance the resil- ience and resolvability of the financial sector. The reason for these efforts is to POSTCRISIS REFORMS ensure that banks can live up to their AND INTERNATIONAL fundamental role in the economy in a sus- COOPERATION tainable manner. This article will briefly Regulation of the financial services outline the main structural achievements industry has undergone a complete over- toward a more robust financial sector haul since the global financial crisis following the Great Financial Crisis, that started in 2007. That crisis led the identify remaining areas of concern that G20 to define a comprehensive reform need to be addressed, and highlight the agenda, which has since transformed the main areas requiring future attention by industry and the way financial service authorities and the private sector alike. providers do business. The result of These areas include questions raised by these globally coordinated reforms is new technologies but also broader risks, a substantially stronger foundation for such as those related to climate change. financial stability. Objectives will be Banking regulation, supervisory coopera- achieved when a full, consistent, and tion, and the dialogue between authorities timely implementation of these reforms and the private sector will need to evolve is completed.

140 | REVITALIZING THE SPIRIT OF BRETTON WOODS Enhanced Regulation and a well as the recapitalization of a new Fundamental Reform holding company for the failed bank The most important changes to finan- holding company’s operating subsid- cial services regulation have been the iaries. Taken broadly, this fundamental strengthening of the international bank- reform includes the following elements: ing regulatory framework (Basel III), • Requirements that have been substantial enhancements to shift the endorsed for additional loss absorp- over-the-counter derivatives business tion capacity to reflect the greater to central clearing, and the creation of risks that G-SIFIs pose to the global recovery and resolution mechanisms financial system aimed at ending the concept of “too big to fail.” • More intensive and intrusive super- Basel III increased the quantity and vision of G-SIFIs, with higher quality of required regulatory capital, expectations for such matters as risk with effective requirements for global governance, internal control, and systemically important banks (G-SIBs) risk data aggregation capabilities going up by a factor of more than 10. • Establishment of international super- It also introduced an internationally visory colleges for better coordination agreed-upon liquidity framework and among home and host authorities in a macroprudential overlay for the first assessing risks facing G-SIFIs time. New central clearing and reporting requirements on derivatives trans­ • Development of an international actions provide netting opportunities standard to set out the responsibil- to reduce risks, increased transparency, ities, instruments, and powers that and better risk management overall. national resolution regimes should Finally, a number of actions have been introduce into national law (i.e., taken to address the moral hazard the Financial Stability Board’s “Key posed by global systemically important Attributes of Effective Resolution financial institutions (G-SIFIs). The Regimes for Financial Institutions”)1 framework adopted is a multifaceted These measures should enable set of measures, the core of which is the authorities to resolve failing financial total loss-absorbing capacity (TLAC) firms in an orderly manner without concept. TLAC is intended to absorb exposing public funds to loss. losses after an institution has failed and to facilitate an orderly resolution as

1 Financial Stability Board, “Key Attributes of Effective Resolution Regimes for Financial Institutions” (Financial Stability Board, Basel, Switzerland, October 2014).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 141 International Cooperation raise questions about the optimal Is Essential to Tackle level of regulatory requirements Future Challenges Authorities have been successful Despite substantial progress made, nota- in requiring sufficient levels of gone-­ bly on the implementation of external concern capital so that a bank’s bail-in TLAC and the development of recovery effectively supports recapitalization and resolution plans, work remains for and stabilization of the failed entity. both authorities and firms to achieve However, while the capital require- full implementation of the measures ments and resolution plans of G-SIBs listed above. Areas of focus include the remain the responsibility of national following: authorities, one bank’s difficulties can • Issues related to the identification of rapidly morph into global financial sta- material subgroup entities and the dis- bility issues. Therefore, international tribution of internal TLAC, where it is and cross-border cooperation should key to maintain incentives for effective continue to be a priority for national cross-border cooperation, particularly authorities, so as to provide an effective when implementing single-point-of- and robust banking supervision system. entry resolution strategies At the same time, several jurisdic- tions have put local requirements in • Funding in resolution, to ensure place that go beyond those foreseen that liquidity will remain available by the Financial Stability Board, such to maintain critical operations in as asking banks to create intermediate resolution holding structures to insulate a sub- • Additional clarity for operationally structure from the rest of the group, or executing bail-ins while maintain- requiring them to trap significant capital ing financial stability resources at the national level. Through actions like these, regulators run the • Valuation issues, operational conti- risk of creating the illusion of strength nuity, and disclosure to provide even from a systemic perspective, despite the more assurance of the financial sys- reality that resources are unavailable to tem’s strength and readiness to face flow freely and stabilize the system in a new crisis the case of a crisis. • Pressure on profitability, loss in risk To make sure that national account- sensitivity (associated with a sub- ability and political expectations do stantially more binding leverage not lead to further fragmentation, ratio and a capital floor), increased authorities need to deepen their inter- lending costs, and the risk of aligned national cooperation in order to find behavior due to standardized risk global solutions to global issues. Because measurement—all topics that can large firms operate globally yet laws

142 | REVITALIZING THE SPIRIT OF BRETTON WOODS remain national, international organi- coming decade. The challenge needs zations have to play certain central roles. to be tackled from both a business and Examples include fostering international a regulatory perspective, in a sensible dialogue and collaboration, monitoring way. Things boil down to the fol- the implementation of reforms, and lowing question: how can banks be assessing vulnerabilities. International innovative and competitive in a man- regulatory bodies, provided they operate ner that is sustainable over the long under robust and transparent gover- term? The financial services industry nance, should remain independent from should embrace technological change undue political pressure. Other inter- as an opportunity rather than a threat, national financial institutions should but monitor risks closely. Banks that build on their analytical resources, data fully embrace digitalization can become collection capabilities, and global out- “holistic banks,” positioning them- reach to monitor the implementation of selves as trusted partners beyond the regulatory reforms and assess vulnerabil- traditional understanding of financial ities. They should do so in a transparent services. Technology and digitalization manner that includes an open dialogue will enrich client interactions, driving with the private sector, and under an banks to rethink their operating models adequate accountability mechanism. and adapt to shifting client needs, as well as to achieve more efficiency in back-office functions and processes. PREPARING FOR For example, though not a panacea, THE CHALLENGES distributed ledger technology (DLT), OF THE FUTURE with its considerable potential to drive How to resolve failing banks is an simplicity and efficiency, is poised to essential mechanism of a safe and sound be one of many technologies that will financial system. At the same time, form the foundation of next-generation ensuring the viability and profitabil- financial services infrastructure. DLT ity of banks in the future remains the and other significant innovations will preferable course of action to stabilize require strong collaboration between them in the postcrisis era. Challenges incumbents, innovators, and regulators and opportunities are many. to harness their benefits for consumers and the economy at large. At the same time, regulators will have Digitalization, Data, to stay vigilant with respect to these and Cybersecurity new business models that technology Digitalization is an important challenge enables. They will have to monitor the as well as an opportunity for financial risks in terms of financial stability and services companies, and it will be the possible crossover into shadow banking, major determinant of success in the as well as in terms of risks to data privacy,

REVITALIZING THE SPIRIT OF BRETTON WOODS | 143 operations, and cyber security. Therefore, more personalized products and services regulators have an important role to play: over a variety of distribution channels. ensuring a level playing field (a “same Regulators should focus on providing risk, same regulation” approach) and an the right conditions as well as clarity innovation-enabling mind-set. These about how existing regulations must be are the two key aspects of the future of applied, thus enabling financial institutions regulation in this domain that will have to serve their customers in the best way to be balanced. Parallel to this balanc- possible by developing big data technol- ing act, innovation must not be stifled ogies. There would be clear benefits from by premature regulation or misaligned aligning and indeed balancing incentives incentives. to ensure access to data, addressing privacy Last but not least, given the signifi- and security concerns, and overcoming cantly increased complexity and costs technological barriers. of compliance for financial institutions Amplified by the growing use of in the last decade, it is a welcome devel- technology, cyber security threats have opment that regulators are increasingly evolved over the last 10 years to become looking at ways to support the adoption more sophisticated, more targeted, and of new technologies to facilitate the more frequent. Cyber security and cyber delivery of regulatory requirements. resilience are among the priorities of Regtech (the use of new technologies both regulators and financial institutions. to solve regulatory and compliance It is critical that governments and law requirements more effectively and enforcement agencies commit the neces- efficiently) has enormous potential to sary resources to deter criminal activities. enable better compliance solutions, More cooperation is also needed between increase efficiency and profitability, and the private and public sectors, as well as reduce barriers to entering the sector. international alignment of cyber security One area that requires greater atten- regulations and practices. The public tion is the different ways in which banks and private sectors should work pro­ and technology companies approach the actively together, across borders, to share use of data. “Big data,” in particular, and information about attacks, exchange best the ability to effectively make use of it practices, and continually improve secu- is central to the development of inno- rity systems to deter cyber criminals. vative and customized services for the Existing barriers to effective information benefit of customers. At the same time, sharing should be addressed, primarily data protection, as one of the key issues through reinforcing cross-border coordi- associated with big data, is gaining impor- nation of the various actors. Regulators tance due to the increased volume and should coordinate the national frame- availability of personal data and con- works, enabling cross-border reporting of sumers’ demand for immediate access to cyber security incidents. In addition, the

144 | REVITALIZING THE SPIRIT OF BRETTON WOODS public sector, in collaboration with the applicability, global comparability, and a private sector, needs to put more effort level playing field. into raising the cyber security awareness Industry-driven initiatives can, in of the general public. Increased cyber some cases, be more efficient to introduce security education, training, and skill than those from outside the industry. As development will guide consumers on an example, the sustainable and impact their digital journey and help them make investment industry needs to further more informed and conscious choices agree on, simplify, and standardize its when using digital channels, which terms and products. Common defini- increasingly include financial services. tions for sustainable investment would both distinguish it from charitable giving and reassure skeptics that the asset class A Broader Picture of the Risk actually delivers positive social and Landscape: Sustainability environmental outcomes. The industry While authorities and firms have made should also work on providing meaning­ significant progress to tackle issues ful benchmarks. brought to light by the Great Financial Having said that, the primary focus Crisis, new risks, challenges, and oppor- of regulators at this point in time should tunities have become more prominent. be on removing regulatory hurdles to a In this regard, the industry and regula- more sustainable and greener financial tory response to sustainability in finance system. Regulators should help promote is a trend that has emerged over the past a sound framework for internationally few years, is unlikely to fade away, and comparable data provision and product therefore deserves attention. labeling to enhance trust and potentially As opposed to regulatory reform and help avert greenwashing. The search the industry’s corresponding adjustments for global standards should not inhibit in the past decade, sustainable finance the further development of new and was not born out of a crisis. The issues innovative products and methodologies. at its core primarily concern challenges However, any measures related to in the global economy and society, in the mandatory disclosure or stress test- resolution of which the financial sector ing would be premature, in particular can play a key role as an intermediary. as long as data and metrics that are Given the global nature of the issues, it meaningful and material to making a is important that regulators and policy forward-looking assessment of risks are makers be internationally coordinated not readily available. and closely engage with the industry Sustainable investment would when considering introducing additional also benefit from the development regulatory requirements. Such engage- of a fully-fledged derivatives market. ment will provide better cross-border Institutional investment capital will

REVITALIZING THE SPIRIT OF BRETTON WOODS | 145 flow into sustainable markets at scale technological changes that are trans- only if large asset managers can use forming banking and financial markets. derivatives to navigate such markets Firms should continue to adapt and in the same way as traditional ones. serve the interests of their shareholders, Deeper derivatives markets would also clients, and other stakeholders, while make it easier for investors to reduce regulators and supervisors should take the volatility of their financial returns. into consideration the broader perspec- That would encourage institutions to tive when developing public policies. pledge capital to sustainable investment Public authorities should continue to be projects for longer periods of time and inclusive and transparent in their delib- stay invested even in choppier economic erations, and they must ensure their own or political circumstances. continued access to the resources and capacity necessary to supervise chang- ing institutions and financial markets CONCLUSION in a constantly and rapidly evolving National regulators acknowledged environment. early on that effective international Finance needs to reinvent itself cooperation in developing a regulatory in order to play a key role in shaping framework is a prerequisite of a stable the future and fostering sustainability. financial system. International organiza- Private investment is crucial to meeting tions continue to be an essential part of ambitious global sustainability targets, that global mechanism. Besides that, con- such as the United Nations’ Sustainable tinued effective cross-border cooperation Development Goals. But these assets will in supervising financial institutions is a move into the mainstream only if the necessary condition, not only to ensure public and private sectors work together. that enacted reforms deliver their effect They must turn our shared interest in fully but also to tackle new challenges. solving social and environmental chal- A globally consistent regulatory lenges into concrete actions—such as framework is all the more important getting the sustainable investment market in a period of profound and irreversible infrastructure right.

146 | REVITALIZING THE SPIRIT OF BRETTON WOODS STRENGTHENING AND DEEPENING THE INTERNATIONAL FINANCIAL ARCHITECTURE

JEAN-CLAUDE TRICHET Advisory Council Member, Bretton Woods Committee; Former President, European Central Bank; and Honorary Governor, Banque de France

In the years leading up to the 2007-08 to grant advanced economies a signifi- financial crisis, there was a broad consensus cant privilege. In the case of informal among reformers that the international coordination in economic, financial, financial architecture needed to be more and monetary matters, the G7 held inclusive and the doors of international most of the authority and influence, financial consultation should be opened at the levels of governors and finance to emerging economies. The develop- ministers, and ultimately heads of state ment of key guidelines for prudential and government. Regarding the central regulations, standards, and codes should banks, the group that had the leading include all economies with systemic role in terms of informally coordinating influence. Further, all entities involved prudential regulations was the group of in the functioning of the international the 10 largest central banks of industri- financial system, not just the banks, should alized countries, which meets in Basel, be subject to a genuine international Switzerland. coordin­ation of prudential regulations, Admittedly, the central banks had so as to encompass the system as a whole. already decided to broaden the role Before the 2007/08 crisis, the inter- of the Global Economy Meeting of national community indeed continued the Bank for International Settlements

REVITALIZING THE SPIRIT OF BRETTON WOODS | 147 (BIS), which brought together around The launch of the G20 Mutual 30 central banks, thus anticipating Assessment Process on the macro- future developments in the architecture economic front, with the support of of international relations. But it was not the IMF, is a theoretical first step toward until the crisis that this architecture a change that must be deepened and underwent a shift. The G20—which considerably strengthened if we are to brings together all of the world’s sys- avoid future crises of a similar nature. temically important economies, not We can only raise the alarm in this just those of the advanced countries— regard, given the persistent increase in came to replace the G7 as the main total public and private debt as a pro- forum for informal consultation. This portion of global GDP. was a historic change. Naturally, this The second element of the G20’s new change in global informal governance responsibility has existed, virtually, since needed to be accompanied by equiva- the 1997 Asian crisis—as a complement lent changes in the formal governance to the G7’s responsibilities—but the G20 of international financial institutions, has taken center stage with the more particularly the International Monetary recent financial crisis. The Financial Fund (IMF) and the World Bank. It is Stability Board (FSB), created in April unfortunate that these changes have 2009, reports to the G20, while its pre- been slow and, on the whole, remain decessor, the Financial Stability Forum, arduous and inadequate. reported to the G7. The FSB now has 70 The G20 has two fundamental global national member institutions, represent- responsibilities: on the one hand, the ing 24 countries, several international coordination of macroeconomic policies standard-setting bodies, and six regional at the level of systemically important and international financial institu- economies, and on the other hand, the tions—in particular, the IMF, the World development of all prudential regula- Bank, the Organisation for Economic tions, standards, and codes concerning Co-operation and Development, the the prevention of systemic economic BIS, the European Central Bank, and and financial risk. The first element is the European Commission. This list crucial. The lax macroeconomic policies goes to show that since the 2007/08 of advanced economies were among global financial crisis, the two objectives the main causes of the 2007/08 disas- of “inclusiveness” of all systemically ter. Good coordination to prevent the important countries and “comprehen- emergence of excessive external defi- siveness” in considering all elements of cits—which are merely a reflection of the international financial system have abnormal internal imbalances—such been followed. as the persistence of abnormally high Such inclusiveness and comprehen­ external surpluses, is a prerequisite for siveness are necessary for a better global financial stability. functioning of the international monetary

148 | REVITALIZING THE SPIRIT OF BRETTON WOODS system (IMS) in the broader sense; how- system as a system rather than a set of ever, they are not enough. The progress individual agencies. to be made in this area is all the more significant as the new features of a system that is rapidly changing under the influ- POSSIBLE WAYS TO ence of globalization and technological IMPROVE EXCHANGE developments are only gradually appear- RATE RELATIONS ing and are difficult to foresee. The key Still, in my view, even if, thanks to the responsibility of the FSB in this regard reforms proposed by the EPG report, remains the correct identification and the international community were to prevention of systemic risk. achieve a significantly greater devel- To sum up, even if much progress opment impact, secure more effectively has been made over recent years, a lot the benefits of interconnected financial remains to be done as regards global markets, and make the international financial governance, and there is ample system work much more significantly room for further reforms. as a whole, there would still be cause to The best diagnosis and the best set reflect on serious imperfections of the of necessary reforms are to be found IMS in terms of exchange rate relations. in the report of the Eminent Persons First, since certain currencies play Group on Global Financial Governance the de facto role of reserve currency, the (EPG) published in October 2018: “We system remains potentially unbalanced. need a credible and well-coordinated The dominant central currency must global financial architecture to meet the offer the additional liquidity required needs of a world that is more decentral- to support global economic and trade ized in decisions, yet more interconnected and growth. The dominant economy is more challenged in its future” (emphasis in therefore forced to accept a structural original).1 current account deficit, mechani- A “new multilateralism” should sub- cally funded through an increase in stitute now for the old multilateralism. the foreign exchange reserves of other This new concept must reinforce the countries. There is a contradiction here resilience and the strength of the global between the aims of the dominant financial system as a whole. It is the aim economy’s internal monetary policy of the reforms proposed in the EPG (which should, in particular, include the report: significantly improve sustainable domestic stability of the global monetary and inclusive development, preserve anchor) and its external role as provider financial stability, and govern the global of global liquidity.

1 G20 Eminent Persons Group on Global Financial Governance, Making the Global Financial System Work for All (n.p.: G20 EPG, 2018), 11.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 149 Second, in a system that lacks a neu- all the economies associated with the tral and objective monetary anchor (as is two major international currencies, are currently the case), the external financial incompatible with global financial sta- constraint is massively asymmetrical. The bility in the long term. constraint exerted on economies and In short, only very modest progress countries with external deficits to bal- has been made in reforming the IMS. ance their accounts is much stronger than At best, one may notice that, during the incentive for surplus countries to the 2007/08 turmoil, exchange rate reduce their savings surpluses. Of course, relations between major convertible an appropriate symmetry of incentives currencies displayed a remarkable degree is what we would expect the macro- of stability. One may have reasonably economic element of global regulation feared that foreign exchange markets by the G20 (and the IMF) to do. But the themselves would suffer a strong shock, asymmetry in the practical functioning and that a currency crisis would be of the monetary system (in the narrower added to the financial crises. This was sense) makes Mutual Assessment Process not the case. efforts partly ineffective. In the medium and long term, Third, in a system of free movement the reform of the IMS, in the nar- of capital, dangerous currency bub- rower sense of exchange rate relations, bles may arise on account of floating remains crucial. Three dimensions are exchange rates. The tangible experience worth considering: the creation of a of post-1973 fluctuations shows that new global currency; the broadening market investors, operators, and partic- and strengthening of Special Drawing ipants are capable of pushing exchange Rights (SDRs); and the improvement rate relations to unsuspected extremes of the current handling­ of exchange ex ante. In the 1970s and 1980s, dollar rate relations between major convertible fluctuations in relation to European cur- currencies—namely, improvement of the rencies ranged from 1 to 3 (the “Carter” legacy of the G7. dollar at the lowest point, the “Reagan” dollar at the highest). Since the creation of the euro, fluctuations in dollar-euro CREATION OF A GLOBAL relations have been contained at about CURRENCY 1 to 2 (with the dollar at 0.83 at the As Keynes suggested in 1944, a truly lowest point, 1.59 at the highest). Such international reserve currency issued wide fluctuations with regard to one by a global body with worldwide mem- of the most important prices, which bership could theoretically provide real expresses a key economic and finan- symmetry in external adjustments. It cial relationship between the world’s would also allow us—at least theoreti- two major advanced economies and cally—to counter the Triffin critique,

150 | REVITALIZING THE SPIRIT OF BRETTON WOODS provided that the global currency’s Although it is not a currency but issuing body takes care to meet the a basket of currencies, the SDR is, in increased demand for foreign exchange many respects, a useful instrument for reserves by avoiding excessive growth reforming the IMS. In particular, it and a liquidity deficit, while equitably includes three features that are worth redistributing the seigniorage associated highlighting: as a reserve asset, it is the with the currency issue. only instrument that may be issued Unfortunately, what may be desirable without being associated with a debt in theory is not necessarily applicable directly attributable to an economy; as in practice. Implementing a genuinely a store of value, its aim is to represent global currency that acts as the anchor of a stable global monetary entity better the IMS is dependent on meeting certain than any floating national currency; and economic, political, and politico-strategic as a unit of account, the SDR has the conditions, which not only are currently potential benefits of lower volatility of nonexistent but will be difficult to meet its value and hence potentially lower in the future. One therefore wonders costs of foreign exchange hedging. It whether it is possible to imagine more may present compelling theoretical realistic progress toward improved global advantages as an international billing monetary and financial stability. currency and as a reporting currency, on commodity markets for instance. For a reform of the IMS based on the STRENGTHENING promotion of the SDR, progress would SPECIAL DRAWING need to be made in both “official” and RIGHTS “private” arenas. For the “official” SDR, SDRs are an international reserve asset the most promising routes are the fol- created in 1969 by the IMF to com- lowing four: make greater use of the plement the official foreign exchange SDR; facilitate the diversification of reserves of member countries. The SDR foreign exchange reserves, particularly is not a currency. Nor does it, strictly through the creation of a substitution speaking, amount to a claim on the IMF. account allowing for the conversion of But it is, in theory, an instrument that the foreign exchange reserves of the allows for creating foreign exchange various countries into SDRs; make reserves in the event that domestic mon- holding SDRs more attractive, includ- etary policy constraints on the reserve ing through their remuneration; and currency—the dollar at the time—are finally, ensure at all times that the SDR incompatible with the creation of liquid- basket composition accurately reflects ity required for international economic the relative importance of the various and trade growth. In this respect, the economies in international trade and SDR was created to mitigate the adverse financial transactions. effects of the Triffin dilemma.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 151 In the case of “private” SDRs, a after 1999, with the latter immediately necessary, if not sufficient, condition for climbing to second place among major their development would be to design convertible currencies, far ahead of the a genuine private market for the SDR, third-place yen. deep and liquid enough to have certain The SDR should not, for that matter, features of the instruments denomi- be dismissed as part of a long-term per- nated in major international currencies. spective, for two further reasons. The In view of the starting point—a non- inclusion of the renminbi gives the SDR existent private market—such a goal the status of a truly global instrument, calls for a huge effort. In particular, no longer one that represents advanced the international community would economies alone: the relative credibility need to develop a multilateral clearing of this reserve instrument will thus be system—designed, for instance, along enhanced in due course. the lines of the clearing model that the It is also worth considering an BIS managed in the past with respect to important phenomenon that I have the privately traded European currency described as “conceptual convergence,” unit (ECU). Another important aspect which characterized the central bank for the credibility of the private SDR is community during the crisis. This the negative impact of periodic revisions alignment between the positions of of the SDR basket. This pegging to a the various central banks expresses basket of currencies is the main draw- itself in many areas: for example, in back of the SDR. In order to mitigate the area of banking supervision—now this drawback, there would need to be almost unanimously considered to be full transparency with regard to the something that central banks can and basket revision schedule. must legitimately exercise—or in the In short, although the best theoretical area of preventing systemic financial solution for IMS reform remains the cre- risks, in which most countries believe ation of a global currency, strengthening that central banks have an important the use of the SDR presents itself as a role to play, in particular through the second possible dimension of reform, design of macroprudentials. But the albeit a similarly challenging one. The most remarkable of alignments involves main issue is that even if the SDR comes the convergence of large central banks close to being a “good” currency given with regard to the definition of price two of its features (unit of account, store stability. All central banks issuing of value), it is still nonetheless a basket SDR basket currencies—except for the of currencies, whose nature changes People’s Bank of China—have followed over time. It was a change of this kind the same definition of price stability— that made the key difference in Europe namely 2 percent in a medium-term between the ECU as a “basket” in the perspective—since the Federal Reserve’s 1990s and the euro as a “real currency” decision in 2012 and that of the Bank of

152 | REVITALIZING THE SPIRIT OF BRETTON WOODS Japan in 2013, following earlier choices and understood, and has influenced for- by the European Central Bank and the eign exchange relations. This pattern was Bank of England. In my view, this is observed in particular after the 1985 a phenom­enon of great importance. Plaza Accord, whose message was that For the SDR, the fact that four out of the dollar’s decline in relation to other the five currencies in the basket now currencies was desirable; after the Louvre have the same nominal price stability Accord in 1987, whose message was that target adds an additional element of the dollar’s decline had been adequate credibility to this instrument, both as and that exchange rates were appropriate an instrument to retain value and as an “around current levels”; after the April instrument of account at the global level. 1995 agreements, the message being that any further decline in the dollar would not be in line with the economic funda­ IMPROVING THE mentals of the countries concerned; MANAGEMENT OF and finally, after the September 2000 EXCHANGE RATE agreements, whose symmetrical message RELATIONS BETWEEN was that any further drop in the euro MAJOR CONVERTIBLE would not be in line with the relative CURRENCIES economic conditions in the euro area and the United States. The most modest means to improve A glimpse of exchange rate relations the functioning of the IMS would be between major currencies since 1973 to improve the management of floating may be summarized as follows: free exchange rate relations, as has been floating is the rule, whereby exchange carried out among the G5 and then rates are determined by the decentralized­­ the G7 governors and finance ministers decisions of all market investors and of countries issuing major convertible parti­cipants. However, this free floating currencies—including more recently may be tempered by the possibility of informal discussions with China—since G7 members’ sending a signal to market the dismantling of the Bretton Woods parti­cipants when there is consensus fixed exchange rate system after 1973. among authorities (central banks and These regular informal meetings are ministers) in assessing that the system’s often deemed by analysts to have no cohesion is at risk of being seriously real bearing on exchange rates. This is challenged by spontaneous behavior that not my understanding. When currency goes far beyond what seems reasonable trends in foreign exchange markets in light of the fundamentals and policies have been deemed worthy of a clear of the countries concerned. and simple message sent by all G5 and Four conditions need to be met for G7 members to market participants and markets to be significantly influenced investors, this message has been received by the messages sent out by authorities:

REVITALIZING THE SPIRIT OF BRETTON WOODS | 153 • The message must be simple and cohesion of the whole. This is one very clear, ideally along the lines of important example of a larger principle. “no further increase (or no further When sovereign countries are called decrease) of a given currency in rela- upon to manage their economies in tion to others.” the context of strong interdependencies within a larger economic and financial • The economic and monetary funda- entity—whether an integrated conti- mentals, and the policies pursued by nental economy or a globalized world authorities must be in line with the economy—cohesion and prosperity may recommendations of the message— require the relative “containment” of market operators can be persuaded everyone’s freedom of management. I only if the message is not contra- wish to offer three emerging examples dicted by economic reality or by of economic and financial governance authorities’ economic and monetary that are or should be inspired by this policy decisions. concept of “tempered freedom.” • Authorities themselves must take First among them is the coordination a financial risk, even if modest, by of macroeconomic policies between intervening on foreign exchange systemically important economies (the markets, in order to give the signal G20 Mutual Assessment Process). In the credibility. context of the freedom of management of sovereign countries, it is a question • And finally, it is key for G7 members of containing possible excessive internal to be clearly unanimous in convey- and external national imbalances, espe- ing the message, so that no market cially, but not exclusively, in the field of participant may conclude that any current account deficits and surpluses, one of the partners is simply paying when these challenge the stability of lip service to the agreement without the global economy. effectively backing it. Second is the informal consultation Since these conditions are only prompting the definition of pruden- exceptionally met, the international tial regulations and financial standards community very rarely decides to sug- and codes, tempered at the global level gest a relative containment of exchange especially within the framework of rate relations to the market. Great free- the Basel Committee, the Financial dom of action among market operators Stability Board, and the G20. This is therefore the rule at almost all times. consultation—referred to above as an The exchange rate system seems to be important element of the G20’s new characterized by “tempered freedom”: responsibility—seeks to preserve global very large freedom most of the time, systemic financial stability by containing tempered only by the need to ensure the certain key ratios within value “ranges”

154 | REVITALIZING THE SPIRIT OF BRETTON WOODS believed to preserve the cohesion of the floating would remain the rule. Nor whole, for instance capital requirements would there be bands of fluctuation fixed and liquidity ratios in the case of banks. a priori, and the “containment” signals Finally, the fiscal and economic gov- suggested to market participants would ernance of Europe and the euro area be based, as they currently are, on the offers two further examples of “tempered consensus of the governments and the freedom” in view of the need to ensure central banks issuing the participating the cohesion of the whole. In this way, the currencies. But in the eyes of market members of the Economic and Monetary participants, the public disclosure of the Union have agreed on a Stability and medium-term bilateral equilibrium rates Growth Pact that allows them a great calculated by the IMF and accepted by deal of freedom to conduct their fiscal the authorities of the currencies con- policies, provided they do not cross cer- cerned could play a significant role in tain limits considered to be detrimental systemic stabilization and would, in my to the stability and cohesion of the union view, offer a convincing—and perhaps as a whole. The same goes for economic effective—illustration of the concept of policy aspects that would be considered “tempered freedom.” This would be the excessive in the context of the recent new case even if the suggested containment European Macroeconomic Imbalance could be triggered not mechanically or Procedure: the European Commission automatically, but on the basis of a shared and the Eurogroup reserve the right to convergence of views. make recommendations, of a binding A further argument in favor of nature if necessary, to temper the con- disclosing the central rate relates to duct of economic policy—but only if the recent “conceptual convergence” the stability of the entire union appears between central banks mentioned ear- to be called into question. lier. Since the central banks have very Let us return to possible improve- similar definitions of price stability ments in the practical functioning of the in the medium term—and since they IMS, with regard to the practical man- are mindful of the necessity of solidly agement of exchange rate relations in the anchoring their inflation expectations in context of the G7 (or new, de facto, G5— a medium- and long-term perspective— dollar, euro, pound sterling, renminbi, the display of their equilibrium bilateral yen). A simple albeit bold idea today central rates in the medium term would would be for the main convertible cur- be significantly more credible than the rencies and members of the SDR basket current practice. to disclose the bilateral central rates con- Finally, the inclusion of the ren- sidered to be reasonable equilibrium rates minbi, which is now a member of in a medium-­term perspective. Such a the SDR basket, in the informal con- disclosure would not involve returning sultation between the world’s major to a fixed exchange rate system—free currencies introduces an additional

REVITALIZING THE SPIRIT OF BRETTON WOODS | 155 factor in the improvement of the man- As regards, more specifically, the agement of global exchange rates. It management of exchange rate rela- introduces greater inclusiveness, even tions between major convertible—or if the status of the renminbi remains soon to be convertible—currencies, incomplete as long as the Chinese cur- the international community should rency is not freely convertible. also concentrate its reflection more on “tempered freedom” in view of ensuring the cohesion of the whole system. CONCLUSION I see three additional reasons to call To summarize, the international com- for such reflection: munity is in midstream with regard to First, the recent “conceptual con- the international monetary and finan- vergence” observed between the cial system. Drawing lessons from central banks of advanced economies, the 2007/08 crisis, it has made some as expressed in the area of inflation in progress, albeit limited, in seeking coor- particular, with a common definition dination on the macroeconomic policy of price stability at around 2 percent in front, and it has made real headway in a medium- and long-term perspective, developing financial prudential regula- may facilitate possible progress. tions, standards, codes, and principles at Second, equally important is the the global level. Countries with systemic emergence of the renminbi (and later influence—including emerging econo- other major currencies of emerging mies, not just advanced economies, as economies), whose integration into the was the case before the economic and SDR and into informal consultation financial crisis—are now fully exerting between major currencies should allow their role as part of this global gover- for fresh progress at the global level. nance. But progress remains insufficient Finally, there is a clear understand- and there is no room for complacency. ing, shared by all central banks, that We have worldwide awareness that while cyclical exchange rate fluctuations the lessons of the worst financial crisis are useful and legitimate within certain since World War II demand an inclusive limits, the systematic pursuit of a com- and systemic approach to the economy petitive advantage based on the greatest and to global finance. It is a question possible depreciation of one’s currency of gradually building a new concept of on foreign exchange markets would be international cooperation for a world contrary to everyone’s interest, and to that is more multipolar and more de­­ the cohesion of the global economic centralized in its decisions, as well as system as a whole. Rejection of the more interconnected. Many reforms beggar-thy-neighbor policy is among should be resolutely implemented, as the great lessons of the crisis of 1929–30. recommended by the report of the EPG.

156 | REVITALIZING THE SPIRIT OF BRETTON WOODS THE INTERNATIONAL MONETARY SYSTEM AND ITS CHALLENGES FOR EMERGING-MARKET CENTRAL BANKS

KSENIA YUDAEVA First Deputy Governor, Bank of Russia

The international financial system has now from what it was only 10 years changed significantly since the days ago. The role of banks has decreased, of the Bretton Woods Agreement; and their former role has been adopted some of its core elements, however, by asset managers, while an increasing have remained intact since then. In the number of companies borrow directly last 50 years, for instance, the role of from global financial markets. gold has declined dramatically, but the In this environment, the challenge for roles of the US dollar and, to a much the central banks of emerging-­market lesser extent, some of the other reserve economies (EMEs) is to preserve price currencies in international trade and and financial stability by addressing finance, have strengthened. The main both global financial risks and domestic difference between the current sys- challenges, such as weak institutions, tem and the Bretton Woods system, in shallow financial markets, unstable infla- addition to the present widespread use tion expectations, and in some cases, of flexible exchange rates, is the much dollarization of (or predominance of bigger role that private capital flows play other foreign currencies in) savings. The nowadays. This role keeps changing: central banks have responded to these Not only the size but also the compo- challenges by switching to the mone- sition of private capital flows is different tary policy regime of flexible inflation

REVITALIZING THE SPIRIT OF BRETTON WOODS | 157 targeting augmented by extra financial trade system—such as massive capital stability tools. Such tools include employ- flows and value chains—this dollar- ing foreign exchange (FX) reserves to ization results in new challenges for provide FX liquidity (loans) or hedg- the central banks as the main institu- ing instruments to the market, active tions responsible for their respective use of macroprudential instruments, countries’ price and, more generally, and in some cases, capital flow manage- macroeconomic and financial stability. ment tools. This paper focuses on these While many emerging-market central challenges for emerging-market central banks now use the inflation-targeting banks and their responses. It also discusses monetary policy regime with a floating potential scenarios of the system’s evolu- exchange rate, they cannot concentrate tion, including potential changes in the only on domestic factors when design- role of the Bretton Woods institutions, ing a monetary policy; effectively, they from the point of view of improving must perform the role of lender of last financial stability and creating better resort, not only in domestic but also in conditions for economic growth and reserve currencies. long-term investments. Most prices in international trade are denominated in US dollars; other cur- rencies are used only occasionally (Figure MAIN CHARACTERISTICS 1). When export prices are denominated OF THE INTERNATIONAL in dollars or another dominant currency, MONETARY SYSTEM AND depreciations do not affect the demand THEIR CONSEQUENCES for exports. Therefore, the exchange rate FOR CENTRAL BANK elasticity of exports is low and most POLICIES economic adjustments occur through imports.1 Also, in an era of production Today’s international monetary sys- chains, it is imports of consumption tem has retained the central role of the goods, or of components for goods and US dollar, and to a lesser extent some services produced for domestic con- other reserve currencies, as international sumption, that account for most of the payment and finance currency. In com- adjustments. This rule may not hold bination with other characteristics of completely in the case of massive depre- the current international monetary and ciations, because in those cases producers

1 Patrice Ollivaud and Cyrille Schwellnus, “The Post-crisis Narrowing of International Imbalances: Cyclical or Durable?”(OECD Economics Department Working Papers, No. 1062, Organisation for Economic Co-operation and Development, Paris, June 2013); Swarnali Ahmed, Maximiliano Andres Appendino, and Michele Ruta, “Depreciations without Exports? Global Value Chains and the Exchange Rate Elasticity of Exports” (Policy Research Working Paper 7390, World Bank, New York, August 2015); Daniel Leigh, Weicheng Lian, Marcos Poplawski-Ribeiro, Rachel Szymanski, Viktor Tsyrennikov, and Hong Yang, “Exchange Rates and Trade: A Disconnect?” (IMF Working Paper WP/17/58, International Monetary Fund, Washington, DC, March 2017).

158 | REVITALIZING THE SPIRIT OF BRETTON WOODS FIGURE 1. BREAKDOWN OF FOREIGN TRADE BY SETTLEMENT CURRENCY

Other Local currency EUR USD 100

90

80

70

60

50

40 PERCENTAGE 30

20

10

0 Russia Turkey India* China Brazil South Indonesia Korea, Israel* Africa Rep.

Russia—data for Q1 2018 overall trade; Turkey—data for 2015 imports; India— average for Q4 2013 exports and imports; China—average for 2010 manufacturing exports and imports; Brazil—average for 2011 exports and imports; South Africa— data for 2003 exports; Indonesia—average for 2010 exports and imports; Korea— data for 2007 overall trade; Israel—data for 2004 exports.

SOURCE: Data from World Bank website (https://data.worldbank.org/) and countries’ respective central bank websites (www.cbr.ru; www.tcmb.gov.tr; www.rbi.org.in; www.pbc.gov.cn; www.bcb.gov.br; www.resbank.co.za; www.bi.go.id; www.bok.or.kr; www.boi.org.il), accessed May 9, 2019. * Local currency data are not available; therefore, transactions in local currency are included in the “Other” category. EUR = euro; USD = US dollar.

are often willing to provide discounts to In practice, this means that tra- buyers of their goods in order to increase ditional price indexes, such as the demand, and thus the exchange rate elas- headline consumer price index or the ticity of exports increases.2 Still, EMEs core inflation index, are not the best react to external shocks in a manner policy targets for the emerging-­market different from that predicted by the central bank. Theoretical literature Mundell-Fleming model. suggests that in a dominant-currency

2 There is evidence of such behavior on the part of Russian exporting firms in 2015, after the depre- ciation of the ruble in 2014.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 159 world, central banks should target the exchange rate fluctuations on inflation, prices of goods produced domestically but a more pronounced reaction to the because under such circumstances, secondary effects. However, whether inflation gaps and output gaps do not such a rule can actually be implemented close simultaneously.3 Neither head- depends on the central bank’s credi- line nor core inflation indexes satisfy bility and the stability of its inflation this criterion, because both of them expectations. can include prices of foreign-produced The second relevant characteristic goods. Some emerging-market central of the international monetary system banks seem to experiment with indexes today is the increasingly significant role constructed along the lines of recom- of private international financial flows, mendations taken from the theoretical often denominated in US dollars, and as a literature. The notable example is the consequence, the heavy influence of US IPCA (“Broad Consumer Price Index”) monetary policy on the policies of other in Brazil, chosen by the National central banks, despite the widespread use Monetary Council as a reference for its of floating exchange rate regimes. The inflation-targeting regime, implemented nature of capital flows in the last 10 years in June 1999. This index has a lesser has changed somewhat: the importance share of tradable goods and is therefore of banks has decreased, and the role of less subject to exchange rate fluctuations asset managers has become more prom- than the traditional IGP-DI (“General inent. But this trend has not challenged, Price Index—Domestic Availability”), and may have even strengthened the role which combines both wholesale and of the US dollar in international financial retail prices, and has represented the flows (figure 2), possibly even increasing country’s official inflation measure the spillovers from US monetary policy. for decades.4 Most of the emerging Several strands of academic literature countries’ central banks use traditional are studying the nature of capital flows consumer price indexes. Their mon- and their impact on monetary policy, etary policy rule usually envisages a trying to explain why most of the capital limited reaction to the primary effects of flows are still denominated in US dollars

3 Linda S. Goldberg and Cedric Tille, “Vehicle Currency Use in International Trade,” Journal of International Economics 76, no. 2 (2008): 177–92; Gita Gopinath, “The International Price System,” in Jackson Hole Symposium, Volume 27 (Kansas City, MO: Federal Reserve Bank of Kansas City, 2015), 71–150; Gita Gopinath, Emine Boz, Camila Casas, Federico J. Díez, Pierre-Olivier Gourinchas, and Mikkel Plagborg-Møller, “Dominant Currency Paradigm” (NBER Working Paper No. 22943, National Bureau of Economic Research, Cambridge, MA, December 2016, revised September 2017). 4 Central Bank of Brazil, “Price Indices in Brazil: Information up to March 2016” (Frequently Asked Questions Series, Brasília: Central Bank of Brazil, 2016).

160 | REVITALIZING THE SPIRIT OF BRETTON WOODS and only a few other reserve currencies.5 regime, many emerging-market central The practical takeaway from this litera- banks have to use FX operations as a ture for emerging-­market central banks tool to help stabil­ize the market under is that even under a floating exchange stress. The exact instruments used for rate regime, they have to take into seri- such purposes can vary significantly, ous consideration the policies of the US depending on the cause of the finan- Federal Reserve and the central banks cial stability concerns. Traditional spot that regulate other reserve currencies; market interventions are still widely that is, they must base their monetary used. However, some central banks, policies not only on domestic economic such as the Brazilian one, intervene not trends but also on predictions for future on the spot market but on the cross-cur- US monetary policy, its influence on rency swap market to provide hedges to global financial markets, and ultimately, companies and banks. It is also common the repercussions of that influence for to perform operations on overnight the domestic economy and inflation. FX swap or repo markets to provide The practical consequences of cap- FX liquidity. The Bank of Russia used ital flows’ being not only large and FX repo operations quite intensively in volatile, but also denominated in FX, 2014/15 and still occasionally provides go beyond monetary policy. Despite short-term FX liquidity in the over- switching to a floating exchange rate night swap market.

5 (1) As far as dollar dominance is concerned, a number of articles argue that it can result from the inclination of dominant countries’ investors to provide risky finance to developing countries’ com- panies while at the same time hedging their currency risks by providing the funding in US dollars or other dominant currencies. (2) The size and direction of the flows is a concern of the famous “global saving glut” theory developed by Bernanke, the strand of literature on the role of the United States as a global safe assets provider, and so on. Ben S. Bernanke, “The Global Saving Glut and the US Current Account Deficit” (Remarks by Governor Ben S. Bernanke at the Sandridge Lecture, Virginia Association of Economists, Richmond, VA, March 10, 2005), https://www.federalreserve.gov/ boarddocs/speeches/2005/200503102/default.htm; Ricardo J. Caballero, Emmanuel Farhi, and Pierre- Olivier Gourinchas, “An Equilibrium Model of ‘Global Imbalances’ and Low Interest Rates,” American Economic Review 98, no. 1 (2008), 358–93; Pierre-Olivier Gourinchas and Hélène Rey, “External Adjustment, Global Imbalances, Valuation Effects,” in Handbook of International Economics, vol. 4, edited by Gita Gopinath, Elhanan Helpman, and Kenneth Rogoff (Amsterdam: Elsevier, 2014), 585–645. (3) Consequences for monetary policy in countries other than the United States are the main con- cern of the “dilemma versus trilemma” discussion. Hélène Rey, “Dilemma Not Trilemma: The Global Financial Cycle and Monetary Policy Independence” (NBER Working Paper No. 21162, National Bureau of Economic Research, Cambridge, MA, May 2015, revised February 2018). (4) On the other hand, the monetary policy spillovers literature argues that the Fed should take spillovers into consideration when making monetary policy decisions. John B. Taylor, “International Monetary Policy Coordination: Past, Present, and Future” (BIS Working Papers, No. 437, Bank for International Settlements, Basel, Switzerland, December 2013); Qianying Chen, Marco Jacopo Lombardi, Alex Ross, and Feng Zhu, “Global Impact of US and Euro Area Unconventional Monetary Policies: A Comparison” (BIS Working Papers, No. 610, Bank for International Settlements, Basel, Switzerland, February 2017); Raghuram Rajan, “Competitive Monetary Easing: Is It Yesterday Once More?,” Macroeconomics and Finance in Emerging Market Economies 8, no. 1–2 (2015): 5–16.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 161 FIGURE 2. SHARE OF FOREIGN CURRENCY–DENOMINATED DEBT IN GROSS EXTERNAL DEBT POSITION OF SELECTED COUNTRIES Average over Q1 2017–Q1 2018 sample

100

90

80

70

60

50

40 PERCENTAGE 30

20

10

0

India Brazil Chile China Russia Turkey Thailand Mexico Indonesia Philippines South Africa Korea, Rep. Czech Republic

SOURCE: Data from World Bank DataBank (https://databank.worldbank.org/data/embed-int/Table-2-SDDS-new/ id/7857d781), accessed May 9, 2019.

To decrease the financial stability risks a local-currency bond market helps to related to capital flows, emerging-market decrease FX risks for borrowers. central banks and governments make Although sovereign local-currency efforts to develop local-currency sover- debt markets have been growing in eign debt markets. Such measures allow the last 10–20 years, companies’ debt is for partial transfer of currency risks to still mostly denominated in FX, due to investors. They do not enable a complete preferences not only of investors but of mitigation of capital flows’ effect on FX borrowers as well. The accounts of many volatility, though, because of the hedging companies, particularly of those that are strategy of investors, who either hedge internationally active, are denominated their local-currency bond holdings from in US dollars or other dominant cur- the beginning or react to shock by buying rencies (Figure 3). This situation seems FX to hedge their unhedged positions. to be common not only in emerging-­ Despite this limitation, development of market countries but also in Europe.

162 | REVITALIZING THE SPIRIT OF BRETTON WOODS FIGURE 3. SHARE OF FOREIGN CURRENCY–DENOMINATED LOANS

40 Corporate sector Households 35

30

25

20

15

10

5

0 Indonesia Poland Russia Turkey Czech Republic

SOURCE: Data from countries’ respective central bank websites (www.bi.go.id; www.nbp.pl; www.cbr.ru; www.tcmb.gov.tr; www.cnb.cz), accessed May 9, 2019.

Since prices for goods traded on inter- borrow in FX prefer lending in FX to national markets are denominated in domestic borrowers as well. While such US dollars, exporters consider dollar policies may decrease currency risks for funding not to be risky, viewing it as a individual banks and companies, they natural hedge. However, this phenom- may increase the volatility of the overall enon is not limited to exporters; it can FX market. For example, the effect of be observed in most large companies terms-of-trade shocks on the exchange and banks, which depend on reserve rate can be amplified if exporting com- currency funding.6 The link between panies need further adjustment of the the financial system and the dollar- exchange rate to be able to service their ization of company debt and accounts debt. As a result, a high share of FX goes both ways. Companies deposit debt, even in the exporting sector, can borrowed funds into accounts in local result in significant financial stability banks. On the other hand, banks that risks and output volatility.

6 Antoine Berthou, Guillaume Horny, and Jean-Stéphane Mésonnier, “Dollar Funding and Firm-Level Exports” (Banque de France Working Paper No. 666, Bank of France, Paris, March 1, 2018), http:// dx.doi.org/10.2139/ssrn.3135724.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 163 The foregoing is why some central examples. Currency substitution is usu- banks and governments of emerging ally a result of entrenched high inflation economies occasionally make special combined with expectations of high and efforts to stimulate dedollarization of unstable inflation.7 The obvious long- the financial system and overall econ- term solution to this situation is to build omy. Limits on open FX positions of up the credibility of monetary policy as banks are very common. In Russia, in well as to decrease and anchor inflation order to stimulate banks to decrease the expectations by conducting monetary proportion of FX-denominated loans, policy consistent with a monetary policy we use higher risk weights for FX lend- target.8 But this process is neither simple ing to domestic companies, particularly nor fast, and countries may remain highly to nonexporters. Indonesia has intro- vulnerable to financial stability shocks duced a set of FX liquidity requirements during such transitions. Central banks directly for companies. Peru, Russia, of countries suffering from this problem Turkey, and a number of other countries often have to react to external shocks by have introduced differentiated reserve conducting a procyclical monetary policy requirements, providing incentives for in order to stabilize domestic demand for banks to fund in the domestic currency. national currency– and local currency–­ In addition to such measures, traditional denominated assets. They also tend to capital controls or capital flow manage- conduct FX interventions for financial ment measures are still used in a number stability purposes more often. Capital of emerging markets. controls are also commonly introduced, Successful anti-inflation policies and though usually they are not very effective inflation targeting have made dollariza- because they lead to a fast development tion of domestic savings a less important of the black FX market. problem for some emerging markets Among the new features of the inter- (Figure 4). However, it is still an issue for national monetary system that so far have a number of countries, where inflation is had only limited consequences, if any, for or recently has been relatively high and monetary policy and financial stability unstable. Russia, most Eurasian Economic is the development of digital financial Union countries, Turkey, and some technologies in general and crypto assets Latin American countries are notable in particular. One of the consequences

7 Early literature on this topic includes Guillermo A. Calvo and Carlos Vegh, “Currency Substitution in Developing Countries: An Introduction” (Working Paper No. 92/40, International Monetary Fund, Washington, DC, May 1992); and Carlos Alfredo Rodriguez, “Money and Credit under Currency Substitution,” IMF Staff Papers 40, no. 2 (1993): 414–26. 8 Credible monetary and fiscal policies, along with sufficient deepening of domestic financial markets and implementation of sound macroprudential policies, seem to be prerequisites for the reduction of emerging markets’ dependence on the monetary policies and financial cycles of the dominant-currency countries.

164 | REVITALIZING THE SPIRIT OF BRETTON WOODS FIGURE 4. SHARE OF FOREIGN CURRENCY–DENOMINATED DEPOSITS AND LOANS

50 Loans Deposits 45

40

35

30

25

20

15

10

5

0 China Indonesia Czech Mexico Russia Poland Turkey Republic

SOURCE: Data from countries’ respective central bank websites (www.pbc.gov.cn; www.bi.go.id; www.cnb.cz; www.banxico.org.mx; www.cbr.ru; www.nbp.pl; www.tcmb.gov.tr), accessed May 9, 2019.

of this process is the growing impor- central banks have also demonstrated that tance of operational and cyber risks to financial technology is still considerably financial stability. The share of crypto less efficient than traditional financial assets in global finance is quite small (less tools. Therefore, in the near future the than 1 percent).9 So far, their main use share of such assets will probably remain has mostly been limited to such activ- small and their effect on financial stability ities as money laundering, overcoming limited. If private crypto assets develop capital controls, and speculation. Bank further, the impact on central banks’ for International Settlements research10 policies will be similar to that of any suggests that crypto assets lack some of other form of currency substitution or the important features of fiat money. growth of the market for assets denomi- Technological experiments of various nated in foreign currencies. However, the

9 Based on coinmarketcap.com data, as of August 14, 2018, the cryptocurrency market cap stood at US$192 billion. This is in contrast to the global debt of around US$250 trillion and the stock market cap of around US$100 trillion. 10 See, for example, Claudio Borio, “On Money, Debt, Trust and Central Banking” (BIS Working Papers, No. 763, Bank for International Settlements, Basel, Switzerland, 2019).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 165 situation will be even more complicated but may increase the instability of the because there is no lender of last resort overall system. Reserve accumulation for such assets. increases demand for safe assets, usu- ally denominated in US dollars, thus exacerbating the global saving glut and CAN THE leading to lower interest rates on safe INTERNATIONAL assets, higher incidence of the zero lower MONETARY SYSTEM bound problem for dominant curren- BE IMPROVED? cies, increased global financial market ECONOMICS VERSUS volatility, and the increased probability 11 POLITICAL ECONOMY of a financial crisis. The international monetary system To sum up, the current state of the inter- can be improved in several ways in order national monetary system influences to make the overall global financial the policies of EMEs’ central banks in a system more stable, decrease pressure variety of ways. Mainly, despite switching on the emerging markets’ central banks to floating exchange rates and infla- as providers of FX liquidity to their tion targeting, the monetary policies of countries’ financial markets, and even- emerging countries’ central banks should tually create a better environment for take into account those of the US Federal economic growth and particularly for Reserve and some other central banks long-term investment. These solutions, that issue other reserve currencies. They however, can be difficult to implement also need to have a significant buffer of in full, either because implementation FX reserves to be able to perform the would take significant time or due to role of lender of last resort, not only in a number of political and economic local currency but also in FX. Moreover, barriers to their implementation. the instruments used by these central One of the solutions is a more active banks should allow for channeling FX use of reserve currencies other than the liquidity not only to the financial system US dollar. The first half of the 20th but, through it, to the corporate sector as century contained periods when use of well, whose FX borrowing directly from reserve currencies was more diversified global financial markets has increased in than nowadays. However, that was also the last few years. the time of the gold standard, when the Reserve accumulation of emerging ultimate role of reserves was still played markets’ central banks improves the by a single asset—gold. So it is not fully financial stability of specific countries

11 Ricardo J. Caballero, “Risk-centric Macroeconomics and Safe Asset Shortages in the Global Economy: An Illustration of Mechanisms and Policies” (Massachusetts Institute of Technology Department of Economics and National Bureau of Economic Research, Cambridge, MA, September 2018), http://dx.doi.org/10.2139/ssrn.3253064.

166 | REVITALIZING THE SPIRIT OF BRETTON WOODS clear now how a global financial system The second potential (but not nec- with several reserve currencies of com- essarily feasible) solution is to increase parable importance can function in a the role of the Fed as a central bank that globalized world. Some authors have issues the global reserve currency and suggested that such an arrangement therefore should have a global vision for would not be sustainable and would designing and conducting its policy as result in a fast transition to a new dom- well as the way it uses its financial stabil- inant global currency.12 It is possible, ity instruments. In practice, the Fed has though, that diversification of reserve had to change its policy along these lines currencies will be sustainable, but this to provide for a case of potentially severe change will also be accompanied by spillbacks to the American economy and a more regionalized global trade and financial market. In 2008, it had to use financial system. In any case, for other swaps with a number of both advanced reserve currencies, such as the euro and and emerging markets’ central banks to especially the renminbi, to play a bigger stabilize the global financial markets. role as reserve currencies, their financial In the last five years, the pressure has systems should be strengthened and the intensified on the United States’ and availability of safe assets denominated other advanced countries’ central banks in them increased. In the case of China, to coordinate their monetary policies further liberalization of policies on cap- with other countries’ central banks and ital accounts may be required. In any take the potential spillovers of their own case, changes along these lines require policies into consideration.13 The Fed time and depend not only on political has responded by fine-tuning its com- decisions but also on market decisions. munications with both financial markets It should be noted, though, that in and other central banks. However, when the last few years the United States it comes to policy making, neither cur- has started to use access to its financial rent nor former Fed officials have found infrastructure as a foreign policy tool, it necessary to account for the spillovers and so the search for ways to increase from their policies, unless they entail the use of other reserve currencies has spillbacks.14 In the era of globalized intensified. (even if fragmented) financial markets and economic interdependence, such

12 Gita Gopinath and Jeremy C. Stein, “Banking, Trade, and the Making of a Dominant Currency” (NBER Working Paper No. 24485, National Bureau of Economic Research, Cambridge, MA, 2018). 13 Rajan, “Competitive Monetary Easing.” 14 Ben S. Bernanke, “US Monetary Policy and International Implications” (Speech at “Challenges of the Global Financial System: Risks and Governance under Evolving Globalization,” high-level seminar spon- sored by Bank of Japan and International Monetary Fund, Tokyo, October 2012); Stanley Fischer, “The Federal Reserve and the Global Economy” (Speech at Per Jacobsson Foundation Lecture, 2014 Annual Meetings of International Monetary Fund and World Bank Group, Washington, DC, October 2014).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 167 spillbacks may become more common, India, China, and South Africa). The so the Fed will, effectively, have to take CRA is a US$100 billion reserve pool spillovers into consideration. One exam- arrangement. Each country commits ple of the Fed’s reaction to spillbacks is to lend to others a certain amount of the events of late 2018 to early 2019, reserves, which sum up to US$100 bil- when market worries about a possi- lion. In exchange, each country can ble slowdown of the global economy borrow from others a certain amount of led to changes in the Fed’s policy and reserves (not necessarily the same amount communications. committed). There is a delinked part of A solution that would be more this amount that member countries pro- feasible in the short run is further vide without any IMF involvement, but strengthening of the global financial a larger part of the borrowing is provided architecture in order to improve the additionally to the IMF program. availability of FX liquidity instruments Both the IMF liquidity provision for the EME central banks. The demand programs and reserve pools similar to the for reserves will be lower if the central CRA perform a role similar to that of banks have access to FX liquidity to contractual liquidity lines (CLLs), which borrow in case of an emergency or have the central banks of countries with a the equivalent of insurance against FX deficit of liquid market instruments may liquidity stress. Both the International provide to domestic banks, according to Monetary Fund (IMF) and the central Basel III. The main difference is the size banks of emerging markets themselves of the liquidity line. In the case of the have taken steps in this direction in the IMF instruments, the size of the credit last few years. The IMF has increased line depends on the size of the quota, the number of credit lines with low and in the case of the liquidity pools, it conditionality (its Flexible Credit Line is predetermined by agreement between and Precautionary and Liquidity Line), countries. In contrast to both of those, which the central banks of countries the size of the CLL depends on the size with ex ante strong fundamentals can of potential outflows from a specific use as a source of FX liquidity in the bank and the available liquid assets in case of massive capital outflows. the system. The size of the potential In addition, there are several initiatives capital outflows from emerging markets, for establishing shared reserve pools for obviously, can have a weak correlation emerging markets’ central banks, which with the size of the IMF quota. Generally should allow central banks to borrow speaking, liquidity needs depend on gross reserves from each other. A good example rather than net flows, and they can be is the Contingent Reserve Arrangement much higher than the current account (CRA) initiative of the central banks of and structural finance needs, which are the BRICS countries (Brazil, Russia, the components for computing the IMF

168 | REVITALIZING THE SPIRIT OF BRETTON WOODS quotas. Therefore, not only the stigma of resources available to it, largely because attached to the IMF resources—which of the position of the United States and may be needed if the IMF increases its other developed countries. One of the role of lender of last resort for the central ways forward may be to try to separate banks—but also their adequacy is a big the resources needed for standard struc- question. The 15th IMF quota review tural finance from those required for has been stuck for several years. Also, liquidity finance, and to create innovative over the last several years, the IMF has programs to provide financing liquidity been struggling to increase the amount for the EMEs’ central banks.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 169 STRENGTHENING THE RULES-BASED INTERNATIONAL MONETARY SYSTEM

JOHN B. TAYLOR Mary and Robert Raymond Professor of Economics and George P. Shultz Senior Fellow in Economics, Hoover Institution at Stanford University

At the end of the 1944 conference where reminiscent of the past—and an the Bretton Woods Agreement was entirely new global economy. This essay finalized, US Treasury Secretary Henry addresses the question, “In what ways Morgenthau spoke for all 44 delegations must monetary policy cooperation and when he proclaimed that the purpose the role of central banking be reimaged of the agreement was to “do away with to continue to provide an effective pol- economic evils—competitive currency icy tool kit for the real economy?” To devaluations and destructive impedi- answer the question, I first consider ments to trade.”1 Despite tremendous how people addressed such problems progress and many accomplishments 75 years ago, and I then show how we during the past 75 years, today we are can adapt their strategy to our current again facing economic evils—some challenges.2

1 Henry Morgenthau, “Closing Address to the Conference” (Speech given at United Nations Monetary and Financial Conference, Bretton Woods, NH, July 1944). 2 This essay draws on John B. Taylor, “Recreating the 1940s-Founded Institutions for Today’s Global Economy” (Speech presented upon receiving the Truman Medal for Economic Policy, Kansas City, MO, October 2015) and John B. Taylor, Reform of the International Monetary System: Why and How? (Cambridge, MA: MIT Press, 2019).

170 | REVITALIZING THE SPIRIT OF BRETTON WOODS THE PROBLEMS THE economic freedom and caused all sorts BRETTON WOODS of distortions and injustices. SYSTEM WAS DESIGNED To deal with these problems, the parties to the Bretton Woods Agreement TO ADDRESS developed a strategy: Each country Competitive devaluations and currency would commit to two basic monetary wars were a serious economic problem rules, which would become the key in the years leading up to World War foundation of the rules-based system. II. The British devalued the pound in First, countries would swear off com- 1931 and thereby gained a compet- petitive devaluations by agreeing that itive advantage, but the devaluation any exchange rate change of more than harmed other countries’ exports and 10 percent from certain values, or pegs, economies. Not to be left behind, other would have to be approved by a newly countries followed, including the United created International Monetary Fund States, which devalued the dollar in (IMF). As then Assistant Secretary of 1934. Whether defensive or offensive, State Dean Acheson later explained in these “beggar-thy-neighbor” actions led testimony to gain support from the US to government restrictions and inter­ Congress, “The purpose of the fund is ventions in other countries. After trying not to prevent any devaluation. It is to such interventions, Italy, for example, prevent competitive devaluation.”3 The devalued the lira by 40.93 percent in agreement created what was called an 1936, matching precisely the US de­­ adjustable peg system. valuation of 1934. Second, countries agreed to remove Another serious international eco- their exchange controls, with a transi- nomic problem stemmed from extensive tion period because many had extensive “exchange controls,” in which importers controls in place. To be sure, the coun- of goods were forced to make payments tries did not agree to remove capital to a government monopoly in foreign controls, which include restrictions on exchange. The government would deter- making loans, buying or selling bonds, mine what types of goods could be and making equity investments. imported and how much to pay export- With these commitments, the IMF ers. Exchange controls also involved would provide financial assistance in multiple exchange rates, government the form of loans. Jacob Viner, professor licenses to export and import, and even at the Chicago School of Economics, officially conducted barter trade. Such explained the deal to the US Senate: practices deviated from the principles of “Other countries make commitments

3 “Statement of Hon. Dean Acheson, Assistant Secretary of State, Washington, D.C.,” in Bretton Woods Agreements Act: Hearings before the Committee on Banking and Currency, United States Senate (Washington, DC: Government Printing Office, 1945), 26.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 171 with respect to exchange stability and monetary policies, usually in the form freedom of exchange markets from of inflation targeting, and they thereby restrictive controls while we [the entered into a period of stability. United States] in turn pledge financial aid to countries needing it to carry out these commitments.” He argued that TODAY’S it was largely “an American blueprint INTERNATIONAL for the postwar economic world…. It MONETARY SYSTEM seems to me a magnificent blueprint.”4 Unfortunately, this benign situation did Many other economists supported it, not hold, and the international monetary including Irving Fisher, Frank Knight, system now faces challenges eerily similar and Henry Simons.5 to those at the time of the creation of the In important respects, the agree- IMF. In my view, the problem traces to ment succeeded. Exchange controls a departure from rules-based monetary were removed, though it took more than policies at both the national and inter- a decade, and the currency wars ended, national levels. These deviations have not though the adjustable peg system itself only helped bring on and worsen the fell apart in the 1970s, giving way to a global financial crisis, but they were also flexible exchange rate system. The 1970s a factor in the subpar recovery. were difficult because monetary policy Quantitative easing (QE) started in lost its rules-based footing, and both earnest in 2009 in the United States. It inflation and unemployment rose. But was followed by a period in which the in the 1980s and 1990s, policy became dollar was low relative to the yen, even- more focused and rules-based, and eco- tually leading to QE in Japan in 2013, nomic performance improved greatly. which depreciated the yen, as was the Though the move was not part of the expressed intent of the Bank of Japan. original agreement, virtually all the That was followed by QE in the euro- developed countries that signed it—and zone in 2014, which depreciated the others, such as Germany and Japan— euro, as was the expressed intent of the also abandoned capital controls. By the European Central Bank.6 The dollar-yen- late 1990s, many emerging-­market euro story from 2009 to 2014 looks a countries were adopting rules-based lot like the pound-dollar-lira story from

4 “The Views of Jacob Viner, University of Chicago,” in Bretton Woods Agreements Act: Hearings before the Committee on Banking and Currency, United States Senate (Washington, DC: Government Printing Office, 1945), 637–45. 5 See “Recommendations of Economists for United States Approval of the Bretton Woods Monetary Agreements,” in Bretton Woods Agreements Act: Hearings before the Committee on Banking and Currency, United States Senate (Washington, DC: Government Printing Office, 1945) 460–65. 6 Taylor, Reform of the International Monetary System, traces the details of QE and exchange rates during this period.

172 | REVITALIZING THE SPIRIT OF BRETTON WOODS 1931 to 1936, even though US policy controls. The IMF has endorsed such makers considered the exchange rate controls, as part of its new Institutional effect to be a by-product of their actions, View, calling them “capital flow man- not the direct intent. So QE begets QE, agement measures,” or CFMs.7 Some which begets QE, and so on. macroprudential regulations are devoted Interest rate decisions at central to international transactions and thus banks around the world would also can become capital controls in disguise. resemble currency wars during this period. Whether you ask them or watch them, you can tell when central bankers A NEW STRATEGY have followed each other. Extra-low The world needs a new strategy to deal interest rates in the United States were with these problems. The new strategy followed by extra-low interest rates in could build on the old strategy of the many other countries, in an effort to 1940s. We now have evidence that the prevent sharp currency appreciations. key foundation of a rules-based inter- There was a global spread and amplifi- national monetary system is simply a cation of monetary policy deviations. rules-based monetary policy in each Capital also flows in response to inter- country. Research shows that the move est rate differentials—even if attenuated toward rules-based monetary policy in by policy reactions. Capital first rushed the 1980s was the reason that economic into emerging markets and is now rush- performance improved in the 1980s and ing out. The rush in was in the form of 1990s. More recent research shows that large borrowings in dollars by firms and the spread and amplification of devia- governments of emerging-market­ coun- tions from rules-based monetary policy tries, which now are causing problems are drivers of the current international as the dollar firms. instabilities. And research shows that A host of government interventions if each country followed a rules-based and restrictions, especially in housing monetary policy consistent its own eco- markets, have been used to prevent the nomic stability—and expected other low interest rates from causing bubbles. countries to do the same—a rules-based, Macroprudential regulations, which have internationally cooperative equilibrium legitimate purposes, were also being used would emerge.8 to counter the effects of the low interest So today, as in the 1940s, the inter- rates. There’s also been a revival of capital national community could forge a new

7 International Monetary Fund, “The Liberalization and Management of Capital Flows: An Institutional View” (International Monetary Fund, Washington, DC, November 14, 2012). 8 John B. Taylor, “A Rules-Based Cooperatively-Managed International Monetary System for the Future,” in International Monetary Cooperation: Lessons from the Plaza Accord after Thirty Years, edited by C. Fred Bergsten and Russell Green (Washington, DC: Peterson Institute for International Economics, 2016), 217–36.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 173 agreement whereby each country would and the reasons for it would be in the commit to its own rules for monetary agreement. policy. In keeping with today’s inte- The IMF would have an important grated global economy, it would not be role in maintaining this international an adjustable peg system but, instead, agreement to state and follow a monetary a flexible system in which each coun- rule or strategy. First, it would naturally try—each central bank—describes and take a monitoring role by providing a commits to a monetary policy rule or a common format for describing each strategy for setting its monetary policy country’s strategy in a transparent way, instruments. The strategy could include as well as keeping track of and report- a specific inflation target, some notion ing on each country’s strategy. Second, of the long-run interest rate, and a list of it would provide guidance to countries key variables and ways to react to them. and central banks, and share procedures Such a system would provide each cen- to help them to communicate their strat- tral bank with a transparent tool kit to egies internationally. The policy rules or deal with the real economy. Experience strategies would likely be different for shows the importance of making sure small open economies than for large the process does not impinge on other economies, and the IMF would allow countries’ monetary strategies nor focus for such differences. Other than ensuring on sterilized currency intervention.9 transparency and clear reporting, the IMF The rules-based commitments would would not have to stipulate that countries reduce the volatility of both capital flows follow specific rules, but only that they and exchange rates, while also removing follow some rule. some of the reasons that central banks Note that this strategy is not just for have followed each other in recent years. the G7 or the G20 or some regional Such a process would pose no threat grouping. It is completely global— to either the national or the inter­ something for all the members of the national independence of central banks. IMF. As in the 1940s, the process could It would be the job of each central bank begin informally with a small group and to formulate and describe its strategy. then spread out, perhaps through circu- Participants in the process would not lating markups of the relevant sections have a say in the strategies of other cen- of the agreement. tral banks, other than that the strategies This reform is by far the most import- be reported. And the strategies could be ant ingredient needed for re-creating changed or deviated from if the world a rules-based international financial changed or if there were an emergency. system. It will be difficult to carry out A procedure for describing the change because there is still disagreement about

9 That is a lesson from the Plaza Accord of 1985, as explained in Taylor, “A Rules-Based Cooperatively-Managed International Monetary System for the Future.”

174 | REVITALIZING THE SPIRIT OF BRETTON WOODS the diagnosis and the remedy, though The Fed’s approach paves the way to disagreement and debate were features an international monetary normalization of the period leading up to the Bretton and reform of the kind proposed here. Woods Agreement in the 1940s too.10 Such a reform is attractive because each Some argue, for example, that the com- country can choose its own strategy petitive depreciations of the 1930s and and still contribute to global stability. those of the past few years are simply And the time may be ripe, as witnessed part of the process of world monetary by many recent calls for international policy easing.11 monetary reform. The former head Though many countries are still in of the Reserve Bank of India, Raghu the midst of unconventional mone- Rajan, emphasized that “what we need tary policies, the US Federal Reserve are monetary rules.”13 The European is now in the process of normalizing Central Bank president, Mario Draghi, its balance sheet and its interest rate argued that “we would all clearly benefit policy. It appears to be moving onto a from … improving communication over path to bring monetary policy back to our reaction functions.”14 a rules-based framework. Many of the Other related reforms would also changes have occurred recently, even be important, such as setting a long- as, in reports and speeches, the Federal term goal of open capital markets and Reserve has been emphasizing its mon- a corresponding sequenced removal of etary strategy and the use of monetary capital controls. Currently, 36 countries policy rules.12 have open capital accounts, but another

10 Benn Stiel, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order (Princeton, NJ: Princeton University Press, 2013) describes the contentious disagreements back then, especially in the battle between John Maynard Keynes and Harry Dexter White, some of which continued at the 1944 conference, as may be seen in the recently published transcripts: Kurt Schuler and Andrew Rosenberg, eds., The Bretton Woods Transcripts (New York: Center for Financial Stability, 2015). 11 See, for example, Ben S. Bernanke, “Monetary Policy and the Global Economy” (Speech at Department of Economics and Suntory and Toyota International Centres for Economics and Related Disciplines Public Discussion in Association with the Bank of England, London School of Economics, London, March 25, 2013). 12 See, for example, Jerome H. Powell, “Semiannual Monetary Policy Report to the Congress” (Given before the Committee on Financial Services, US House of Representatives, Washington, DC, February 27, 2018) and Board of Governors of the Federal Reserve System, Monetary Policy Report (Federal Reserve System, Washington, DC, July 13, 2018). 13 Raghuram Rajan, “Why the World Needs New Monetary Policy Rules,” World Economic Forum, March 22, 2016, www.weforum.org/agenda/2016/03/why-the-world-needs-new-monetary-policy-rules/. 14 Mario Draghi, “The International Dimension of Monetary Policy” (speech, ECB Forum on Central Banking, Sintra, Portugal, June 28, 2016).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 175 48 are classified as “gate” countries and described 75 years ago by Secretary 16 as “wall” countries, with varying Morgenthau, could be part of an overall degrees of capital controls.15 The reform international economic reform. The would involve a change in the IMF’s specific reforms of the international Institutional View, and it should occur monetary institutions that I have out- with a transition period, accompanied lined here could form the basis of a by measures to improve market resil- broader strategy of economic growth, iency in individual countries, along stability, and development that includes with adequate enforcement of safety the World Bank, other international and soundness regulations on finan- financial institutions, and the World cial institutions. Though controversial, Trade Organization. In that way, I the reform would be conceptually the believe we can reset the international same as the 1944 agreement to remove economic system for another 75 years exchange controls. of progress and accomplishments. Such a reform would be a way of recommit- ting to the spirit of Bretton Woods and CONCLUSION to the benefits of a rules-based inter­ This clear commitment to a strategy national economic system as a key force of counteracting “economic evils,” as for global peace and prosperity.

15 Andres Fernández, Michael W. Klein, Alessandro Rebucci, Martin Schindler, and Martín Uribe, “Capital Control Measures: A New Dataset” (IMF Working Paper No. 15/80, International Monetary Fund, Washington, DC, April 2015).

176 | REVITALIZING THE SPIRIT OF BRETTON WOODS THE FUTURE OF THE EUROZONE

LORENZO BINI SMAGHI Chairman, Société Générale, and former Executive Board Member, European Central Bank

AN UNPRECEDENTED experienced several shortcomings, in PROJECT particular as a result of the great finan- cial crisis that erupted in 2008 and lasted The creation of the euro in 1999 was longer in Europe than elsewhere. The one of the most influential changes in eurozone slid into a second recession in the international monetary system since 2012/13, while the international econ- the Bretton Woods agreements. Although omy was continuing its recovery. The many countries were bound by a fixed International Monetary Fund (IMF) exchange rate system during the first was asked to intervene on several occa- two decades after World War II, never sions, in particular to contribute to the before had so many advanced econo- design and financing of the adjustment mies—initially 11, grown currently to programs of countries such as Greece, 19—decided to share their monetary Ireland, and Portugal, which had lost sovereignty to give birth to a monetary access to financial markets. union with a single currency, managed The request to access IMF resources by a single central bank. The creation of was difficult to understand, especially the euro is no doubt a unique project in for less-developed constituencies, since modern monetary history. the eurozone is one of the world’s most The project was nevertheless contro- advanced economic areas and should, in versial from the start, being criticized principle, be able to deal with its inter- by many academics on the basis that the nal problems. As Jean-Claude Juncker, European Union did not qualify as an president of the European Commission, optimal currency area. It was rejected recently stated in front of the European by some member states, in particular Parliament, US authorities would cer- the United Kingdom and Denmark, tainly not request the help of the IMF which obtained opt-out clauses. It

REVITALIZING THE SPIRIT OF BRETTON WOODS | 177 if California had budgetary problems! the no-bailout clause, which prohibits Rather than asking for external help, governments from supporting each oth- shouldn’t European countries fix those er’s debt, and for preventing the central parts of the monetary union that do bank from purchasing public debt on not work properly? For how long can the primary markets. The assumption the eurozone rely on external help to of a crisis-free world was obviously an address its internal problems, and for illusion. Crises do happen and policy how long will other constituencies be makers do make mistakes. willing to provide such help? Given the During the 2012/13 crisis, the euro- size of the eurozone, these questions are zone took measures to improve the of interest to the whole international institutional architecture of the monetary monetary system. union and make the system more resil- The future of the eurozone will ient. To cite just a few of these measures, depend on three main capabilities. The the European Stability Mechanism first is the ability to complete the neces- was created to help finance countries sary monetary and financial architecture that lose access to capital markets. The to ensure that the union is capable of European Central Bank adopted the countering major shocks, such as that Outright Monetary Transactions pro- experienced during the Great Recession gram to protect countries that abide by of 2008. The second is the ability to adjustment programs from speculative restore strong and sustainable growth so attacks in the financial markets, which as to address the consequences of global- can drive borrowing costs to unsus- ization, in particular on the inequalities tainable levels. The banking union was that are fueling a widespread dissatis- created, and the European Central Bank faction with European institutions. The was given responsibility for supervising third is the ability to contribute to a the EU financial system under the Single more stable international financial and Supervisory Mechanism. The Single economic order. Resolution Fund was set up to resolve failed banks. These changes have strengthened STRENGTHENING THE the eurozone and enabled it to recover EURO ARCHITECTURE after the second recession, in 2012/13. It is widely recognized that the euro- However, they are not sufficient to zone has been built on the assumptions ensure that the union would not be that there would be no crises and that severely hit in the face of a new crisis. if all the members behaved properly, Further strengthening is required. there would be no need for major The key problem is the ability of the policy adjustments. These ideas were monetary union to face a shock, either the basis for inserting provisions such as symmetric or asymmetric, the latter of

178 | REVITALIZING THE SPIRIT OF BRETTON WOODS which may produce a different impact participants to manage their liquidity across countries. The different room and to serve as a benchmark for pricing for maneuvering that each country risky assets. may have in addressing the shock, as There is also a need to create the a result of a different budgetary or foundations of a more coherent policy cyclical position, may tend to widen response to shocks, based on a common divergences and fuel snowball effects as instrument. This step would require well as self-­fulfilling expectations that a European budget to finance inter- can destabilize financial markets. ventions across the union so as not to Improving the eurozone’s resilience overburden national budgets. Such requires action in various areas. The first a budget could initially finance spe- is to complete the union’s capacity to cific policies, such as unemployment absorb shocks through the financial mar- compensation, subject to adherence to kets, which in turn requires completion common standards. The issue is not of the banking union. Building a true simple politically, however, because of pan-European banking system would the reluctance to create mechanisms that ensure that regions or countries that could lead to the permanent transfer of are hit by a shock can continue to be resources across countries, potentially financed thanks to the geographic diversi­ fueling moral hazard. Nevertheless, fication of banks’ balance sheets. The several proposals have been put on the biggest obstacles to a full-fledged banking table that could be experimented with union are the persistence of national and broadened over time. exceptions in European regulation, which allow national authorities to require banks to maintain national liquidity and capital RESTORING constraints, and the lack of a common SUSTAINABLE GROWTH deposit insurance scheme. The second factor that will determine Another requirement is the creation the future of the eurozone is its ability of a true capital market in the eurozone to generate policies to foster sustain- that can distribute the effects of shocks able growth and reduce unemployment, evenly throughout the area. The project especially youth unemployment, which that has been launched by the European is one of the main reasons for the dis­ Commission falls short of ambition and affection people express toward European has been implemented in relatively small institutions. During its first 20 years, the part. A revitalized approach is needed. eurozone largely relied on world trade as A more integrated financial market the main engine for growth, in particular also requires the availability of a truly after the second recession, in 2012/13. European “safe asset,” denominated The eurozone’s current account moved in euros, that can be used by market from an overall balance at the start of the

REVITALIZING THE SPIRIT OF BRETTON WOODS | 179 euro to a surplus of around 4 percent To implement these policies, the of GDP. Most eurozone countries are eurozone largely relies on policies actually in surplus, with the exceptions enacted at the national level. The budget of France, Greece, and Cyprus. available at the EU level is limited. The International trade might not con- new budget for the 2020–2027 phase tinue to be as dynamic as in the past, needs to stand up to the challenges faced especially if protectionist pressures con- by the world economy. To do so requires tinue to mount and retaliations between a stronger capacity to invest in research major trade blocs escalate. If Europe and development, as well as in common wants to strengthen its growth perfor- defense and security. Negotiation on a mance in a sustainable way, it needs to new financial plan should start follow- rely more on domestic demand. Such ing the May 2019 European elections, reliance requires a rebalancing in the with a view to being completed by the growth model, with greater emphasis end of 2019. on consumption and investment, both public and private. Consumption can be boosted through THE EURO AS A GLOBAL faster increases in purchasing power, in PLAYER particular real wages. Such increases can be The third factor that will determine the achieved only through higher productivity future of the eurozone is the role that growth, which in turn requires stronger the EU will want, and be able, to play investments in technology and innova- at the global level. The rebalancing of tion. Making the European economy power, in economic and political terms, more attractive for investment is the key has accelerated in recent years. China is challenge in the years ahead, and it will emerging as the world’s largest economy, require a stronger effort in research and with growing political influence not only development to create a more stimulat- in Asia but also in Africa and Europe, ing environment for entrepreneurship. It notably through the Belt and Road will also require structural reforms in the Initiative. The United States is trying to product and labor markets to allow new fight the trend of a decreasing market companies to emerge and develop with- share, with initiatives aimed at boosting out being hampered by barriers to entry. military spending while at the same time The excess of savings over investment reducing military presence abroad. in Europe also needs to be channeled The issue of migration is affecting through a better-functioning capital all developed areas of the world. The market. The implementation of a cap- EU, which has limited powers in foreign ital market union is aimed not only at and security policy because its member better absorbing shocks that affect the states retain most of those capacities, eurozone but also at financing a more does not seem to have adapted to the dynamic economy. new environment. Its process remains

180 | REVITALIZING THE SPIRIT OF BRETTON WOODS paralyzed by the need to make deci- An interesting case relates to the role sions by consensus, with any country of the euro as one of the major inter- capable of blocking a decision. These national currencies. Although the euro constraints explain the difficulty of is currently the second most import- effectively addressing the challenge of ant currency in the world, after the US migration, which is particularly bur- dollar, there is no policy to extract from dening some EU members and fueling it any key strategic advantages. The inter- negative feelings in large parts of the national use of the euro is left to free population. They also explain the rising market choice, not encouraged, nor even tensions within the transatlantic mili- required in international transactions. tary alliance, with European countries This is a very different attitude from continuing to limit their budgetary that of the United States and possibly spending on defense, relying instead China. The United States, in particular, is on US financing. taking huge advantage of the role of the In the economic sphere, the inter­ dollar in international markets, in many national representation of European different respects. For instance, the extra- interests remains fragmented. For instance, territoriality of US legislation is claimed in the IMF, the Eurozone is represented to apply whenever the dollar is used in not by a single chair, which would give it transactions, even outside the United a weight comparable to that of the United States and between non–US citizens. States, but by several chairs, some in con- The complexity of the EU decision-­ stituencies containing emerging markets. making process has prevented Europe The European influence is thus diluted from being more assertive in the inter­ and not capable of promoting common national environment and made it interests. The same fragmentation prevails defensive with respect to the reform of in other international forums, such as the inter­national financial system, starting the G20 and the Basel Committee on with the governance of the IMF and Banking Supervision, the latter of which World Bank. This situation has created defines the regulatory framework for an imbalance between the economic size global financial markets. of the union and its effective ability to Overall, what seems to be lacking, influence global issues. Such an imbal- be it from the European Commission, ance may become more apparent over the European Council, or the European time, in particular with the emergence of Parliament, is a coherent view of the role China and other economic powers that that Europe should play in the world and may have different principles and policy in the economic and political dimen- objectives from those of the EU. The abil- sions of international relations, and what ity of EU member states to understand measures it should promote to achieve that their relative power has decreased such a role. and will continue to do so over time, to the point of their becoming irrelevant,

REVITALIZING THE SPIRIT OF BRETTON WOODS | 181 will be a key factor in determining their case, for instance, with the monetary desire to share sovereignty in these areas. union, which was implemented after the The European institutions, including the currency crises of the 1970s and 1980s, Council of Ministers (i.e., the Council and with the banking union, which came of the European Union), the European after the 2011 crisis. Commission, and the European Central Jean Monnet’s prediction that “Europe Bank, should be proactive in promoting a will be forged in crises and will be the single representation within international sum of the solutions adopted for those bodies, with a view to making the latter crises” remains valid. Incidentally, it more effective and accountable. applies not only to Europe. Most of what It is not clear what will trigger such a the United States is today is the result of change. However, experience shows that decisions made during crises. It is thus an Europe tends to move only in reaction illusion to think that the future of Europe to crises. Only in crises do governments can be drawn in the abstract, based on realize that the prevailing institutional some theoretical model or copying an system does not allow them to make existing one. It will be the way in which efficient decisions. Only in crises do the people of Europe react to events, citizens realize that more rather than including crises, that will affect the world less Europe is needed. This has been the around Europe.

182 | REVITALIZING THE SPIRIT OF BRETTON WOODS THE LONG MARCH OF CHINA’S EXCHANGE RATE REGIME REFORM

YU YONGDING Senior Fellow, Chinese Academy of Social Sciences, and former President of the China Society of World Economics

The reform of China’s exchange rate centers across the country, where com- regime has dragged on for some 40 panies traded foreign exchanges. At these years, since the early 1980s. Currently, swap centers, the exchange rate was deter- China is one of the very few countries mined on the basis of demand for and in the world that is still reluctant to supply of foreign exchanges. On January adopt a floating exchange rate regime. 1, 1994, the swap rate and the official rate were merged. A unified exchange rate was set at Y8.7/US$1, and the renminbi THE WINDING ROAD TO exchange rate started to appreciate slowly. TODAY’S EXCHANGE During the 1997 Asian financial RATE REGIME crisis, China adopted a policy of no Since the founding of the People’s devaluation under any circumstances. Republic of China, the renminbi has As a result, the country’s exchange rate been basically pegged to the US dollar, regime shifted to a de facto peg to the though with frequent adjustments. In US dollar. Then, on July 21, 2005, the 1979, when China launched its reform renminbi depegged from the US dollar and economic opening, the exchange rate and was revalued from Y8.28/US$1 to was settled at 1.49 yuan (Y) to US$1. Y8.11/US$1. The renminbi exchange At the beginning of 1985, a new rate thereafter was supposed to be based exchange rate regime was introduced, on market demand and supply, with consisting of an official exchange rate reference to a currency basket. coexisting with a swap rate, the latter In August 2008, in response to the decided in the interconnected swap Global Financial Crisis, China repegged

REVITALIZING THE SPIRIT OF BRETTON WOODS | 183 the renminbi to the dollar until June MORE RECENT POLICY 2010. On August 11, 2015, the People’s DEVELOPMENTS Bank of China (PBOC) announced Today, officially, the renminbi exchange that the determination of the renminbi rate against the US dollar is determined exchange rate against the US dollar by three elements: yesterday’s closing would be based on the closing rate on price, the needed change in the renminbi the previous trading day. The reform exchange rate to keep the CFETS index shocked the market, and panic selling stable, and the countercyclical factor. of the renminbi ensued. Two days later, The problem is that outsiders do not on August 13, the PBOC brought the clearly understand how the counter­ reform to an abrupt end. cyclical factor is calculated, and therefore In January 2016, the PBOC intro- the central parity rate-setting rule is also duced a new rule for setting the less than transparent. renminbi exchange rate. The rule Under certain circumstances, a stable set today’s central parity rate of the exchange rate is conducive to China’s renminbi as equal to yesterday’s cen- export drive as well as its financial sta- tral parity rate plus the change in the bility. However, when the renminbi is renminbi exchange rate against the under appreciation pressure, an inflexible US dollar that the Chinese monetary exchange rate encourages inflows of hot authority had to make over the past money, which contribute to the creation 24 hours to keep stable the index of a of asset bubbles. On the other hand, given basket of currencies. This index is depreciation pressure on the renminbi known as the China Foreign Exchange facilitates the unwinding of carry trade Trade System (CFETS) index. as well as capital flight, both contributing After having risen for some six to the erosion of national wealth. months, in April 2017 the US dollar index China ran twin surpluses (both current started to fall. According to the central account and capital account surpluses) for parity-setting rule as well as economic more than two decades, until two years fundamentals, the renminbi exchange ago. While the country has accumulated rate against the dollar should have risen. a huge foreign exchange reserve in the However, because of renminbi devalu- form of low-yield US Treasuries, its for- ation expectations, it fell continuously. eign liabilities consist mainly of foreign The PBOC, unhappy with this result, direct investment with a very high return introduced a so-called countercyclical on investment. As a result, despite the factor into the central parity-setting rule holding of US$1.8 trillion in net foreign in May 2017, with the aim of weakening assets, China’s investment incomes have the impact of market sentiment on the been in deficit for more than a decade. determination of the central parity rate. Though the list of the specific causes of the twin surpluses is long, one of the necessary conditions for this irrational

184 | REVITALIZING THE SPIRIT OF BRETTON WOODS international investment position to exist A RECOMMENDED is the inflexibility of China’s exchange FUTURE PATH rate. The existence of such twin surpluses, After a temporary respite in 2017, the by definition, means that the renminbi is renminbi has been under depreciation undervalued. If the currency were allowed pressure since the second quarter of 2018. to appreciate to reach an equilibrium Hopefully, having learned this costly level, regardless of by which particular lesson in the past, China’s decision makers channels, the current account and capi- as well as the market participants will tal account would have to sum to zero. treat the current round of depreciation in Hence, China would not need to accu- a calm manner. Whichever the direction mulate such a large amount of low-yield of the pressure, China should stop inter- US Treasuries, and it would be less likely vening in the foreign exchange market, to run an investment account deficit. so as to accomplish the long-overdue Since late 2014, capital outflows have reform of the exchange rate regime as surged, China’s balance of payments soon as possible. has shifted from surplus to deficit, and Over the past four decades, the role the renminbi exchange rate has begun of the Bretton Woods institutions, in to be under devaluation pressure. Due particular the International Monetary to the deeply rooted fear of exchange Fund (IMF), in the evolution of China’s rate instability, the PBOC’s policy exchange rate regime has been positive has shifted from containing renminbi but limited. The country’s exchange rate appreciation to preventing renminbi policy is not a pure economic issue, and depreciation. As a result of constant hence how to adopt a fair and objective intervention, China’s foreign exchange position for the well-being of the global reserves fell by an astonishing US$1 economy as well as the parties involved trillion in less than two years. Many is of utmost importance. In this regard, Chinese economists argue that the shift the IMF has done quite a good job. On in policy is to keep foreign exchange in the other hand, the IMF could be more the hands of the people, and hence it straightforward and less diplomatic in dis- represents an improvement in resource cussing China’s exchange rate policy with allocation. However, while China accu- the Chinese monetary authority. With mulated US$1.28 trillion of current its rich experience and expertise, the account surplus from 2011 to the third IMF, as well as the other Bretton Woods quarter of 2016, its net foreign assets institution, the World Bank, certainly can fell by US$12.4 billion over the same make greater contributions to the reform period of time. Nobody knows where of China’s exchange rate regime. the money has gone. If, in the past, the challenge facing China was how to stop importing “dark matter,” now it is how to avoid “matter annihilation” as well.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 185 THE BRETTON WOODS ERA The Hidden, Misunderstood Role of Debt

RICHARD VAGUE Managing Partner, Gabriel Investments, and Co-founder and former Chief Executive Officer of Energy Plus, First USA Inc., and Juniper Financial

Spoiler alert: It was an era of very low had created large out-of-balance export debt. and current account positions in Britain, Before we discuss the low debt France, Germany, and Japan. Given the profile of the Bretton Woods I era, how- complexities of managing trade, any ever, a brief review. The Bretton Woods current account with a balance posi- Agreement of 1944 is rightly credited tion under 1 percent can effectively be with helping a war-ravaged world recover. considered balanced, but the positions It gave the world’s currencies a starting of Britain, France, Germany, and Japan point for trade and prevented the early were often well above this point. The devaluations that would have shattered architects of Bretton Woods I were that fragile start. It created the lending concerned that trade imbalances would institutions that helped safeguard cur- again bring the risk of a depression. rencies and boost investment. It helped It was a testament to the value of launch an era that, once past the after- their efforts that in the 1950s and 1960s shocks of war, posted the best sustained both Britain and France showed much period of real GDP growth in the 20th more balanced trade behavior than century, which ended only with the sky- before. And although Germany and rocketing oil prices of the early 1970s. Japan continued to show large imbal- As shown in table 1, in the 1920s ances after 1950 as they rebuilt their and 1930s the disparate and competitive economies, Germany showed much trade policies of the industrial nations more balance in the 1960s. Notably, US

186 | REVITALIZING THE SPIRIT OF BRETTON WOODS TABLE 1. AVERAGE CURRENT ACCOUNT SURPLUS AND NET EXPORT POSITION, AS A PERCENTAGE OF GDP

US UK GERMANY FRANCE JAPAN

CAB NE CAB NE CAB NE CAB NE CAB NE 1920s 0.8% 0.8% 1.9% -5.6% -1.3% -2.5% 4.1% -0.2% -1.7% -2.9% 1930s 0.4% 0.5% -1.0% -5.6% 0.6% 1.2% -1.1% -3.5% -0.1% -0.5% 1940s -0.1% 0.3% 0.8% -1.2% 1.7% 1.3% -0.1% -0.6% 0.8% -2.9% 1950s 0.5% 0.6% -0.1% -1.0% 0.6% 1.8% 0.3% -0.4% 0.1% -0.8%

SOURCE: Òscar Jordà, Moritz Schularick, and Alan M. Taylor, “Macrofinancial History and the New Business Cycle Facts,” in NBER Macroeconomics Annual 2016, vol. 31, edited by Martin Eichenbaum and Jonathan A. Parker (Chicago: University of Chicago Press, 2017), 283–357.

exports and current account balances government debt. But this view doesn’t were in line during all four of these take into account private debt, that com- decades—the 1920s, 1930s, 1950s, and bination of business and individual debt 1960s—though the US economy was that is usually a larger sum than govern- so large that even small imbalances had ment debt and has a more direct impact a large impact on its trading partners. on private-sector trends. In these circumstances, developed For the United States and the world, economies entered the golden age of the ratio of total debt, public plus private, growth noted above, though by the to GDP was lower in 1948 than it had early 1970s the Bretton Woods currency been in 1928, and far below the record parameters proved enough of a strait- high of 1932. More notably, the ratio jacket that the United States, and thus of private debt to GDP, considered by much of the world, had to abandon the itself, was at an extraordinary, century-­ Bretton Woods standards. long low. Why was private debt so low? In the United States, it started with lender A PERIOD OF LOW DEBT curtailment—the disastrous policy of What was largely unrecognized about calling loans—that sent loan totals the Bretton Woods I era, both then and plummeting in the 1930s. Then, in the now, was that it had an extraordinary 1940s, it was a combination of individ- boost that contributed significantly to ual austerity and the decision of the US its success: low levels of debt. Many government not to put the burden of wrongly recall this period as one of high financing war manufacturing on corpo- debt, because of the high war-related rate America that resulted in a further

REVITALIZING THE SPIRIT OF BRETTON WOODS | 187 FIGURE 1. RATIO OF PRIVATE DEBT TO GDP For most of these key countries, private-sector debt was the lowest of the entire Federal Reserve era in the years immediately after World War II.

210

180 US 150 Britain 120 Japan

90 France Germany PERCENTAGE 60 China 30

0 1928 1948 1972 2017

SOURCE: Data retrieved from https://www.cbo.gov/publication/21728; https://fraser.stlouisfed.org/files/docs/ publications/SCB/1950-59/SCB_101950.pdf; https://datacatalog.worldbank.org/dataset/world-development- indicators; https://www.bis.org/statistics/totcredit.htm. For 1928, Britain and France private debt is an estimate based on bank loan data. For 1948, Britain, France, Germany, and Japan private debt is an estimate based on bank loan data. lowering of private-sector debt. Add to THE ADVANTAGES OF this the fact that in Germany and Japan, LOW PRIVATE DEBT government debt also reached very low Why was low private debt in the Bretton levels. In Germany, this was because the Woods I era so advantageous? Because Allied powers, determined not to repeat market-based economies are best posi- the mistakes of Versailles that had left tioned to grow when they have low levels that country strangled with reparations of private debt. When a company has a and debt, had enacted a program of low level of debt, it can more readily outright government debt forgiveness in expand by using debt to build a new store the London Debt Agreement of 1953. or factory, and an individual with low In Japan, it was due, at least in part, to debt can more readily take out a loan to, the ravages of wartime inflation. say, build a home addition or buy a new The result was that the late 1940s car. Since an economy is for the most part saw a Federal Reserve–era record low simply the sum of the financial activity in total debt, as well as in private debt, of all its businesses and individuals, lower for four of the five key countries—the aggregate private debt means a higher United States, Britain, France, Germany, growth opportunity for that economy. and Japan (see figures 1 and 2).

188 | REVITALIZING THE SPIRIT OF BRETTON WOODS FIGURE 2. RATIO OF TOTAL DEBT TO GDP For most of these key countries, the ratio of total debt to GDP was lower in 1948 than it had been at the height of the Roaring ’20s.

400 US 340 Britain 280 Japan 220 France Germany PERCENTAGE 160 China 100

40 1928 1948 1972 2017

SOURCE: Data retrieved from sources cited in figure 1, https://www.treasurydirect.gov/govt/reports/pd/histdebt/ histdebt.htm, and https://www.imf.org/external/pubs/ft/weo/2018/01/weodata/index.aspx. For 1928, Britain and France private debt is an estimate based on bank loan data. For 1948, Britain, France, Germany, and Japan private debt is an estimate based on bank loan data.

With the low private debt-to-GDP levels countries were inclined to be cooper- of the late 1940s, the world was extraordi- ative. Certainly, the bonds forged in narily well positioned for expansion. Even World War II brought the goodwill that better (perversely enough), the devastation carried Bretton Woods in its early years. and deprivation of the war meant that But as that source of goodwill faded, it the world had insufficient quantities of was the world’s robust economic growth virtually everything—especially housing. in the late 1950s and 1960s—growth It’s hard to imagine a better circum- boosted by the rapid loan growth that stance for a developed economy than so easily came from this platform of low levels of private debt and widespread low private debt—that brought a new shortages—especially housing shortages. wave of goodwill. It gave developed In that circumstance, rapid economic economies a strong tailwind and helped growth occurs simply by using debt to cover up a multitude of problems—there add to the needed supply of housing and were simply plenty of good results to other items. Mix in a baby boom, and the go around. developed economies of the world soared There was another really good thing from the mid-1950s to the early 1970s. about the low private debt of the period. So why did strong growth help As I have shown elsewhere, financial Bretton Woods? Because to succeed, crises are much less likely when private-­ Bretton Woods needed a world in which sector debt is low (since financial crises

REVITALIZING THE SPIRIT OF BRETTON WOODS | 189 are usually simply moments when far, far debt. They overlooked, however, that too many bad loans have been made), it was private debt that had been the so with this very low private debt, there biggest factor in bringing about the were no major financial crises in this Great Depression. period, and that fact alone brought In the $100 billion US economy advantage to the era. alone, there was a massive, runaway One other really good thing about $40 billion growth in private-sector low private debt was that it allowed debt between 1923 and 1928, largely the United States to deleverage from comprised of speculative loans for its sky-high government debt. As the ill-conceived real estate development government debt-to-GDP ratio of the that went awry and brought down United States declined in the 1950s the banking industry. To put that in and 1960s, it was offset—and in effect perspective, US GDP growth during made possible—by growth in the private that period was only $12 billion. Total debt-to-GDP ratio. If that had not been annual US exports averaged only $5 true, that government debt deleveraging billion, and international debt owed to would have brought a decades-long the country appears to have been less recession. In fact, a review of more than than that. Gold at the Federal Reserve 40 countries since World War II shows was only $2.5 billion. Growth in US that most instances of an improved gov- private debt was by far the largest factor ernment debt-to-GDP ratio have been in the development of the Depression. possible because of offsetting growth in Note also that this private debt growth the private debt-to-GDP ratio. totaled an amount far larger than the $33 billion in German reparations, only $21 billion of which was paid. WHAT WENT WRONG IN That massive overextension of loans THE ROARING ’20S created a massive oversupply of build- Back to Bretton Woods. The Bretton ings and housing. With that oversupply, Woods Agreement had stemmed from sales plummeted, bank loans soured, and an incomplete understanding of the long lines of desperate depositors started factors that brought on the Depression pulling their deposits out of those banks. and fascism and thus World War II. The The bad debt decimated bank capital. It Bretton Woods architects attached great forced banks to prematurely call loans, importance to trade and currencies. resulting in a massive contraction of loans They felt it was the mismanagement of and thousands of bank failures. Loans those two things that had, in large part, shrank by $32 billion in a mere three brought on the Great Depression. To years, on a percentage basis an amount the extent they considered debt, it was inconceivable today, helping bring about government debt—not private-sector a $45 billion decline in GDP.

190 | REVITALIZING THE SPIRIT OF BRETTON WOODS As much as the crafters of Bretton sword. When private debt is low and Woods I focused on trade, it was a used prudently, it is very good indeed, smaller factor than is generally recog- poised to power growth. But when it nized and appreciated, and it is therefore grows too fast and gets too high it can be important to keep the trade imbalances lethal, bringing oversupply, strangling of the 1920s in perspective. In the those suddenly unable to pay, and crush- United States, which was the epicenter ing lenders. Real estate loans in both the of the global Great Depression, exports United States and Germany had reached were only 5 percent of GDP in 1926, that lethal precipice in the late 1920s, as compared with 12 percent today. and they brought a crushing collapse. (Trade was a much smaller factor in Hitler’s party gained most of its ground France and Germany then as well.) As after the German people were suffering mentioned, US gross exports were only in the economic debris of that country’s $5 billion annually in a $100 billion often ignored but all-too-real, debt-­ economy, and the year-to-year change induced real estate collapse. in exports prior to the Depression was I call it the paradox of debt. Private never more than $0.65 billion. Compare debt is good and necessary but can that with the plunge in GDP of $45 bring calamity when it grows too fast. billion in three years. Trade was simply This was a hard lesson that had to be not large enough to be a major cause of relearned in 2008. the Depression. The architects of Bretton Woods I ignored private debt and focused instead on currencies, trade, and gold. But THE PARADOX OF DEBT they were lucky. Though they hadn’t Back to private debt. How could private noticed, world circumstances had done debt be so good for one era, namely the the deleveraging work without them, Bretton Woods I era, and so bad for bringing the low levels of private debt another, namely the rampant lending from which to launch this new era. of the late 1920s? Because, importantly, Low private debt was a hidden, but private debt is a very sharp two-edged invaluable, boost to Bretton Woods.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 191 AN INTERCONNECTED WORLD Bolstering Financial Resilience through Insurance

WALTER B. KIELHOLZ Chairman of the Board of Directors, Swiss Re Ltd.

Reading the news makes it seem as if come with the evolution of the private we live in the riskiest of times. Rarely life and nonlife insurance markets. For does a day go by without another crisis example, we take it for granted that our dominating the headlines—cyclones in homeowner’s policy will reimburse our Mozambique, dam failures in Brazil, losses if our house burns down or that extremism in New Zealand. The cost our health care coverage will finance of these events is staggering. Economic our visit to the emergency room when losses from disasters have increased for needed. Only a few generations ago, our decades and reached more than US$150 ancestors would never have dreamed of billion in 2018. Tragically, some 10,000 such protection. people lost their lives due to these same However, as we look to the next disasters.1 The scale, complexity, and phase of economic progress, we must interconnectedness of risks have grown. confront a stark reality. We cannot rely Yet we know that humans are better on more capital alone to reduce risk off and better protected than at any time in an increasingly complex and inter- in history, living wealthier, healthier, connected world. Our world may be and safer lives. Part of this revolution wealthier and safer than in the past, but is the trust and confidence that have those benefits have been concentrated

1 Lucia Bevere, Anna Ehrler, Vineet Kumar, Roman Lechner, Alexandra Schelbert, Marla Schwartz, and Rajeev Sharan, “Natural Catastrophes and Man-Made Disasters in 2018: ‘Secondary’ Perils on the Frontline” (Swiss Re Sigma Report No. 2/2019, Swiss Re Institute, Zurich, Switzerland, 2019).

192 | REVITALIZING THE SPIRIT OF BRETTON WOODS in a limited segment of the population. to take calculated risks and, in turn, to We must rethink the way we view the pursue economic enterprise. public-private compact established by The Bretton Woods institutions were Bretton Woods. Growing our global created in the post–World War II era economy will no longer be enough. We with goals for the macroeconomy very must also strive for equitable and inclu- similar to those of the insurance industry: sive growth so that people in emerging reconstruction, risk diversification, and markets can also share in the benefits of economic stability. By creating a mutual economic prosperity. Though we may lending system, coupled with analysis, be a ship with many decks, we share capacity building, and access to markets, a common destination. We are now the World Bank and the International compelled to adjust our course as we Monetary Fund (IMF) have served as part face more turbulent seas. of the economic and political framework of assurance to emerging-market econ- omies. Given such closely intertwined TWIN PILLARS OF objectives, it is not surprising that over FINANCIAL SYSTEM time, the Bretton Woods institutions STABILITY and the (re)insurance sector came to In the 14th century, shippers in the appreciate and acknowledge their com- northern Italian port city of plementary roles. invented insurance by separating mutual During what the UN declared the risk sharing from earlier bilateral credit “Decade of Development” of the 1960s, contracts. Rather than use high interest the UN Conference on Trade and Dev­ rates to hedge against misfortune, these elopment identified a sound insurance new contracts allowed for more accurate and reinsurance market as an “essential pricing of risk and created incentives to characteristic of economic growth” in manage risks prudently. Since then, the developing countries.2 The insurance techniques to protect human enterprise industry, in turn, looked to the World from misfortune have become increas- Bank to provide the regulatory frame- ingly sophisticated, gradually making works that would enable the flow of ever more risks insurable. capital and, later through the International Today the insurance industry, which Centre for Settlement of Investment includes reinsurance as its backstop, is Disputes, the legal processes to uphold a pillar of a stable financial system. It the rule of law. provides a financial safety net to protect In the 1980s and 1990s, as inter­ assets and livelihoods, allowing people national organizations sought alternatives to debt-creating loans, the World Bank

2 See UNCTAD Recommendation A.IV.23: “Proceedings of the United Nations Conference on Trade and Development” (E/CONF.46/141, Vol. 1, United Nations, New York, NY, 1964).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 193 started to actively promote the liberal­ tools will need to evolve to prepare us ization of international reinsurance for the next 75 years. services to help developing countries place their risk in globally diversified risk pools. As a by-product, consumers PAST PERFORMANCE in emerging-market economies began IS NO GUARANTEE OF to see more insurance product inno- FUTURE RESULTS vation, such as annuities and business In 1906, days after a massive earthquake interruption policies. The World Bank (estimated at a moment magnitude of and IMF have also been key advocates 7.9) and subsequent fire devastated the for the role of the (re)insurance sector city of San Francisco, the first funds from as a long-term investor in local capital insurers arrived in the city, providing markets and infrastructure financing, weary residents strong signs that all was bringing further depth and stability to not lost. Most insurance contracts at the domestic debt markets. time excluded fire following an earth- Today, the World Bank and IMF are quake. Regardless, (re)insurers paid out, increasingly focused on the impact of recognizing that without their contri- new risks on emerging economies, both bution even a city as dynamic as San natural ones such as climate risks and Francisco would face a slow recovery. man-made ones such as cyber risks. The In 2018, the global private insurance recognition of the detrimental impact sector paid out US$4.6 trillion in total of such exogenous risks on economic life, health, property, and other financial and human development, fiscal stabil- losses, according to Swiss Re Institute ity, and the broader social and political estimates. This amount, more than 5 environment is forcing these institu- percent of global GDP, reflects the tions to provide new responses to their importance of the industry in support- constituents. ing financial resilience globally. In summary, over the last 80 years, Yet the lack of insurance is a mount- the Bretton Woods institutions have ing challenge to economic development acted as a stabilizer for the governments around the world, particularly in the of emerging economies. In parallel, fast-growing emerging markets, where insurers and reinsurers have provided growth has outpaced the take-up rate a similar service to the private sectors of insurance. The result is the growing of those countries by pricing risk, exposure of uninsured capital stock and encouraging enterprise, and speeding human lives. up recovery following catastrophes. Yet, The differences between actual losses as we reflect on three-quarters of a cen- and insured losses are called “protec- tury of the Bretton Woods institutions, tion gaps,” and they are staggering in we must acknowledge that our tested terms of both economic cost and human

194 | REVITALIZING THE SPIRIT OF BRETTON WOODS suffering. The global protection gap to fiscal costs of contingent liabilities, life and property amounts to US$500 the IMF noted that while contingent billion in annual expected losses.3 Over liability risk arises primarily from the the past 10 years, more than 70 percent financial sector in advanced economies, of losses from natural catastrophes went for emerging markets, natural disasters uninsured. In emerging markets, this stand out as one of the leading historical ratio rises to more than 90 percent.4 contributors to contingent liabilities on The figures are even more alarming government balance sheets.7 when expressed in human terms. Over 225 million people are impacted by earthquakes, droughts, floods, storms, and CLOSING PROTECTION other natural catastrophes every year.5 GAPS ENHANCES OUR Between 2008 and 2017, an estimated 2 FINANCIAL RESILIENCE billion people worldwide were affected One approach developed in recent years by natural hazards, the vast majority to face this financial resilience challenge of which were weather related. Floods head on is to tackle the protection gap and storms alone accounted for almost at the macro level. Governments are two-thirds of all incidents.6 Of partic- increasingly looking for ways to pre­ ular concern, the absence of adequate finance catastrophic events using financial risk prevention places a disproportion- risk management tools. These ex ante ate burden on the most vulnerable, financing solutions range from risk exacer­bating economic inequalities and retention and contingent credit lines to threatening years of development gains. innovative public-private transactions, Protection gaps expose societies to whereby risk is transferred to third parties massive financial, political, and social such as capital markets or (re)insurers. risks. In a 2016 working paper on the Beyond simply reducing budget volatility,

3 Fernando Casanova Aizpun, Caroline De Souza Rodrigues Cabral, Irina Fan, Astrid Frey, Jessie Guo, Thomas Holzheu, Finn Krueger, Roman Lechner, Mayank Raturi, Maurus Rischatsch, Patrick Saner, Daniel Staib, Kulli Tamm, and Clarence Wong, “Global Economic and Insurance Outlook 2020” (Swiss Re Sigma Report No. 5/2018, Swiss Re Institute, Zurich, Switzerland, 2018). 4 Bevere et al., “Natural Catastrophes and Man-Made Disasters in 2018.” 5 Debarati Guha-Sapir, Philippe Hoyois, Pasacline Wallemacq, and Regina Below, Annual Disaster Statistical Review 2016: The Numbers and Trends (Brussels: Centre for Research on the Epidemiology of Disasters, Université Catholique de Louvain, 2017), https://reliefweb.int/sites/reliefweb.int/ files/resources/adsr_2016.pdf. 6 David Fisher, Kirsten Hagon, Charlotte Lattimer, Sorcha O’Callaghan, Sophia Swithern, and Lisa Walmsley, World Disasters Report 2018: Leaving No One Behind (, Switzerland: International Federation of Red Cross and Red Crescent Societies, 2018), http://media.ifrc.org/ifrc/wp-content/ uploads/sites/5/2018/10/B-WDR-2018-EN-LR.pdf. 7 Elva Bova, Marta Ruiz-Arranz, Frederik Toscani, and H. Elif Ture, “The Fiscal Costs of Contingent Liabilities: A New Dataset” (IMF Working Paper 16/14, International Monetary Fund, Washington, DC, 2016).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 195 these proactive measures accelerate post- first regional sovereign risk pool so that disaster recovery and make a country the fiscal shocks of natural disasters could more attractive to investors. be borne by the broader shoulders of In its landmark 2015 report on the the reinsurance market. Similar schemes relationship between natural disasters have been piloted in other regions of and sovereign ratings, the rating agency the planet. In a recent case, four Latin S&P Global suggested that in the case American governments jointly placed of a major earthquake or hurricane, more than US$1 billion in seismic risk several emerging-market nations were in the capital markets with the World exposed to, on average, a one- to two- Bank’s assistance. notch sovereign downgrade, with more To consistently improve financial pronounced impacts for small island resilience, partnerships between the states and less-diversified economies.8 (re)insurance sector and the Bretton In contrast, governments that embrace Woods institutions will play a key role a preemptive risk management approach in contributing toward the long-term will succeed in attracting funds for capitalization, development, and sta- resilient infrastructure development, bility of the global economy. Most which will spur entrepreneurship and importantly, by collectively derisking innovation, enabling these governments the economy, we can better secure the to direct resources toward protecting livelihoods of the most vulnerable. the lives and livelihoods of their most vulnerable constituents. Helping people, businesses, and CLOSING PROTECTION indeed entire communities cope with GAPS ENHANCES OUR the financial consequences of catastro- SOCIAL FABRIC phes—human-caused and natural—has Closing the protection gap, however, is been the core function of the (re)insur- ultimately about more than just creating ance industry from its early beginnings. financial resilience. Resilience is created In their search for ways to improve the when benefits and protections are shared capitalization and financial resilience of in an equitable and inclusive manner. the emerging markets, the Bretton Woods The World Bank Group and IMF institutions have discovered new forms were established in the post–World War of collaboration with the (re)insurance II era to channel financing to reconstruct sector. Consider the World Bank’s leading a devastated Europe, and they were later role in advising sovereign governments tasked with funding the development of on climate resilience. Under its guidance, newly independent states of the Global Caribbean nations formed the world’s South. In these situations, they were

8 Moritz Kraemer, Marko Mrsnik, Alexander Petrov, and Boris Glass, “Storm Alert: Natural Disasters Can Damage Sovereign Creditworthiness” (S&P Global Ratings, September 10, 2015).

196 | REVITALIZING THE SPIRIT OF BRETTON WOODS by far the most important providers of viable to achieve value for money for affordable capital. Today, their collective governments and service users.”9 means are dwarfed in volume by private Advancing these principles, inno- financing flows to emerging markets. vations are making risk awareness and However, in a world where crisis can management a more practical reality to be exported around the globe overnight emerging-market consumers. Digital through a contagious pathogen aboard an technology is helping streamline the airplane, where nonstate actors manage sales process and reducing distribution to suspend economic activity through and administrative costs. At the same a single act of terror, and where entire time, developments in data analytics regions are devastated by increasingly fre- are broadening the scope of what can quent storms, the role of the World Bank be insured. In short, managing risk and the IMF as global risk managers may is rapidly becoming more affordable, take on new significance. accessible, and relevant to all segments To counter today’s emerging-market of the population. risks, we require not just capital but also In 2015, the government of Kenya and crisis response, agile support mechanisms, the World Bank developed a satellite-based and tailored financing instruments. In this insurance system that provides livestock context, the (re)insurance tool kit can farmers rapid insurance payments under perhaps help strengthen the impact of the accelerating drought conditions. The true existing multilateral tools of policy-based value of the program, however, is in its lending—not just by providing more ability to make payments in time to save capital but by enhancing core principles livestock, in the transparency of its pay- of risk pricing, thereby creating incen- ment process, and in the forward-looking tives to improve behavior and promoting risk framework it provides to pastoralists. financial transparency. More important still, the insurance system In building out the environmental, represents an efficient and effective gov- social, and governance framework of ernment program that increases inclusion its newly created Global Infrastructure and opportunity for a vulnerable segment Facility, the World Bank has actively of the population. sought the views of the (re)insurance In the end, by applying the tech- sector. This collaboration is partly due niques used by insurers, such as risk to the Bank’s recognition that (re)insur- identification, quantification, preven- ers have a unique insight into whether tion, and mitigation, to topics as varied projects are “economically, technically, as infrastructure and agriculture, we socially, environmentally, and fiscally can make the provision of public cap- ital more efficient and public decision

9 Global Infrastructure Facility (brochure), https://www.globalinfrafacility.org/sites/gif/files/ GIFBrochure.pdf.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 197 making more transparent. Rebuilding by insurance, no farmer can plant crops, trust and confidence in our public no government can administer health institutions is precisely what moti- services, and no contractor can guarantee vated the drafters of the Bretton Woods construction of critical infrastructure. Agreement, even if they could not have As political winds rattle the postwar imagined the technology that would agreements that have led to the greatest bring these dreams to bear. economic progress humankind has ever seen, it may be useful to remember that while no insurance policy can take away CONCLUSION the pain and suffering of losing a loved Looking over the changing skyline of one, insurance can provide some security New York City, American industrialist in times of crisis. Henry Ford once remarked, “This has After many years of partnership, it only been made possible by the insurers. feels as if the Bretton Woods institutions They are the ones who really built this and the (re)insurance sector are entering a city. With no insurance, there would new phase in their long journey together. be no skyscrapers. No investor would In this sense, we can hope that our part- finance buildings that one cigarette butt nership will help our world continue to could burn to the ground.” navigate away from rocky shoals while Today, the role of insurance is as advocating for the essential characteristic critical for economic development, inno- of humanity—that we are indeed a ship vation, and social cohesion as it was for sailing across uncharted waters, but that investors in New York’s economic devel- in our time of need, we have the capac- opment at the turn of the 20th century. ity to come together across boundaries, Without the financial safety net, indepen- across political affiliations, and across dent evaluation, and mutuality provided generations to sail forward as one.

198 | REVITALIZING THE SPIRIT OF BRETTON WOODS THE GOVERNANCE OF THE INTERNATIONAL MONETARY SYSTEM

JOSÉ ANTONIO OCAMPO Board Member, Banco de la República; Professor, Columbia University; former Under-Secretary General for Economic and Social Affairs, United Nations; and former Minister of Finance of Colombia

The governance of the international A MULTILAYERED monetary system has been the sub- ARCHITECTURE FOR 1 ject of a heated debate for decades. THE GFSN WITH A The fundamental issue is the need to develop a multilayered global financial WELL-FUNDED IMF safety net (GFSN), with a well-funded AT THE CENTER International Monetary Fund (IMF) The major needed institutional reform at the center, working through a net- is a fully developed, dense, multi­layered work of regional financial institutions GFSN that relies more broadly on under swap arrangements. A second regional and interregional institutions’ set of major issues relates to the leg- payments agreements, reserve pools, and acy of control of the Bretton Woods emergency lending facilities, as well as institutions (BWIs) by the major devel- central bank swap arrangements—the oped countries and the tendency for latter the major mechanism of coopera- key decisions to be made by a group of tion among developed countries, now major countries outside the framework being actively promoted by China. of treaty-­based organizations. Finally, Indeed, in a heterogeneous international major governance reports have recom- community, the creation of networks of mended other internal reforms that have global, regional, and national institutions been only partly implemented. can provide a better system of governance

1 This paper draws from Ocampo’s recent book on the international monetary system, Resetting the International Monetary (Non)System (New York: Oxford University Press, 2017).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 199 than arrangements based on single, global institutions by member countries, espe- organizations. What this means is that the cially small and medium-sized ones. IMF of the future should be conceived of Given the incomplete nature of the as the apex of a network of regional and existing GFSN, these institutions can interregional monetary agreements. The also contribute toward filling the gaps of IMF has accepted the need to cooperate the existing architecture3 in many ways, actively via regional arrangements,2 and including promoting a stronger dialogue this principle is reflected in the memo- on macroeconomic and financial policies, randums of understanding it has signed and possibly conducting monitoring and with regional institutions in recent years. coordination of these policies. A system such as this would be closer Regional and subregional insti- in design to that of the multilateral devel- tutions could also provide automatic opment banks, whereby the World Bank credit facilities similar to the ones swap coexists with several regional develop- arrangements provide. In fact, one of ment banks and, in some parts of the the major drawbacks of the IMF credit world, with several subregional insti- facilities is the weakness of the Fund’s tutions and some interregional banks. contingency arrangements. In particu- In contrast to the network described lar, beyond the Flexible Credit Line and above, the considerable regional gaps that other contingency arrangements that characterize the present international have been created, a more ambitious monetary system indicate the need to reform is needed, one that would design actively promote the creation of regional a credit facility that operates in a way monetary arrangements. similar to central banks’ swap arrange- The best arguments in favor of ments; such a mechanism would also regional and subregional institutions help reduce the stigma associated with are of a political economy character: borrowing from the IMF.4 An alterna- the strong sense of ownership of these tive would be for regional arrangements

2 International Monetary Fund, “Collaboration between Regional Financial Arrangements and the IMF” (IMF Policy Paper, International Monetary Fund, Washington, DC, July 2017). 3 In this regard, see G20 Eminent Persons Group on Global Financial Governance, Making the Global Financial System Work for All (n.p.: G20 EPG, 2018); Ilene Grabel, When Things Don’t Fall Apart: Global Financial Governance and Development Finance in an Age of Productive Incoherence (Cambridge, MA: MIT Press, 2017), chap. 6; Julie McKay, Ulrich Volz, and Regine Wölfinger, “Regional Financing Arrangements and the Stability of the International Monetary System,” Journal of Globalization and Development 2, no. 1 (2011): 5; José Antonio Ocampo, Resetting the International Monetary (Non)System, chap. 6. 4 See the IMF’s proposal to create a new facility, the Short-Term Liquidity Swap (which was debated in December 2017 but not approved), as well as the views of the G20 Eminent Persons Group on the matter: International Monetary Fund, “Adequacy of the Global Financial Safety Net—Considerations for Fund Toolkit Reform” (IMF Policy Paper, International Monetary Fund, Washington, DC, December 2017); G20 Eminent Persons Group, Making the Global Financial System Work for All.

200 | REVITALIZING THE SPIRIT OF BRETTON WOODS to create those swap facilities,5 with the could then be used by the institution to IMF operating as a sort of second-tier lend to countries in need.6 institution, through a rediscount facility Careful consideration should be for those arrangements. given, however, to the links between The GFSN should, of course, have an the IMF and the various regional and adequately resourced IMF at its center, interregional institutions. In the case which requires regular increases in IMF of swap arrangements, for instance, it quotas in accordance with the growth of is essential that they have broader cov- the world economy and the risks it faces. erage than at present and that they be If past practices continue, quota increases designed as multilateral mechanisms, should be complemented by credit lines thus avoiding their control by major from member countries to the IMF, and countries. In relation to regional agree- eventually by allowing the Fund to access ments, after the 2008/09 North Atlantic international capital markets. However, financial crisis,7 Europeans chose rescue a more ambitious and desirable reform packages that mixed resources from would be to make a more active issue the IMF and the European Financial of Special Drawing Rights (SDRs), not Stability Facility (the predecessor of only through regular issuances of this the European Stability Mechanism). reserve asset and exceptional ones during In contrast, the rule requiring an IMF crises—as was done in 2009—but in fact program to access Chiang Mai swap by making all IMF lending with SDRs lines beyond a certain limit (now 30 issued by the Fund, thus making global percent) has prevented use of this mech- monetary creation similar to the way anism because participant countries have central banks create domestic money. This been unwilling to agree on any such would require eliminating the division program due to the continued IMF between the General Resources and the stigma. Curiously, the Contingency SDR accounts and allowing countries’ Reserve Arrangement of the BRICS unused SDRs to finance IMF programs. countries (Brazil, Russia, India, China, A simple way to do so would be to treat and South Africa) adopted a similar the SDRs that countries do not use as rule. On the other hand, the use of deposits in (or lending to) the IMF, which Latin American Reserve Fund (FLAR,

5 The swap arrangements among developed countries’ central banks and the Contingency Reserve Arrangement of the BRICS countries (Brazil, Russia, India, China, and South Africa) could also be expanded to new members. 6 See a full discussion of this issue in Ocampo, Resetting the International Monetary (Non)System, chaps. 2 and 7, but the basic ideas go back to those of IMF economist Jacques J. Polak, “Thoughts on an International Monetary Fund Based Fully on SDR” (Pamphlet Series No. 28, International Monetary Fund, Washington, DC, 1979). 7 I refer to it in this way rather than as the “global financial crisis” because, although its effects were global, it was concentrated in the United States and Western Europe.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 201 according to its Spanish acronym) facil- and its traditional efficiency in terms of ities has tradi­tionally been delinked crisis response.9 from IMF programs—although in In 2006 and 2008, the IMF adopted several cases the programs of the two modest agreements to reform quotas institutions have complemented each and votes on the IMF board, which other. The links between the IMF and entailed a redistribution of the quotas regional arrangements must be subject, and a tripling of the basic votes—the therefore, to flexible designs—based on first such increase since the Fund’s a “variable geometry,” to use a term that inception. In 2010 it adopted a more has become common in relation to the ambitious reform, including the dou- world trading system. bling of quotas, a revision in the way quotas and voting power are allocated, the reduction of European representa- THE VOICE AND tion on the IMF board by two chairs, PARTICIPATION and the decision that all of its mem- OF DEVELOPING bers should be elected. The capacity of COUNTRIES AND THE the US Congress to block this reform ELECTION OF THE for five years was, nonetheless, a major HEADS OF THE BWIS problem, and should be a concern of the international community in the future. In relation to the second issue—the Relative to the pre-2006 situation, legacy of control of the BWIs by the the increase in the quotas (3.9 per- major developed countries—the stron- centage points) and voting power (5.3 gest statement was made by the United points) of developing and transitional Nations Conference on Financing for economies was less than these countries Development in Monterrey, Mexico, expected. Furthermore, some of them in 2002, underscoring “the need to experienced large gains that were, by broaden and strengthen the participation implication, partly at the expense of of developing countries and countries other developing countries. The protec- with economies in transition in inter- tion of the voting power of the poorer national economic decision-making and and smaller developing countries thus 8 norm-setting.” In terms of governance, relied on the increase in the number of the issue of voice continues to be a major basic votes that had been agreed upon gap in the IMF, in contrast to advances in 2008.10 in accountability over the past decade

8 United Nations, “Monterrey Consensus on Financing for Development” (adopted at International Conference on Financing for Development, Monterrey, Mexico, March 2002), para. 62. 9 Independent Evaluation Office of the International Monetary Fund, “Governance of the IMF: Evaluation Update” (Independent Evaluation Office, IMF, Washington, DC, 2018). 10 See Ocampo, Resetting the International Monetary (Non)System, chap. 6.

202 | REVITALIZING THE SPIRIT OF BRETTON WOODS The reforms related to the “voice and the relative openness of economies. The representation” of developing countries in growing trade in intermediate goods the IMF should, therefore, continue. Such would favor the use of export value reforms should also be pursued in rela- added rather than gross trade, and indi- tion to financial regulatory bodies—the cators of financial openness tend to favor Financial Stability Board and the Basel a few international financial centers and Committee on Banking Supervision— even tax havens. Controversies also rage an issue that I do not discuss here. The about the possible inclusion of lending current basis for the discussion of IMF by countries to the IMF, but such a step quotas is a formula based on a weighted would further favor developed coun- average of GDP (weight of 50 percent, tries. Furthermore, most gains under with a blend of GDPs estimated at market the current formula will go again to a exchange rates and purchasing power few emerging economies, and notably to parities), indicators of openness and eco- China, whereas many other developing nomic variability (30 percent and 15 countries, including low-income coun- percent, respectively), and international tries, will actually lose. This imbalance reserves (5 percent).11 This formula is underscores the importance of increas- still far from capturing the relative eco- ing the share of basic votes—still only nomic weight of countries today, leading 5.5 percent of total voting power—in in particular to overrepresentation of the next and subsequent reviews of Western Europe and underrepresentation quotas and voting power. of emerging and developing countries, A crucial additional issue is guaran- particularly those in Asia. teeing a transparent and open process The major controversies relate to the for selecting the heads of the BWIs, use of economic variability and open- based on the merit of the candidates ness,12 measures that favor the smaller and regardless of nationality. Although European economies. There seems to be in 2009 the G20 formally endorsed a broad agreement that the measure of the principle that the heads of all economic variability should be dropped. inter­national institutions “should be There is also a strong view that the gross appointed through an open, transparent measures of trade and finance that are and merit-based process,”13 the election used in the formula tend to overestimate of the IMF managing director in 2011

11 The formula also includes a “compression factor” that reduces the dispersion in calculated quota shares. 12 For more on these controversies, see International Monetary Fund, “Quota Formula: Data Update and Further Considerations” (IMF Policy Paper, International Monetary Fund, Washington, DC, August 2014). Openness is defined as the annual average of current receipts and payments (goods, services, income, and transfers) during the previous 5 years, and variability that of current receipts and net capital flows over a 13-year period. 13 G20, “Leaders’ Statement, the Pittsburgh Summit” (adopted at G20 Summit, Pittsburgh, PA, September 24–25, 2009), para. 21.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 203 and the World Bank president in 2012, defined, implying exclusion of some their later reelections, and the election large countries, lack of representation of the World Bank president in 2019 of small and medium-sized countries, continued to be effectively closed pro- and (once again) over­representation cesses. So there is a clear need to launch of Western Europe. Furthermore, this really open processes that break with system erodes the governance struc- the tradition of having the IMF headed tures of the BWIs, which are based on by a Western European and the World a system of constituencies, with most Bank by a US citizen. executive directors representing groups of countries. The major problem in this regard is that the IMF board has become THE NATURE OF THE merely a mechanism to rubber-stamp MAJOR FORUM FOR decisions already made by the G20, ECONOMIC DECISION without taking into account the views MAKING of less powerful IMF members. An important related issue is which gov- Therefore, although “Gs,” includ- ernance body makes the major policy ing now notably the G20, can play an decisions. During the North Atlantic important role in placing new issues on financial crisis, a major step in this the agenda and steering changes that regard was the G20’s self-designation as generate a consensus among the most “the premier forum for our international influential countries, no structure of economic co-operation.”14 Although governance can generate legitimacy as the G20 is, of course, a step forward long as its decision-­making processes compared with the G7 in terms of rep- are not inclusive. resentation of developing countries, For all of these reasons, the G20 ad hoc, self-appointed bodies cannot should be transformed into a more rep- replace representative institutions in a resentative mechanism of international well-structured international gover- economic cooperation. In this regard, nance architecture. the best proposal is that of the UN The basic issue is, of course, the Commission of Experts on Reforms tension between the legitimacy asso- of the International Monetary and ciated with representativeness and the Financial System, to create a Global 15 true power structure. Problems are Economic Coordination Council. also associated with the ad hoc way According to the proposal, this coun- in which the G20 membership was cil would be set in the framework of

14 G20, “Leaders’ Statement, the Pittsburgh Summit,” Preamble, para. 19. 15 United Nations, “Report of the Commission of Experts Convened by the President of the UN General Assembly on Reforms of the International Monetary and Financial System” (United Nations, New York, September 2009), chap. 4.

204 | REVITALIZING THE SPIRIT OF BRETTON WOODS the UN system, to which the BWIs clear redefinition of the relations between belong, and formed on the basis of this council, the board, and manage- constitu­encies elected through weighted ment, including reorienting the board votes.16 The proposals by the Palais toward formulating strategy and mon- Royal Initiative17 to create a top global itoring policy implementation, rather monetary policy-making body have than performing the day-to-day execu- elements in common with those of the tive functions it now exercises; and (3) UN Commission of Experts, but they reducing the threshold of votes needed center on designing an apex organi- to approve important IMF reforms from zation for the international monetary the current 85 percent to, for example, system, and thus one with less scope 70–75 percent, to keep individual coun- than the proposed Global Economic tries—that is, the United States—from Coordination Council. having veto power. All of these reforms should be adopted. One issue underscored by the Com­ OTHER GOVERNANCE mittee on IMF Governance Reform REFORMS relates to broadening the Fund’s surveil- Other issues of governance have yet to be lance to cover macroeconomic policies, addressed, such as those proposed by the prudential issues, and financial spillovers.19 2009 Committee on IMF Governance This is an area in which there have been Reform and by the IMF’s Independent significant advances since the North Evaluation Office,18 including (1) the Atlantic crisis, through such means as creation of a Council of Ministers, new instruments of multilateral sur- as envisioned by the IMF Articles of veillance, stronger and more candid Agreement, with effective powers to assessments of systemically important adopt the most important policy deci- economies, and a renewed recognition sions, thus replacing the International of the positive role that macroprudential Monetary and Financial Committee; (2) a policies affecting cross-border capital

16 So, although designed to mirror the framework of the UN system, its voting would be structured along the lines of the BWIs, correcting, of course, for the problems of representation that these organizations face today. 17 Palais Royal Initiative, “Reform of the International Monetary System: A Cooperative Approach for the 21st Century,” in Reform of the International Monetary System: The Palais Royal Initiative, edited by Jack T. Boorman and André Icard (New Delhi: Sage Publications, 2011), 7–26. 18 Committee on IMF Governance Reform, “Final Report” (International Monetary Fund, Washington, DC, March 2009); Independent Evaluation Office of the International Monetary Fund, “Governance of the IMF: Evaluation Update”; Independent Evaluation Office of the International Monetary Fund, “Governance of the IMF: An Evaluation” (International Monetary Fund, Washington, DC, 2008); see also the more detailed studies for this report in Leonardo Martinez-Diaz, “Executive Boards in International Organizations,” in Studies of IMF Governance: A Compendium, edited by Ruben Lamdany and Leonardo Martinez-Diaz (Washington, DC: International Monetary Fund, 2009), 82–126. 19 Committee on IMF Governance Reform, “Final Report.”

REVITALIZING THE SPIRIT OF BRETTON WOODS | 205 flows can play in ensuring financial sta- to do so in the early 21st century. The bility. This trend should continue. lack of a sovereign debt restructuring A major additional issue is the rep- mechanism is indeed one of the major resentation of small and medium-sized­ failures of the multilateral system, and countries, including how well the constit- the location of such a system in the IMF uency system works. The major problem could have the advantage of generating in this regard is that directors from greater confidence in the mechanism constituencies characterized by strong among developed countries. But if this imbalances in voting power tend to step is taken, there should be guarantees consult other members of their constitu­ that the mechanism will operate much encies rather infrequently, whereas, in as World Trade Organization dispute contrast, constituencies with a better settlement does, with total independence power balance among their members from the governors, the IMF board, and function better. Beyond that, it is import- IMF staff who do not work in the dispute ant to adopt a special mechanism to settlement mechanism, and with fixed support small and medium-­sized coun- deadlines for voluntary negotiations, tries. Such a mechanism could include mediation, and eventual arbitration. double-majority­ voting for certain Finally, it should be said that one purposes—such as credit lines for low-­ of the most important advances of income countries and even the election the IMF has been the creation of the of the IMF managing director. It could Independent Evaluation Office, perhaps also include a special instrument to make the best institution of its kind in the these countries’ voices heard, notably one multilateral system. This office should that would allow weak IMF members continue to be strongly supported. to express what they perceive as unfair Advances have also been made in the treatment by Fund staff in the design of area of transparency, through access programs and Article IV consultations. to official IMF documents as well as An additional issue is whether the publication of staff views that may in IMF should expand its mandate, in some ways express differences from or particular to include sovereign debt caveats with the official positions. This restructuring, following the failed attempt should also continue.

206 | REVITALIZING THE SPIRIT OF BRETTON WOODS There must be a general realization that world prosperity, like world peace, is indivisible. Nations must act together to restore multilateral international trade, and to provide orderly procedure for the maintenance of balanced economic growth.

—Excerpt from a proposal for an International Stabilization Fund drafted at the 1944 Bretton Woods Conference

REVITALIZING THE SPIRIT OF BRETTON WOODS | 207 In 1983, former Treasury officials Henry Fowler and Charls Walker saw the need for an organized effort to ensure that leading citizens spoke out about the importance of the IFIs. Henry Owen, James Orr, and others took up the idea and created the Bretton Woods Committee.

World Bank President Barber Conable addresses the Bretton Woods Committee at the Annual Meeting soon after taking office in 1986.

Committee Co-chair Paul Volcker (left) confers with fellow founding member David Rockefeller on emerging-market debt issues in 1989.

In 1988, Treasury Representative Secretary James A. Richard Cheney tells Baker III describes seminar participants his plans to help that an increase in developing countries World Bank funding is grow out of their “doable in 1988, but debt as “the only it’s not going to be viable long-term easy.” option.”

208 | REVITALIZING THE SPIRIT OF BRETTON WOODS IMF Managing Director Michel Camdessus (left), discusses the need to increase the Fund’s available capital with Senator Charles Percy (right) and Margaret S. Wilson at the 1988 Annual Meeting.

Senators Paul Sarbanes (left) and Charles Mathias (center) speak with Washington Post columnist Colbert King between sessions at the 1989 Annual Meeting.

Jacob Frenkel (left), Alan Greenspan (center), and Michael Boskin discuss the pace of free market reforms at the 1991 Annual Meeting.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 209 Stanley Fischer, First Deputy Manager of the IMF, chats with attendees at the reception of the 1998 Annual Meeting.

Michel Camdessus (left) and Bretton Woods Committee International Council Chair Richard Debs chat at the 1998 Annual Meeting before Camdessus takes the stage to caution against “large budget deficits and unproductive spending.”

US Secretary of State Madeleine Albright outlines the Clinton Administration’s second- term priorities and hopes for increased support of the IFIs by the United States.

210 | REVITALIZING THE SPIRIT OF BRETTON WOODS US Treasury Secretary Robert Rubin (right) and Bretton Woods Committee Co-chair Henry Owen discuss the need for stronger IFIs and more open markets at the 1999 Annual Meeting.

Toyoo Gyohten (second from right) and other attendees stop for a photo during a 1999 luncheon.

Anne Krueger, First Deputy Managing Director of the IMF, addressing the Bretton Woods Committee in 2002.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 211 Bretton Woods Committee Co-chair (right) awards the Global Leadership Award to longtime Committee Chair Paul Volcker in 2004.

US Secretary of State calls for greater multilateral engagement in the wake of the launch of the in 2003.

From left to right, Bretton Woods Committee leaders and members gathered at Annual Meeting 2003: Richard Frank, Richard Debs, Bill Frenzel, Bill Rhodes, Jerry Corrigan, Tim Geithner, and James Orr.

212 | REVITALIZING THE SPIRIT OF BRETTON WOODS Bretton Woods Committee Advisory Council member Jean-Claude Trichet addresses the Committee at the inaugural International Council meeting in 2005.

Randal Quarles (right) greets Committee Co-chair Bill Frenzel (left) at a Committee reception in 2005.

Bank of Mexico Governor Guillermo Ortiz Martínez (center) speaks at a Committee seminar on strengthening global financial system resilience in the aftermath of the global financial crisis in 2009.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 213 At the 2010 International Council Meeting, bank regulators Mark Carney (left), Daniel Tarullo (center), and Jaime Caruana discuss the importance of the Basel III standards.

Bretton Woods Committee Executive Director Randy Rodgers (left) chats with Co-chair Henry Owen after the 2010 Annual Meeting.

Bill Dudley of the Federal Reserve describes how the United States is adjusting in the first year of the Dodd-Frank Act at the 2011 International Council meeting.

214 | REVITALIZING THE SPIRIT OF BRETTON WOODS Christine Lagarde, Managing Director of the IMF, reflects on the Fund’s response to the eurozone crisis.

Masaaki Shirakawa, Governor of the Bank of Japan (left); Choongsoo Kim, Governor of the Bank of Korea (center); and Kazuyuki Sugimoto, Chairman of the Mizuho Research Institute, at the 2012 International Council Meeting in Tokyo.

Jim Yong Kim (left), Christine Lagarde (center), and Paul Volcker at the 2014 Annual Meeting.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 215 Senator John McCain discusses the importance of bolstering US leadership in the IFIs at the 2014 Annual Meeting.

George Soros addresses attendees in the World Bank’s Wolfensohn Atrium at the 2015 Annual Meeting.

US Treasury Secretary Jacob Lew (right) gives his first public remarks in the aftermath of the Brexit vote to Committee guests at the 2016 Annual Meeting.

216 | REVITALIZING THE SPIRIT OF BRETTON WOODS Bretton Woods Committee Advisory Council member Mohamed El-Erian (left) and Barclays Chair John McFarlane discuss how innovation and technology are disrupting the financial services sector at the 2017 International Council Meeting.

From left to right: John B. Taylor, Tharman Shanmugaratnam, Vanessa Rubio Márquez, and Clare Woodman at the 2017 Annual Meeting.

Bill Rhodes (left) and Vanessa Rubio Márquez (center) look on as Gail Kelly explains the importance of corporate governance and culture in building trust in the financial sector.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 217 Bretton Woods@75 is launched at the 2018 International Council Meeting in Bali, Indonesia. From left to right: Thierry Déau, Thomas Bernes, Masood Ahmed, Christine Lagarde, Takatoshi Ito, and Ernesto Zedillo.

Bretton Woods Committee Co-chair Jim Kolbe (left) moderates a conversation at the 2019 Annual Meeting on WTO reform and the global trading system with Carla Hills (center) and James Bacchus.

From left to right: Larry Summers, Afsaneh Beschloss, Minouche Shafik, Nicholas Stern, and Sri Mulyani Indrawati participate in a 2019 panel discussion moderated by Josh Zumbrun on the future of the World Bank under its new president, David Malpass.

218 | REVITALIZING THE SPIRIT OF BRETTON WOODS José Antonio Ocampo (left), Andrew Sheng (second from right), and Ceyla Pazarbasioglu (right) listen as former President of Liberia Ellen Johnson Sirleaf discusses the importance of participatory development programs at the 2019 Annual Meeting.

From left to right: Gillian Tett, Mark Carney, Axel Weber, and Clare Woodman discuss impacts of Brexit on the financial services sector.

US Treasury Secretary Steven Mnuchin (left) and Wall Street Journal commentator Greg Ip discuss the Trump Administration’s priorities for the IFIs for 2019 and beyond.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 219 US delegates at the Bretton Woods Conference. From left to right, standing: Assistant Secretary of the Treasury Harry Dexter White, Fred M. Vinson, Dean Acheson, Edward E. Brown, Marriner S. Eccles, and Michigan Congressman Jesse P. Wolcott. From left to right, seated: New York Senator Robert F. Wagner, Kentucky Congressman Brent Spence, Secretary of the Treasury Henry Morgenthau Jr., and New Hampshire Senator Charles W. Tobey.

Source: Bettmann/Getty Images MULTILATERAL DEVELOPMENT BANKS IN THE NEW DEVELOPMENT LANDSCAPE

REVITALIZING THE SPIRIT OF BRETTON WOODS | 221 INSTITUTIONAL REFORM AT THE WORLD BANK GROUP Staying Relevant in the Modern Era

SRI MULYANI INDRAWATI Minister of Finance of Indonesia and former Managing Director and Chief Operating Officer, World Bank Group

Seventy-five years ago, the Bretton ever-changing global environment, both Woods institutions were founded with the World Bank Group and the IMF a pertinent mandate to rebuild a war- need to evolve in order to deal with the torn landscape and stabilize the financial new breed of development challenges system. It was a different world back of this generation. then, and the International Monetary In 2015, when all nations collec- Fund (IMF) and the International Bank tively came up with the Sustainable for Reconstruction and Development Development Goals (SDGs), the world (IBRD)—the precursor of the World was very optimistic that poverty can be Bank Group—had specific tasks that fit reduced to almost zero in our lifetime with the times. and that all people can partake in the This commemoration of the 75th fruits of growth and prosperity. But anniversary since the Bretton Woods given the current environment, such Conference provides an opportune optimism is going to be very challeng- time for soul-searching. Since the ing to sustain. establishment of the two institutions, Fast forward to 2019, a mere four billions have been lifted out of pov- years later, and the idea of the world erty, and economies have experienced speaking with one voice seems like rapid growth. These socioeconomic ancient history. Cooperation seems to achievements made to date need to be have been replaced by zero-sum uni- safeguarded. To remain relevant in this lateralism, and political leaders have

222 | REVITALIZING THE SPIRIT OF BRETTON WOODS become increasingly preoccupied with sector in driving development. Cross- myopic, procyclical, and populist pol- border issues and global public goods are icies at home. fast becoming the Bank Group’s bread After the relative peace and develop- and butter. ment progress following the end of the Flagship issues of our time, such as cold war and the fall of the Berlin Wall, tackling climate change, immigration, the world has again descended into pandemics, and global financial crises, the geopolitical tension we see today. are best addressed through a multilat- There is a worrying trend of nations eral framework. On top of it all, the resorting to unilateralism to advance Bank Group needs to also assist gov- their national interests, setting aside the ernments in addressing within-country rules-based multilateral system. challenges, such as macrostability, gov- The foundation of international ernance, human capital, stunting, and cooperation and multilateralism has infrastructure. Thus, the architecture of been weakened and eroded so fast. the organization needs to reflect these Can we save the spirit of cooperation changing needs. to achieve global peace and prosper- Ten years earlier, during the global ity? What will the roles of the Bretton financial crisis of 2008, policy makers Woods institutions be going forward from around the world—especially to stay relevant? among G20 economies—had the politi- cal courage to pursue collective measures that staved off a global depression. There RECALIBRATING THE is no reason why the response should WORLD BANK GROUP, be any different now, and the Bretton MAINTAINING THE SPIRIT Woods institutions should still play their OF MULTILATERALISM role as effective interlocutors to reverse As the world changes and development this worrying trend of unilateralism. The challenges evolve, the Bank Group world needs leading global institutions needs to continuously recalibrate to stay to help address current and future devel- relevant and take a leadership role in opment challenges. promoting development cooperation for For its part, as a responsible global its member countries. With globalization, player, Indonesia recently hosted the 2018 economies are more interconnected, and Annual Meetings of the International any volatilities in the global economy Monetary Fund and World Bank Group will have spillover effects nationally. The in Bali, where there was overwhelming world is changing rapidly in terms of agreement that the spirit of multilater- its interconnectedness, economic struc- alism must be kept alive. The speech of tures, development models, technological Indonesian president Joko Widodo at the advancement, and the role of the private opening reminded us of the danger of

REVITALIZING THE SPIRIT OF BRETTON WOODS | 223 unilateralism and the need to continue from emerging and developing coun- preserving global cooperation. The Game tries. He also mandated more gender of Thrones–styled geopolitics should be balance by recruiting and appointing avoided. more women in the managerial and higher-level positions. As part of the institution’s voice INSTITUTIONAL reform, voting powers were amended REFORMS, STAYING to increase the voice of developing RELEVANT IN THE countries and emerging economies. GLOBAL DEVELOPMENT This affects, to some extent, the LANDSCAPE decision-­making process in the Bank Group’s board with developing nations For one thing, the present economic and emerging economies collectively landscape is no longer what it was when owning 48 percent of the shares. Voice the Bank Group was established. The reform was also aimed at unlocking the G20 nations, which represent around financial potential and effectiveness of 80 percent of the global economy, also the Bank Group through an expansion consist of emerging economies whose in multilateral activity. shares and voices at the Bank Group are The Bank Group has strengthened not reflective of their current economic its emphasis on tackling poverty in the weight. The general composition of world’s poorest countries, especially in these shares tends to be skewed toward Africa, and in middle-income coun- high-income members. tries where many of the world’s poor In 2010, under Bob Zoellick’s pres- reside. Furthermore, with the capital idency, the Bank Group launched a increase, the Bank Group could do far comprehensive reform package to make more to support fragile states, highly the institution move faster, act nimbler, indebted countries, and upper-­middle- and be more accountable. In addition income nations. These reform efforts to voice reform and capital increase, the are designed to capitalize on the Bank bank sharpened its strategic focus where Group’s comparative advantage as a it can add most value, such as in targeting global institution. the poor and vulnerable and creating New and improved policies with opportunities for growth. The institu- regard to environmental and social tion also introduced operational reforms frameworks were also introduced to that included the bank’s new Policy on strengthen the Bank Group’s operational Access to Information, the Open Data safeguards. Furthermore, new lending initiative, and more rigorous governance instruments were devised in order to and anticorruption efforts. Zoellick also stay current with clients’ needs. This recruited a more diverse top manage- includes the development policy oper- ment in the institution: three managing ations, which take the form of loans, directors in charge of operations came

224 | REVITALIZING THE SPIRIT OF BRETTON WOODS grants, or credits that provide rapidly Second, it has committed itself to work disbursing financing to help a borrower as “One World Bank Group” in order to address its actual or anticipated devel- make the most of combined resources. opment financing requirements. The And third, it will maximize develop- innovative Program-for-Results, an ment impacts through developing and instrument that links disbursement of promoting partnerships. funds directly to achievement of specific As part of its institutional reform, program results, was also launched. the World Bank Group reorganized to In addition, the Bank Group took include the creation of Global Practices aim at boosting private-sector partici- (GPs) and Cross-Cutting Solution pation in development and adopted the Areas (CCSAs) to promote the flow cascade framework to maximize financ- of knowledge on various sectors and ing for development. The framework thematic areas across the institution’s recommends that reforms be tried first, sectors, regions, and Bank Group followed by subsidies, and then public member countries. The strategy inte- investments to fill the investment gap. grates and adds further momentum for Internally, the Bank Group also instituted improved extraction and curation of efficiency measures to reduce its opera- tacit knowledge within the institution. tional budget and human resources costs. Furthermore, the creation of GPs and Continuing these reforms, not long CCSAs was aimed to strengthen the after his appointment as Bank Group Bank Group’s ability to deliver inte- president, Jim Yong Kim in 2013 intro- grated and evidence-based solutions duced the institution’s long-term global to client countries based on tailoring strategy for financing international global knowledge to local contexts. development. The bank adopted two This reform created natural tensions overarching goals as aspirational suc- between the need, on the one hand, to cess metrics to be achieved by 2030: allocate staff to be closer to clients and ending extreme poverty by bringing focus on serving and understanding the down the percentage of people living client’s political-economic environment on less than US$1.25 a day to less than better and deeper and the need, on 3 percent globally and promoting shared the other, to be a global knowledge prosperity by fostering income growth institution focusing on collecting data among the bottom 40 percent of the and knowledge across countries and population in every country. have fast mobility of staff movement The Bank Group adopted a three- across regions or globally. A new coun- prong strategy to achieve these goals. try engagement model was introduced First, it will support countries in deliv- to increase selectivity of Bank Group ering customized solutions by focusing country programs in addressing the cli- on the most important challenges to ent’s development challenges by aligning alleviating poverty and vulnerability. the program across the Bank Group and

REVITALIZING THE SPIRIT OF BRETTON WOODS | 225 thus increasing efficiency and compara- stunting; at the same time the world tive advantage of Bank Group resources. could learn from Indonesia’s accom- As a knowledge bank, the institu- plishments with its family planning tion’s body of work and research makes program and also our robust macro- it the preeminent brain trust in devel- economic stability and fiscal discipline. opment economics. Operationally, in Regional and sectoral silos within the addition to financing, the bank has institutions were broken down in order provided the soft factor in terms of to enhance knowledge flow and col- transferring the knowledge and manage- laboration. Staff are encouraged and ment techniques critical to building any incentivized to work across organiza- country’s ability to access other sources tional boundaries. Indeed, moving from of external financing. a project mentality to a broader culture of delivering customized solutions for client countries requires a major change A CLIENT’S VIEW OF THE in mind-set. This way, the institution WORLD BANK GROUP can bring the right global knowledge I have a unique vantage point as both to the right clients, on the right issues, client and former senior management and at the right time. of the World Bank Group. My six-year My country, Indonesia, has engaged tenure at the institution, under the pres- with the World Bank Group since the idencies of Bob Zoellick and Jim Yong 1950s. Our socioeconomic history Kim, convinced me that the institution has seen us elevated from a poverty-­ needs to continuously reform in order stricken, low-income nation in the to enhance the development impact of 1960s to become the confident middle­ its work and continue to be relevant to -income nation we see today. Despite its member countries. As part of the the slight setback experienced during bank’s senior management back then, the Asian financial crisis, Indonesia I was fortunate to be involved in this has now become a thriving economy organizational transformation. with a rich development experience. As governor and chair of the Bank Throughout our development phases, Group’s Development Committee, I our policy makers have engaged with fully understood that some of these the inter­national community and, at the institutional reforms remain a work in same time, sought local wisdom to find progress. But as a client, I have seen how the best solutions to our development with these gradual improvements, we challenges. now have better access to global best In 1968, the World Bank financed practices and can extract their relevance the first project in Indonesia and has in addressing our own development played an important role in helping lay challenges. Indonesia could learn from the foundation of the nation’s economic Peru’s successful approach in fighting development in the early decades of

226 | REVITALIZING THE SPIRIT OF BRETTON WOODS cooperation. The bank supported the Emerging economies, like Indonesia, development of Indonesia’s agricultural, have an important role to play in the transportation, telecommunications, global arena supporting, building the power, education, health, and tourism capacity of, and providing lessons learned sectors. At later stages, the cooperation to countries earlier in their develop- expanded to sustainable development ment stage. As a responsible global player, issues, such as forestry, land man- Indonesia is keen to share its development agement, water and sanitation, and experience with the world, and institu- more. The World Bank also supported tions such as the Bank Group can be an Indonesia’s flagship community-driven effective interlocutor in that endeavor. development program. When our interests are aligned, there is With our own resources playing a no limit to where global cooperation more important role, the Bank Group’s can take us. Indonesia has the potential function as a development financier to be a development prototype that will will become less. But as an emerg- resonate well among the developing ing country with many development world. Indonesia’s development successes challenges—a young demographic pop- and lessons learned are worth extracting ulation, fast urbanization, a growing for the world. middle class, and a rapidly increasing demand for energy—we need to con- tinue improving our policy on human SPIRIT OF BRETTON capital development and build efficient WOODS: THE WORLD and clean infrastructure—including BANK GROUP AND THE energy and designing and supporting NEXT 75 YEARS urban development—in a more sustain- The World Bank Group should con- able and efficient way. We also need to tinue to serve the world as a global strengthen public–private partnerships public good and an effective repository and reform our economy to be more of development knowledge. One facet efficient and flexible, amidst rapid tech- of the institution that has received scru- nological changes and the Industrial tiny is the way in which it is governed. Revolution 4.0. Indonesia could and Although the Bank Group represents needs to learn from other countries 189 member countries, economically as well as from multilateral develop- powerful nations have greater influ- ment institutions, including on how ence within the governance structure, to manage the transition from middle-­ including in the selection of the bank’s income to high-income status and avoid leadership, despite the fact that the main the middle-income trap. These areas are borrowers are developing countries. where the Bank Group could offer more Going forward, this requires major and better services to countries like us, soul-searching. beyond financial support.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 227 In the modern architecture of global Hamburg principles for MDB financing finance, the World Bank Group needs that were translated in the Bank Group’s to clearly define its niche due to the cascade approach form a good starting increasingly global nature of private cap- point. MDBs now need to improve ital flows and the ascendance of large their instruments and platforms for emerging economies. The establishment risk sharing and for mobilizing private by the BRICS countries of the New investment and finance. Extra effort is Development Bank and the China-led necessary in order to bring the Billions Asian Infrastructure Investment Bank to Trillions agenda to fruition. has presented developing countries with The World Bank Group’s real strength alternative financial sources. The Bank comes through leveraging its lending Group continues to be the leading devel- with ideas. Despite the capital increase, opment institution with its comparative the Bank’s resources still pale in com- advantages over other institutions, such parison to the magnitude of funding as its global presence, knowledge repos- needed by its clients. Thus, synergies itory of best practices, financial acumen, with the private sector and other multi- leadership in global public goods, and role lateral institutions will be key. I believe as a development catalyst globally. But the talents within the Bank Group are the institution cannot afford to rest on ready to embrace a development solutions its laurels; it needs to constantly reform culture based on decades of experience and evolve with the times to continue and deliver evidence-based knowledge to remain relevant. of what actually works in economic More broadly, to unleash the full development. potential of the multilateral development To stay relevant in the next 75 years bank (MDB) system, greater coherence and remain the leading development and political commitment across share- institution, the Bank Group’s future value holders will be required. The World may be in providing advisory assistance Bank Group, along with other MDBs, based on its long experience of past is uniquely placed to play a central role successes and failures. Emerging econ- in realizing the ambitions of the global omies, such as Indonesia, have acquired development agenda. MDBs can support their own development wisdom, and policy and institutional reforms, build institutions like the Bank Group have the institutional capacity, and enhance the global radar to effectively use that tacit quality of projects and programs, as well knowledge where it is needed the most. as scale up for transformative change. At the same time, the Bank Group MDBs individually and collectively needs to have an effective antenna in need to become far more effective in addressing the new breed of devel- improving their catalytic role and in opment challenges. This includes unlocking private financing. The G20 addressing impacts of technological

228 | REVITALIZING THE SPIRIT OF BRETTON WOODS disruptions, making human capital that transformation needs to lead to new investments ready for the Industrial pathways to prosperity. Revolution 4.0, tackling the climate When the global population reaches change challenge, and ensuring fair 10 billion, the issues of water, food, and taxation in the new digital economy. energy security will be even more chal- The World Bank Group needs to lenging. In addition, global governance be cognizant of global trend lines to of the future will be very different than stay relevant. Geopolitical dynamics what we see today, especially with the constitute one important element; we increased roles of nonstate actors and hope leaders of tomorrow will believe in the private sector. In short, these are and be committed to working together just glimpses of future trends; the world to fight poverty and boost prosperity. will be getting more complex, and the Global demographic trends, such as Bank Group needs to be equipped to aging populations in developed econ- deal with these future challenges. These omies and demographic dividends in global issues require global cooperation, developing nations, will be important to and the spirit of multilateralism must watch. Furthermore, digital technology be kept alive. will further transform the world, and

REVITALIZING THE SPIRIT OF BRETTON WOODS | 229 THE SPIRIT OF BRETTON WOODS, THE WORLD BANK AND THE NEXT 75 YEARS From Where Within the Development Sphere Will Leadership on Bretton Woods Values Come?

AFSANEH M. BESCHLOSS Founder and Chief Executive Officer, RockCreek Group, and former Treasurer and Chief Investment Officer, World Bank Group

MINA MASHAYEKHI Senior Advisor, RockCreek Group, and former Head of Trade Negotiations and Commercial Diplomacy Branch, UNCTAD

The values of Bretton Woods were The blueprints for the International forged in the tragedy of World War II. Bank for Reconstruction and Dev­ Humanity witnessed carnage and elopment (the core of what would destruction on an unprecedented scale, become the World Bank Group) and and the leaders of the Allied nations the International Monetary Fund (IMF) were determined to never let such an were derived from several convictions. atrocity happen again.

230 | REVITALIZING THE SPIRIT OF BRETTON WOODS The first was that extreme economic of the new order. As White argued, “there instability had been the tinderbox of is nothing that will serve to drive these conflict. It had given rise to the dis­ countries into some kind of ‘ism’—com- location, dispossession, and grievances munism or something else—faster than that led to popular resentment and a having inadequate capital.” willingness to consider violence and The result of their efforts, and those war as solutions. of countless others at Bretton Woods 75 The second was a recognition of the years ago, became the World Bank and shrinking nature of the postwar world. the IMF, two institutions that quickly Technological revolutions in disparate became cornerstones of the post–World sectors—transportation, communica- War II era. tions, energy, and armaments, among Within years, both had established a others—had converged to make the level of proficiency that had simply not world a smaller place. The economic existed in any such institutions before fates of nations were more deeply inter- the war. Perhaps the most vivid demon- twined than ever before. stration of their mastery of development The third conviction was that the and finance was the World Bank’s financ- good intentions and preparedness of ing in the late 1950s of the renowned individual nations could no longer be Shinkansen project in Japan, which regarded as a sufficient safeguard against enabled high-speed “bullet trains” to conflicts. Institutions that could bridge travel between Tokyo and Osaka. The borders and generations were needed to line established the global standard for serve as repositories of values, solutions, rail excellence for years. and resources. Global stability could not The missions of the two institutions be derived entirely from the transient care soon expanded to encompass the devel- of political leaders with fleeting mandates. oping world, a change driven in part by It must be supported in part by indepen- the cold war. But the fundamental values dent, brick-and-­mortar institutions run that have animated both have changed by public servants who could take a long little since their founding. Economic view guided by dispassionate analysis. stability is still regarded as a currency The implication was clear: an orderly, that purchases the opportunity for devel- well-financed system would be needed opment; development is still regarded as to deal with global economic issues a down payment on peace, prosperity, ranging from development to liberalized and the fulfillment of human potential. trade to balance of payments to currency Indeed, development itself has come to devaluations. be defined more broadly. It now includes British economist John Maynard not only growth in gross domestic prod- Keynes and Harry Dexter White, the uct but also, as economist Amartya Sen emissary of US president Franklin Delano and others have advocated for years, Roosevelt, were the intellectual architects

REVITALIZING THE SPIRIT OF BRETTON WOODS | 231 broader measurements of economic per- Despite this progress, of course, the formance and social progress. ugly head of poverty and increasing inequality continues to contribute to much of the political tension we see THE EVOLUTION OF globally. Moreover, the potential of THE BRETTON WOODS technology to exacerbate inequality is INSTITUTIONS increasing—another area in which the The original Bretton Woods institu- Bretton Woods institutions could play tions have shown remarkable staying an invaluable role. power through their ability to reinvent In the 1980s, as the complex themselves for the prevailing needs of inter­dependence between projects, com- the times. munities, and institutions became more When the system of fixed exchange apparent, the World Bank gradually rates broke down in the early 1970s, increased financing for environmental, the IMF adapted to a world in which social, health, and education projects. major currencies floated against one When cross-border challenges such another. During this era, the fund also as environmental threats, refugee crises, started providing concessional financ- and epidemics came to the fore, the ing to the world’s poorest countries. World Bank devised new instruments The World Bank and IMF, meanwhile, and strategies to help preserve global came to recognize that macroeconomic public goods. While helpful, much structural adjustments—privatization, more work needs to be done, given the deregulation, smaller fiscal deficits, increasing scale and near permanence procompetition policies, and reduction of the refugee crisis. of trade and foreign direct investment As middle-income nations began to barriers—were necessary to buttress the diminish their reliance on borrowing, effectiveness of their lending to nations. both the World Bank and the IMF con- When it was clear that massive infra- tinued to engage with them by providing structure projects were insufficient to more technical assistance and advisory propel nations forward and, in some services designed to sustain their progress cases, were damaging to long-term and concentrate on reducing poverty in value creation, the World Bank in the lower-income nations. 1970s reoriented its mission to embrace Global and local capital markets more direct poverty alleviation. In the have expanded dramatically in recent ensuing decades, this helped bring decades and show no signs of slowing extreme poverty down from a global down and increasingly are the main rate of roughly 50 percent in 1970 to source of capital to emerging markets. just under 11 percent in 2018, even The size of the Chinese market may as world population more than dou- soon result in China’s having its own bled, from 3.7 billion to 7.6 billion. place in market indices. Developing

232 | REVITALIZING THE SPIRIT OF BRETTON WOODS nations are now “leapfrogging” legacy Bank, and the African Development infrastructure to adopt state-of-the-art Bank—have tried to serve their regions technology. Emerging markets con- by providing capital and economic stabil- tinue to post growth rates that are much ity. They have the mandates and capacity faster than those of advanced economies. to continue doing so. Collectively, they Their financial ecosystems, from mobile represent almost as much in annual money platforms to sovereign wealth financing as the World Bank. Moreover, funds, get stronger with each passing the nations that are their major sharehold- year. Of course, despite these new cap- ers are the same nations that historically ital sources, in 2008-2009 the role of have been at the forefront of the World the IMF and the World Bank again got Bank Group’s governance. enhanced as economic crises limited Cooperation among these institu- other sources of capital to emerging tions will be critical. Too many times economies, reminding everyone of the in the past, the multilateral banks have critical role of these institutions. The competed for projects, policy mandates, World Bank and IMF are beginning or donor funding. The result has been to reorient themselves to such changes. redundancy, contradictory efforts, or However, greater responsiveness and dilution of impact. Fortunately, this faster adaptation will be necessary to seems to have improved in recent years. carry Bretton Woods values forward on The loosely organized Billions to this front, including working on public Trillions movement, for example, was goods as well as with lower-­income incubated in the World Bank Group in countries on reducing poverty. They 2015 to mobilize more private-­sector have been emphasizing efforts such as capital for development. In recent years, Billions to Trillions to better lever- it has gathered steam and evolved into a age public- and private-sector capital. formal collaboration among all MDBs There is still much work to be done in to optimize resources, jointly report this area. results, and share best practices. Cutting across a wide swath of activity, from infrastructure development to local THE ROLE OF REGIONAL currency financing to private equity, DEVELOPMENT BANKS the initiative is already showing enor- From where else will “Bretton Woods mous promise, crowding ever more values” come in the next 75 years? institutional investors into develop- Regional multilateral development ment finance. These institutions have banks (MDBs) have assimilated Bretton enormous potential to leverage their Woods values. These MDBs—the resources to harness innovative appli- European Bank for Reconstruction and cations of fintech and new financial Development, the Asian Development tools and tap the new pool of capital Bank, the Inter-American Development

REVITALIZING THE SPIRIT OF BRETTON WOODS | 233 going into impact investing and socially World Bank’s willingness to survey proj- responsible investing. ects across disparate countries and sectors The regional MDBs are also increas- for the sake of institutional learning and ingly providing financing for global knowledge-sharing has been a hallmark public goods, an area in which the World of its values. Starting with World Bank Bank once operated nearly alone. The president Jim Wolfensohn and continuing European Bank for Reconstruction and to current leaders, the institutions have Development has made climate finance increasingly stressed transparency in the investments in 38 countries. The Asian analysis and reporting of project and Development Bank has a portfolio of program outcomes, so lessons could be $1.5 billion for projects and programs drawn from successes and failures. under its Climate Investment Funds win- Both the AIIB and the NDB have dows. The Inter-American Development adopted environmental and social frame- Bank recently announced a $1 billion works for their lending. The impact of program for climate-smart investments climate change and pollution, among across the Caribbean region. other issues, has become so pervasive that The African Development Bank is it can no longer be waved away in project on the front line of global efforts to planning and implementation. Moreover, combat pandemics such as Ebola. It both institutions have vowed to bring has provided $300 million for Ebola in private capital for co-investment,­ and emergency and recovery programs in private investors are no longer willing the affected nations and neighboring to assume the liabilities that accompany countries, and it will continue to be a projects with negative environmental and key player in the campaign against HIV. social side effects. The newer MDBs—the Asian Energy infrastructure is a case in point. Infrastructure Investment Bank (AIIB) The needs at the nexus of energy and and the New Development Bank (NDB), the environment in the poorest nations also known as the BRICS bank—are continue to be staggering. More than 60 also beginning to pick up the mantle percent of the people in least-developed­ and methods of the Bretton Woods nations lack access to electricity. Four out institutions. They have committed, at of 10 businesses in such nations suffer least in principle, to following in the from inadequate electricity. Thus, the World Bank’s tradition of using rigorous combined forces of public, private, and analysis for evaluating risk and return, MDB financing as well as public stan- conducting independent evaluations to dards will continue to be critical. This is learn from experience, and sharing best why the NDB, like others, has declared practices. Of course, all these institutions, that it is an enthusiastic supporter for including the World Bank, could bene- “sustainable infrastructure,” as well as for fit from adopting broader measures of the Paris Agreement on climate change. economic performance and impact. The

234 | REVITALIZING THE SPIRIT OF BRETTON WOODS THE ROLE OF Investor demand is another reason. DEVELOPMENT FINANCE Foreign direct investment and portfo- INSTITUTIONS lio flows, in a significant and growing number of developing countries, out- Another set of institutions that could strip the volume of official development well carry the torch of Bretton Woods assistance. DFIs, by design, catalyze values is the development finance insti- these flows and seek to ensure and tutions (DFIs): CDC Group, Swedfund, enhance their development impact. FMO, and more than a dozen others. By providing risk guarantees, insur- The Belt and Road Initiative has pro- ance, and co-investment (equity and vided a new source of capital and, in debt), DFIs have come to play an ever- some cases, controversy. larger role. Collectively they are growing DFIs have a mandate to provide at a faster rate than the World Bank development lending to the private Group and may come to rival the World sector in the developing world. They Bank’s lending in the 75 years ahead. are now coming to the fore in scale By drawing on the expertise of their and breadth. co-investors in the private sector, DFIs In October 2018, for example, the have the added advantage of being able United States passed legislation to to invest only when the market is ready. replace its DFI, the Overseas Private DFIs find themselves heirs to all the Investment Corporation (OPIC), aspirations and pressures that the Bretton with a dramatically larger agency. Woods institutions have assumed for The new entity, the US International years, especially with respect to job Development Finance Corporation, creation in low-income countries, envi- will inherit the broad mandate, port- ronmental and social concerns, and folio, and team of OPIC. It will have transnational impacts of investments. double the lending authority (up to $60 billion) of OPIC as well as the ability to take equity investments and provide CHAMPIONING THE guarantees and loans in local currencies. SPIRIT OF BRETTON The reasons for the recent growth WOODS INTO THE of DFIs are grounded in both technol- ogy and economics. Many sectors that FUTURE were once the nearly exclusive domain In 1944, two institutions were imbued of the public sector and MDBs—trans- with Bretton Woods values. Today, portation, telecommunications, energy, dozens of institutions all over the world water, consumer finance, and education, carry on the legacy of the founding among others—are increasingly, and conference. Each, in its own way, in some cases largely, the domain of also confronts the massive, unfolding private-sector finance. challenges of global development: the

REVITALIZING THE SPIRIT OF BRETTON WOODS | 235 protection of global public goods; the inequality. They cut across the entire evolution toward a low-carbon energy global development agenda. regime; and the needs of the poorest Something more prosaic may be the nations, especially those facing crises or ultimate litmus test of durability: finan- rebuilding after a conflict. Technology cial and credit discipline. Whenever is proving to be a dual-edged sword. the importance of the Bretton Woods The phenomenal growth of the Web institutions seems to wane, a crisis comes has enriched thousands of lives and cre- along to prove again their unique role ated new economic opportunities. But in the world. This was demonstrated roughly half the world’s population vividly with the role of the IMF during remains disconnected, another source the global financial crisis of 2007–2008. of growing inequality, particularly for The Bretton Woods institutions have women and the poor. Payment sys- managed their balance sheets to weather tems and financial startups are going to tough economic times, and that has play an increasingly important role in allowed them to stay true to their mis- some developing economies but remain sion and values over the years. All those beyond the reach of too many. Inclusion, who would carry forth the Bretton especially for the products and services Woods legacy should do likewise. being generated by the dynamic startup Indeed, as competition for public community in emerging markets, needs resources grows via the appeals of smaller to be the watchword of the Bretton development banks, sovereign wealth Woods values. funds, and strategic investment funds, One test of the durability of Bretton the Bretton Woods institutions will face Woods values will be the degree of insti- a higher bar for capital replenishments. tutional commitment to geopolitical They will be obliged to make an even stability, job creation, multilateralism, more compelling case for their roles. transparency, and environmental and social They will have to demonstrate there is standards. Collaboration between public more coherence and coordination to sources of finance and the private sector their collective efforts. A sharp pencil will increasingly be the key to lever- on the bottom line—in black ink, not aging resources and achieving success. red—will be a requirement. Their future Further, there should be no doubt by now and success will depend on it. that Bretton Woods values have become Decades ago, leaders of the Bretton inextricably linked with the Sustainable Woods institutions scarcely could have Development Goals (SDGs). The success imagined that regions of the developing of the SDGs will be a metric of success world would exist where cellular tele- for the Bretton Woods mission. Nowhere phones and mobile banking were more is this clearer than with respect to SDG pervasive than schools or wastewater 10, which aims to reduce inequality, and facilities. Big data, CRISPR genetic SDG 5, which aims to eliminate gender technology, artificial intelligence,

236 | REVITALIZING THE SPIRIT OF BRETTON WOODS nanotechnology, telemedicine, and resources, health care, and others. To remote sensing have arrived. Who be successful, the heirs of the Bretton knows which of these technologies, Woods values must hew to the foun- or perhaps an entirely new one, will dational vision for these institutions’ revolu­tionize some part of the develop- success—capital dedicated with disci- ing world, even before the G7? pline toward the purpose of stability, What we do know is that Bretton peace, economic performance, social Woods institutions and values will need progress, and development—even as to adapt to change in every sector: that vision is revitalized for generations infrastructure, energy, finance, natural to come to reduce poverty.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 237 THE MDBs How Governance Matters

NANCY BIRDSALL Founding President Emeritus, Center for Global Development, and former Executive Vice President, Inter-American Development Bank

The founders of the World Bank at A central feature of MDB gover- Bretton Woods created a cooperative nance is the system of weighted voting, model—the multilateral develop- in which country members’ votes are ment bank (MDB)—that has proven closely related to their shares in the cap- its worth in raising resources to sup- ital of the banks. Weighted voting related port development and in deploying to capital contributions is peculiar to the resources, if not always ideally, then well MDB model compared with that of the enough.1 Today’s development chal- United Nations and other international lenges, captured well by the Sustainable institutions; there is little doubt that the Development Goals, include deploying ability to borrow on the capital market billions of dollars of public capital to backed by rich-country shareholders is mobilize trillions of dollars of private what has secured the MBDs’ financial capital for clean infrastructure, espe- sustainability compared with the non- cially in Africa, and far greater public bank institutions dependent largely on spending to combat the global public periodic voluntary contributions. bad and looming development catastro- Weighted voting (and sometimes phe of unchecked climate change. These other aspects of governance, such as challenges alone justify more capital at selection of presidents) has in that sense the MDBs as a group well into the rest been key to sustaining creditors’ confi- of this century, as well as attention to dence in the financial soundness of the the optimal deployment of scarce public banks, encouraging their periodic par- capital among the MDBs. ticipation in new infusions of capital. At

1 For references, data sources, and additional tables go to “The Dilemma of the African Development Bank: Does Governance Matter for the Long-Run Financing of the MDBs?” available at https:// www.cgdev.org/publication/dilemma-afdb-does-governance-matter-long-run-financing-mdbs.

238 | REVITALIZING THE SPIRIT OF BRETTON WOODS the same time, the long-run effectiveness biggest creditor, with a lower vote share of the MDBs (compared especially with than capital share, and is potentially a bilateral aid) depends as well on their borrower. Assuming the government of effectiveness in the use of scarce capital, China retains the presidency and remains and therefore on the borrowing share- the largest creditor, as does the United holders’ sense of ownership, legitimacy, States at the World Bank, it will evolve and trust in the institutions—something more clearly as a creditor bank, with the fundamental to the MDB cooperative levers and influence the United States model, if hard to measure. still has at the World Bank.2 In this note I explore how the share- The mixed-governance model at the holders of the major MDBs have, in IADB has the benefit of minimizing the effect, “managed” the resulting tradeoff tradeoff between creditor confidence between creditor confidence versus and borrower ownership and legitimacy, borrowers’ sense of ownership and legit- but is also the outcome of history, luck, imacy. Are there lessons for shareholders and cooperation among all its share- about future governance? holders. The United States has been the single largest shareholder since the founding of the bank and still is. At its THREE TYPES OF MDB founding, the allocation of board chairs Table 1 characterizes six major MDBs and a system of double-majority voting (and, for comparison, several others) ensured that the president would come operating in developing countries as from the borrowing region. In 1994 creditor-dominant, borrower-dominant, the United States sold enough shares as or mixed/cooperative, based on their part of a recapitalization to allow for an governance structures. Of the six, three increase in the shares of borrowers to 50 including the World Bank are creditor percent, responding not only to its own banks (using these simple indicators, fiscal constraints but to the readiness and which are not independent of each other eagerness of the region’s middle-income but in these banks highly correlated). borrowers to increase their capital shares One, the African Development Bank, is and thus their influence. The IADB’s borrower-dominant. The Inter-American mixed nature has emerged as a response Development Bank (IADB) is a mixed in part to growth of its large, middle-in- creditor-borrower bank. It is difficult come borrowers and their interest in to pigeonhole the Asian Infrastructure having “their” regional bank be larger. Investment Bank (AIIB). Though it looks like a mixed bank, China is its single

2 Or China’s strategic interest may be in attracting other middle-income borrowers to increase their capital sufficiently over time so that it becomes a global counterpoint as a model mixed bank to the creditor-dominated World Bank.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 239 TABLE 1. WHAT TYPE OF MDB? CREDITOR- OR BORROWER-DOMINANT, OR “MIXED” OR CO-OP?

CREDITOR-DOMINANT BORROWER-DOMINANT CREDITOR, BORROWER, WEIGHTED BOARD WEIGHTED BOARD MIXED, BANK SHARES CHAIRS PRESIDENCY SHARES CHAIRS PRESIDENCY OR CO-OP IBRD å å å Creditor IADB 50 50 å å Mixed AfDB å å å Borrower AsDB å å å Creditor EBRD å å å Creditor AIIB å å å ?a

EIB å å å Co-opb NewDB å å å Co-op IsDB å å å Mixed CAF å å å Co-op a Counting China as a creditor. See text. b The EIB is a co-op among its European members and a creditor for countries outside of the European Union. IBRD = International Bank for Reconstruction and Development; IADB = Inter-American Development Bank; AfDB = African Development Bank; AsDB = Asian Development Bank; EBRD = European Bank for Reconstruction and Development; AIIB = Asian Infrastructure Investment Bank; EIB = European Investment Bank; NewDB = New Development Bank; IsDB = Islamic Development Bank; CAF = Corporación Andina de Fomento.

GOVERNANCE in table 2. The “score” for each bank AND LONG-RUN is the sum of individual members’ sov- FINANCIAL STRENGTH: ereign credit scores weighted by their (differing) proportions of voting shares CREDITWORTHINESS in each bank, permitting a comparison AND COLLECTIVE among them beyond their common ACTION CAPABILITY AAA ratings.3 Governance reflects and affects the The African Development Bank MDBs’ long-run financial strength in ranks at the bottom of all six banks and, at least two ways. One is the weighted in cardinal terms, notably below the creditworthiness of each bank, shown other legacy banks essentially because

3 Rating agencies still rely heavily on the high-income countries’ commitments but are also aware of borrowers’ ability to service MDB debt.

240 | REVITALIZING THE SPIRIT OF BRETTON WOODS TABLE 2. AVERAGE CREDIT SCORE, WEIGHTED BY VOTE SHARE

AVERAGE CREDIT SCORE, BANK WEIGHTED BY VOTE SHARE RANKING OF THE SIX MDBS IBRD 72.6 3 IADB 70.5 4 AfDB 55.2 6 AsDB 73.6 2 EBRD 78.5 1 AIIB 64.4 5

EIB 83.8 NewDB 59.0 IsDB 54.1 CAF 48.1

SOURCES: Sovereign credit ratings from publicly available credit scores, and annual reports.

borrowers hold about 60 percent of all creditors in the six banks. A higher shares and almost by definition have concentration of shares enhances lower scores. The AIIB’s score is partic- cooperation because it encourages ularly sensitive to China’s credit rating smaller players to free-ride, reducing and its relatively young age as an insti- the transaction costs of developing a tution; at the moment it ranks below common coalition view. all of the older legacy banks. The other Collective action capability is par- regional banks’ scores are in the same ticularly important in getting to “yes” range as that of the World Bank. on a new initiative such as increasing a A second measure of long-run finan- bank’s capital or agreeing on major new cial size and strength bears on the ability contributions. One reason MDB presi- of creditors and borrowers to cooperate dents are powerful is that once in office with each other and within their groups, they have immense “yes” power in shap- such as, for example, in agreeing on a ing and leading initiatives, including recapitalization. the decision to obtain new financing, Table 3 shows an index of concen- compared with shareholders represented tration of shares4 of borrowers and of by large boards where the transaction

4 Using the Herfindahl–Hirschman index. For the MDBs, we take the sum of squares of each credi- tor member’s and each borrower member’s voting shares, in the order of shares held.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 241 TABLE 3. COLLECTIVE ACTION RANKINGS

RANK BY CONCENTRATION RANK BY CONCENTRATION BANK INDEX FOR BORROWERS INDEX FOR CREDITORS IBRD 5 5 IADB 1 1 AfDB 2 6 AsDB 4 4 EBRD 6 3 AIIB 3 2 a Counting China as a creditor.

cost of getting to agreement on a new Among the six banks, the IADB does initiative is high. particularly well on the concentration Like high concentration indexes, indexes in part because of the balance double-majority voting for presidents of weighted votes between creditors of the banks is a feature of governance and borrowers in this “mixed” bank. that encourages long-run cooperation It also has the advantage of a single between creditors and shareholders. Its large creditor, the United States, hold- use in some form in the regional banks ing 30 percent of all shares and several compared with the World Bank does large borrowers—Brazil, Argentina, and so by increasing borrower influence Mexico—together holding just over 30 on the decision because regional bor- percent of vote shares. rowers tend to have a simple majority The African Development Bank has of unweighted country votes and can the lowest concentration of creditor vote block a candidate the creditors might shares in part because it is a borrower-­ otherwise approve—so that such candi- dominant bank. Its top creditor, the dates are less likely to be nominated in United States, has only 6.6 percent of all the first place than they are at the World shares, and its top four creditors, adding Bank and the International Monetary Japan, Germany, and Canada, in that Fund with only weighted voting.5 order, together have less than 25 percent.

5 For example, if a majority of votes of all member countries had been required (in addition to a major- ity of weighted votes), Paul Wolfowitz would probably not have been nominated to be World Bank president in 2005 as borrowing members might have joined in resisting his election because of his association with the US intervention in Iraq, and so the US would have nominated someone else.

242 | REVITALIZING THE SPIRIT OF BRETTON WOODS The African Development Bank’s handicapped on both market and col- low rank among the major MDBs on the lective action capability. The “mixed” collective action indicators for creditors IADB’s relative weakness in market reflects its history as the only one of the credibility is offset by its strength in legacy banks founded and originally collective action capability. A more owned solely by its African shareholders. general point also emerges: regional A borrower, Nigeria, holds the highest banks “compete” well compared with percentage of shares (only 9.3 percent). the older and larger World Bank in both Only two creditors, the United States domains but particularly in regard to and Japan, are among its top five share- the collective action indicators. The holders, and the former colonial powers, World Bank has the confidence of its the United Kingdom and France, have major creditors; the regional banks have only 1.8 and 3.8 percent of votes. There a greater sense of ownership on the part is no natural creditor “champion” for of their borrowers. the African Development Bank; its European shareholders have concen- trated their financing for Africa in their THE DILEMMA FOR own bilateral donor institutions and at SHAREHOLDERS OF THE the World Bank. AFRICAN DEVELOPMENT Except for the African Development BANK Bank, the regional banks all do better The simple measures above suggest on the creditor side than the World that the African Development Bank Bank. The World Bank’s disadvantage is handicapped, particularly com- in collective action capability is offset by pared with the World Bank, in raising the “ownership” the United States has financial resources. The handicap is historically taken in it since its founding best illustrated by the situation of its at Bretton Woods, its long history, and concessional window, the African the eagerness of its creditors for presence Development Fund (ADF), compared in the global forum on development it with the World Bank’s International provides. Development Association (IDA). The These two simple indicators suggest IDA currently has six to seven times 6 that in the medium term, the structure more resources designated for support of governance matters for the abso- to African countries than the ADF has. lute and relative financial strength of Donor contributions (primarily from the six MDBs. The borrower-dom- creditor countries) to the much smaller inant African Development Bank is ADF have declined in absolute terms for

6 In the short term, views of the current performance of an MDB, and in particular of its leadership, also matter; in the long term the argument here is that performance and leadership are a function in part of governance structure itself.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 243 FIGURE 1. IDA AND ADF REPLENISHMENTS IN COMPARATIVE PERSPECTIVE New contributions are shown in a darker color.

80.0 75.0 ADF Replenishment Total 70.0 IDA Replenishment Total ADF Contributions 60.0

IDA Contributions 52.1 50.0 49.3

BILLIONS 41.6 $ 40.0 35.4

30.0 27.3 22.8 25.1 26.4 26.1 NOMINAL US 20.0 20.6

12.7 8.9 10.0 7.3 5.4 5.2 5.9 3.1 5.8 5.8 5.4 5.2 4.5 0.0 3.1

ADF-9IDA-13 ADF-10IDA-14 ADF-11IDA-15 ADF-12IDA-16 ADF-13IDA-17 ADF-14IDA-18

SOURCES: Replenishment data from IDA and ADF reports and press releases, converted using historic exchange rates data from IMF and AfDB. Replenishments occur every three years. IDA = International Development Association; ADF = African Development Fund.

the last two replenishments (covering less influence on management, staffing, six years), while contributions to the policy, and other decisions associated IDA have grown, even as the IDA for with day-to-day operations than at the most recent replenishment obtained the creditor-dominant World Bank. an AAA rating against its own expected Moreover, because their ownership is future reflows and contributions (see highly fragmented, they face high trans- figure 1). action costs when taking initiatives to Why? Donors want substantial raise new financing or to address inter- control over the use of their contribu- nal concerns,7 with no single or even tions. But in the borrower-dominant small number of them having much African Development Bank, they have skin in the game. They have sufficient

7 Creditors have concerns about such issues as attracting world-class staff following the bank’s move back to Abidjan from Tunis (as do, no doubt, some borrowers) but have minimal incentives and no mecha- nism to take the initiative and work with the president on this kind of management challenge.

244 | REVITALIZING THE SPIRIT OF BRETTON WOODS influence to say “no” to poor use of the the original cooperative model of the African Development Bank resources, founders, at the time when most of the but they lack incentives to push for big borrowers were in Western Europe. “yes” on additional resources—particu- It encourages borrowers to maintain larly given that they have other avenues their own capital ownership, leveraging for support to Africa as a region. In creditors’ willingness to do the same to the absence of incentives to push for avoid losing influence. From the point major changes—and in Europe perhaps of view of raising new capital, it has a aware of their colonial era misdeeds— distinct advantage: creditors have enough the creditors have been content to go “yes” as well as “no” power to maintain along and get along. or increase their financial support, and Yet without adequate financing borrowers have sufficient influence to and incentives for creditors, not just take initiative (and make deals) in pushing borrowers, to focus on effectiveness, for additional financing. the African Development Bank cannot The World Bank is likely to remain realize fully its long-run potential com- creditor-dominant (as is the AIIB over parative advantage as a regional bank the long run, with China as the lead- in advocating for and supporting major ing creditor). But its major creditor investments in regional transport and shareholders, including the United energy infrastructure; nor can it real- States, should consider the benefits of ize its comparative advantage as the changes in the direction of the mixed “African” bank in working with bor- model, both for raising new capital and rowers on regional programs involving increasing legitimacy. One step would several borrowers and associated risks be moving quickly to 50:50 voting (the and on the politically tough reforms World Bank is already close to that). central to attracting investment support More important in terms of increasing and to growth and poverty reduction its legitimacy, the shareholders of the World more generally. Bank should agree on double-majority voting for the election of new presidents. Second, aside from differences in the CONCLUDING balance of creditor/borrower ownership, REFLECTIONS AND the reality is that the regional banks (the IMPLICATIONS FOR European Bank for Reconstruction and MDB SHAREHOLDERS Development is an exception) tend to First, among governance models, the have more borrower ownership than the mixed model of the IADB has the ben- World Bank, if only because borrow- efit of minimizing the tradeoff between ers share geographic and other forms creditor confidence and borrower of proximity. In maintaining the basic owner­ship. The mixed model is close to cooperative model, their “ownership”

REVITALIZING THE SPIRIT OF BRETTON WOODS | 245 and legitimacy advantage will grow more major investments in carbon-neutral growth important in this century assuming con- and other truly global public goods central to tinued convergence of emerging-market the development challenges the world faces.9 economies toward rich-country per Third, the African shareholders should capita income. It is not surprising that agree among themselves on how to reduce their it was the borrowers that drove the formal “ownership” from 60 percent to just relatively larger recapitalizations at the over 50 percent of shares—with leader­ship major regional banks compared with from one or two African shareholders and/ the World Bank following the global or the African Development Bank president. financial crisis.8 Also not surprising has There would be no cost in their “yes” been the creation of the AIIB and the or “no” power, and a potential major New Development Bank in this century, benefit in increasing the bank’s capital, in and the success of the Corporación selling close to 10 percent of its shares as Andina de Fomento (formerly the part of a major recapitalization to China Andean Development Corporation, now and other nonregional current or new renamed the Development Bank of Latin members. Greater consolidation of shares America) in Latin America. Each of these could be part of a bargain in which the has been driven by developing-­country Europeans would agree to buying some of the initiatives. additional shares, sufficient to create a creditor With this in mind, the major creditor champion for the African Development Bank shareholders should welcome and encour- as the United States and Japan have been age growth of capital at the regional banks historically for the IADB and the Asian for country-based lending and important banks. An initiative would have to come regional initiatives and focus on building the from the European Union, or from the financial and technical capacity of the World United Kingdom, France, or Germany, Bank in raising and deploying concessional perhaps with Canada. resources, including to its sister MDBs, for

8 Scott Morris and Madeleine Gleave, “The World Bank at 75” (CGD Policy Paper, No. 58, Center for Global Development, Washington, DC, 2015); Nancy Birdsall and Scott Morris, Multilateral Development Banking for this Century’s Development Challenges (Washington, DC: Center for Global Development, 2016). 9 This is a central recommendation of the high-level panel convened by the Center for Global Development in 2016. See Birdsall and Morris, Multilateral Development Banking, including Appendix A and references there. That report also recommends that the common shareholders of the World Bank and the African Development Bank gradually shift IDA resources to the African Development Bank and find other ways to rebalance the role of the two banks in the short run.

246 | REVITALIZING THE SPIRIT OF BRETTON WOODS DRAWING LESSONS FOR AN EVOLVING MULTILATERAL SYSTEM

JOACHIM VON AMSBERG Vice President of Policy and Strategy, Asian Infrastructure Investment Bank, and former Vice President of Development Finance, World Bank Group

For a world facing many emerging governance, there is also a deep sense challenges amidst a changed global of unease that the postwar consensus geopolitical reality, an expanded to build a multilateral and rules-based and improved multilateral system is order is fraying. needed to ensure continued cooperation The establishment of the Asian between countries, contribute to global Infrastructure Investment Bank (AIIB) economic growth, and deliver global is an effort (and by no means the only public goods. one) toward complementing and adjust- The Bretton Woods institutions have ing the existing system. The AIIB alone for the past 75 years shown the best is not a panacea to cure all ills. By draw- side of multilateralism. Their success is ing lessons from 75 years of multilateral the result of their strong governance; development bank (MDB) experience, their financial and business models; and the AIIB was founded with a different importantly, the history that gave birth to shareholder composition and a focused them. Today, there are concerns that the mandate and business model. It will play same institutions have not fully adapted a constructive role to improve upon the to the changes of the world, includ- existing multilateral system. ing the increased role and expectations of rising developing countries and the emergence of new global challenges. MULTILATERALISM With an uncertain position of the United HAS WORKED States, the key architect and backer of the The World Bank, founded in the mid- Bretton Woods system of international 1940s, was the first MDB set up to

REVITALIZING THE SPIRIT OF BRETTON WOODS | 247 address the needs for investment and one can get. Last, the Bretton Woods reconstruction. Since then, many regional institutions have also become a signif- development banks have also been set up, icant source of global knowledge and including the Asian Development Bank, expertise. The World Bank plays the the Inter-American Development Bank, role of a knowledge bank.1 Even after the African Development Bank, and the the currencies’ peg to gold was offi- European Bank for Reconstruction and cially ended in 1971, the International Development. Monetary Fund continued to play a Critics might argue that the loans highly important role in ensuring global MDBs provide are still small relative to financial stability. the needs of developing countries. Yet The combination of multilateral gov- that overlooks the fact that the loans ernance, finance, and knowledge has the MDBs provide are many times the served the world well. Notwithstanding actual paid-in capital of member coun- this positive assessment, it is also clear tries, and that is the result of a highly that the Bretton Woods institutions are efficient model of financial leverage. facing a profoundly changed world, With their strong governance, MDBs and the system of multilateral coopera- have achieved credit ratings that are tion will need to be refreshed. The higher than their borrowing members, remainder of the essay lays out four key and can thus finance their member challenges, possible solutions, and how countries at interest rates that are typ- the AIIB will play its constructive part. ically far lower than financing costs of these individual members on their own. Beyond the financial model, the MULTILATERALISM MDBs’ success can be attributed to NEEDS TO two other important factors. One, the CONTINUOUSLY ADAPT governance model is one where mul- First, the agenda needs to move beyond tilateral political oversight is coupled poverty reduction and toward economic devel- with technical day-to-day management. opment and economic security. The World Shareholder countries provide the broad Bank estimates that in 2013, 11 percent political leadership, but day-to-day deci- of the world’s population lived below sion making is depoliticized and left to US$1.90 per day, down from 35 percent the technical experts. In the absence of in 1990. More than a billion people a world government, this is as close to had moved out of extreme poverty in a cadre of international civil servants as the past 25 years. To be sure, the battle

1 See Martin Ravillion, “The World Bank: Why It Is Still Needed and Why It Still Disappoints,” Journal of Economic Perspectives 30, no. 1 (2016): 77–94. The author argues that even though past efforts to create the knowledge bank had disappointed, the knowledge role of the World Bank is now in fact more important than the finances it provides to developing countries.

248 | REVITALIZING THE SPIRIT OF BRETTON WOODS against poverty is not yet won (not by different compared with those of 1944. a long shot), but the statistics do show However, voting rights adjustments have that not only have extreme poverty rates been extremely difficult to negotiate and declined, but half of those extreme poor agree on. Indeed, records of Bretton live in sub-Saharan African—in other Woods discussions show that its founders words, poverty has turned into a geo- too spent much time debating on the graphically more concentrated problem. quotas each country should receive.2 On the other hand, the lack of broad- The conversation is as difficult today based economic growth and economic as it was back in 1944. As a result, the insecurity has become a key driver of governance model of Bretton Woods global instability. The polities of devel- institutions still lags current distribution oped countries will find it increasingly of economic power. This has meant difficult to support multilateral efforts to less political ownership by emerging promote development in lower-income economies. countries or to deliver global public Related to this is the lack of financial goods when incomes in the broad mid- ownership and capital to address the dle class of advanced economies are many emerging challenges. “Broader stagnating. The irony is thus that the MDB mandates are not matched by withdrawal of political support from increasing support from shareholders” developed economies could become is the well-argued assessment made by a graver challenge to multilateralism a United Kingdom–based think tank.3 than the inadequate representation of Third, multilateral institutions need to developing economies (the next point). deal with emerging global threats with an Just as the Bretton Woods founders expansion of definition and focus on global debated over the mandates of the then public goods. Climate change is clearly new institutions, we need a debate on an area of global public concern and whether multilateral institutions should one that multilateral institutions have reorient and play a role in promoting already devoted many resources to. broad-based economic development, MDBs have led since the early days even for advanced middle- or high-­ in promoting green investments and income countries. green finance. However, there are other Second, the political governance of insti- emerging global challenges. A list of tutions should reflect the changes in economic such critical issues would include crises weight. This is not a new point, and it that result from food or water shortages, has been obvious for some time already economic dislocations caused by cyber that today’s economic realities are very warfare or digital failures, shortages or

2 See Kurt Schuler and Andrew Rosenberg, eds., The Bretton Woods Transcripts (New York: Center for Financial Stability, 2012). 3 See Lars Engen and Annalisa Prizzon, eds., A Guide to Multilateral Development Banks, 2018 Edition (London: Overseas Development Institute, 2018).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 249 unavailability of key medical supplies, THE AIIB WILL desertification, threats to the health of CONTRIBUTE TO oceans, and natural disasters, to name STRENGTHEN THE just a few. These are all potentially large, cross-border, and systemic destabilizers. MULTILATERAL SYSTEM Today, many of these issues are still in The creation of the AIIB was informed the domain of the private sector or indi- by the 75-year experience of Bretton vidual governments. But increasingly, Woods and other MDBs. The AIIB many of these risks need systemic multi­ builds on the fundamental strength of lateral solutions. It is time to rethink the MDB governance, finance, and what global public goods are and how business model but introduces some to bring multilateral resources to bear differences in governance, mandate, on addressing them. and business approach to address some Finally, and recognizing the very real of the existing weaknesses. tension between this and the previous On mandate, the AIIB focuses on point, there are concerns that present economic development by investing Bretton Woods institutions have become in infrastructure and other productive overly ambitious, overburdened with sectors. The negotiators deliberately multiple mandates, and overstretched allowed the bank a wide latitude to in their ability to deliver on these man- achieve this mandate. The bank does not dates. There should be reforms toward a have a graduation policy and can con- more focused business model. The World tinue to finance projects in middle- or Bank, for example, was formed at a time even high-income countries. This does little capacity existed in many of the not just allow the AIIB to serve a greater client governments, the private sector, number of member countries; it also has and civil societies toward addressing the benefit of allowing it to enjoy project developmental needs. As a result, the diversification (and hence reduced risk) World Bank’s business model is one that even though it focuses on fewer sectors has multiple roles—such as providing than do existing MDBs. In the initial finance, giving policy advice, build- years, the AIIB will focus more on core ing capacity, and even implementation. infrastructure. Over time, it is expected Today, this model risks crowding out that other productive sectors will feature other players. Fairly or not, the business more prominently in its portfolio. This model is also seen by some as bureau- will help the AIIB support economic cratic and overly imposing on clients development of all member countries, who today have much higher capacities in line with its mandate. The AIIB has than in the early days of the Bretton also established cross-border connec- Woods institutions. tivity and sustainable infrastructure as two important priorities. For financing of projects in nonregional countries, the

250 | REVITALIZING THE SPIRIT OF BRETTON WOODS provision of global public goods (such projects with commercial rates of return. as renewable energy to mitigate against Second, and related to the first impli- climate change) will be a priority area. cation, this would mean that the AIIB Turning to the issue of governance, will collaborate actively with the private the AIIB’s shareholder composition sector to provide a range of financing reflects the regional nature of the bank, solutions. This would include provid- with 75 percent of shares allocated to ing refinancing to existing projects regional members. Within the regional and investing in funds or other finan- and nonregional blocks, shares were cial instruments, as long as it can be offered to founding members according demonstrated that the AIIB’s financing to their relative economic weight. The helps mobilize private capital toward resulting shareholding composition is economic development. Third, the therefore reflective of current economic AIIB will not provide concessionary realities. The bank has a nonresident finance. The bank has a special fund to board that provides strategic oversight help countries prepare projects, but this and guidance but has delegated routine will be overseen by the same board and project approval within specified risk management and subjected to the same limits to the president and management. policies as the rest of the bank’s financ- The benefits are threefold: (1) it allows ing. This will avoid the fragmentation for a nimbler project approval process of governance and decision making to benefit clients; (2) it allows manage- and also avoid the need for continuous ment to be held fully accountable for the fund-raising. approved financings, just like in most Finally, and not the least, the AIIB private-sector organizations; and (3) it has adopted a lean business model to allows the board not to be tied down serve its clients. The bank serves all its by routine project approval processes clients (sovereign and nonsovereign) but to focus on strategic issues. with one balance sheet and one staff. The AIIB’s articles of agreement The AIIB will finance clients across the also emphasize the importance of sound entire public-to-private spectrum. The banking and financial sustainability. AIIB has adopted and requires adher- Many implications arise from this. First, ence to international environmental, the AIIB will have to ensure that the social, and governance standards. By projects it finances on balance achieve design, the AIIB’s operational policies a rate of return that would not require support a partnership model in project it to seek shareholder recapitalization preparation and implementation. Rather (that is, not result in unintended share- than duplicating the capacity of existing holder fatigue over the long run). This institutions, the AIIB aims to work with would mean having more financially a smaller in-house staff and establish viable projects in its portfolio, including partnerships with the public, private, and having a sizable share of private-sector nongovernment sectors across a range of

REVITALIZING THE SPIRIT OF BRETTON WOODS | 251 activities from knowledge creation and that the evolution of the multilateral business development to project prepa- system through additions such as the ration and implementation. It is still early AIIB will strengthen the robustness and in the AIIB’s institution building for the effectiveness of the multilateral system effect of this model to be seen, but this as a whole. In time, the lessons learned leaner business and nimbler governance from the AIIB’s establishment may also model is expected to bring benefits to help inform the reform agenda of exist- the clients it serves. ing MDBs. The establishment of the AIIB pro- vided an opportunity to reflect on the lessons of 75 years of MDB experience. A FINAL REFLECTION The AIIB has made innovations on man- As imperfect as multilateral institutions date, governance, and business model. The may seem, there is no better way for first three years of the bank’s operations countries to come together to meet have been a very positive experience. common challenges. The early founders The commitment to transparent multi­ of Bretton Woods institutions keenly lateral governance and high project understood this and made the neces- standards is very strong across all stake- sary compromises that set the stage for holders. Agreement on these principles decades of postwar success. To abuse has allowed management to focus on Churchill, multilateralism is the worst building a “clean, green, and lean” MDB form of global governance, except for that serves the vast needs of and strong any other form. The uncoordinated, demand from its clients. The support the nationalistic, and retaliatory approaches AIIB received from the World Bank and of the 1930s are a fading but somber other MDBs and its cofinancing with reminder of this. As we commemo- existing institutions have helped greatly rate the 75 years of success for Bretton to establish the AIIB as a constructive Woods institutions, we also have the partner of and complement to existing responsibility of constantly improving institutions. Despite some initial skepti- on the existing system, explaining its cism, there is now good reason to expect virtues, and making the multilateral case to all its stakeholders.

252 | REVITALIZING THE SPIRIT OF BRETTON WOODS EFFICIENCY DOES MATTER IN DEVELOPMENT

MUHAMMAD SULAIMAN AL JASSER Former Governor, Saudi Arabian Monetary Authority, and former Minister of Economy and Planning of Saudi Arabia

In this essay I hope to bring to the sub- and a positive potential demographic ject the perspective of a development window). That experience allowed me practitioner who has been fortunate to to reflect a bit more deeply about devel- have been on both the global institutional opment in general and the paradigms we and the domestic policy-making ends tend to use as development practitioners. (although far more on the latter) and who From that I drew two particu- is familiar with all the trials and tribula- lar lessons over the years: one is the tions that come with having to deal with importance of institutions in devis- the consequences of one’s decisions years ing an adequate framework for policy after the decisions were taken. making and implementation, and the From 2011 to 2014, we in Saudi other is the importance of efficiency Arabia dealt with reforms that were in development and the need to give somewhat typical for a developing it more prominence in our discourse. country (labor market reform, subsidy The first lesson is clearly the subject of reform, a major restructuring of the this forum, and no doubt some other economy) but in conditions that were participants will address that lesson; not necessarily typical: a long, stable so I will not dwell on it in this essay. I political environment; decades of almost will, however, address the second lesson uninterrupted positive growth; and because I believe that it has been rela- strong economic tailwinds (the luxury tively neglected recently. of being able to take a long-term view Let me start by giving a couple of of policy, favorable world oil prices, examples, one from my own country substantial foreign exchange reserves, and one from another. In Saudi Arabia,

REVITALIZING THE SPIRIT OF BRETTON WOODS | 253 despite a modern road network only a international practice. And imagine the few decades old, the country has the number of lives spared, health and other unfortunate distinction of having one costs saved, and additional economic of the highest road fatality rates in the and social benefits Saudi Arabia would world. And this is not a consequence of have enjoyed had it instituted a more scarce, ancient, narrow rural roads as in efficient traffic management system. some of the least developed countries Examples such as these abound glob- of Africa or Asia. Instead, it takes place ally. Yet developing countries seem to within and between cities possessing continue to focus primarily on a tradi- modern highways built and equipped tional development model: competing with the latest technologies. Why? on low wages, importing technology, Because the country lacks an efficient and trying to gradually move up the traffic management and enforcement existing value chain. This model, pio- system that forces safe driving behavior. neered by Japan after the Second World This could easily be addressed by intro- War, was followed with great success by ducing such a system and improving the Asian Tigers and their successors, enforcement of existing rules. and the most recent global giant, China. In India, I was told by a friend a few While it is difficult to argue with such years ago, it was cheaper to import a phenomenal successes, I would make the product from another country by sea to case that following such a model is no Chennai than to get it from Delhi only longer a recipe for success for developing about 2,000 kilometers away. Why? countries for two major reasons. Because a product has to clear about 50 The first is that such a model lacks inspection stations on its way from Delhi a focus on efficiency. Getting into the to Chennai, imposing extra costs in time value chain was traditionally done based and money. Here again, this could be on cheap labor. That certainly helped solved easily with less red tape and better countries get their foot in the door, logistics so that transport costs do not develop physical products, increase represent the largest cost component of the ranks of their educated populace, the price of a product in Chennai but and build their physical infrastructure. rather simply the same fraction of cost But cheap labor can carry you only so as in other countries. far. Until a country starts weighing These are just two examples of gross efficiency considerations equally, by inefficiencies that impose significant emphasizing quality as much as quan- costs on the economies of these two tity and by moving from technology countries. Imagine the added growth acquisition to technology generation, its the Indian economy would have ben- advance will always be limited. It may efited from had logistics costs been not even be able to survive competition brought down to average, let alone best, from a new entrant into the value chain

254 | REVITALIZING THE SPIRIT OF BRETTON WOODS with cheaper labor. It will certainly not At its core, efficiency is nothing but be able to innovate. constrained optimization. As one of the The second reason that following basic principles of our economic think- the traditional development model is no ing, it permeates almost every area we longer a recipe for success for developing study, whether it is a particular market countries is that the telecommunications (labor, capital, input, output, or any other) revolution we have seen in the past or a particular flow (e.g., trade, credit) or decade, coupled with the increasingly, even a particular cross-cutting dimension indeed brutally, competitive global (e.g., environment, income distribution). economy, has shortened product cycles Yet in development practice, it somehow considerably. What is state of the art seems to have been neglected in the today becomes old in only a couple of past few decades. Why? I can think of a years and obsolete after about five years. couple of reasons, although there may So the existing value chains may no be others. longer exist half a decade from now. One reason could be that the field Just think of Nokia’s overwhelming of development has lacked adequate (and seemingly impossible to dislodge data. As a policy maker, I have quite at the time) dominance of the global cell often encountered such a convenient phone market and what happened to it but superficial excuse. I have always when Apple introduced the iPhone. A found that justification unconvincing country (or a company) that planned on because the people advancing it would moving up Nokia’s value chain would generally not push for the logical solu- have found itself going nowhere. The tion in this case—namely, investing in key to surviving in such an environment more adequate data. Rather, their usual is to innovate—to develop new products solution was simply to ignore the issue. and new value chains. Another reason for why efficiency has I believe that we need a shift in para­ been neglected may be that we simply digm from our traditional economics have been intellectually too lazy, of development to a stronger focus on opting to import facile solutions from the economics of efficiency. Developed developed-­country experiences rather countries have largely espoused this for than develop more appropriate models some time, but unfortunately think- emanating from conditions prevailing ing in developing countries remains in developing countries. focused mainly on traditional economics Neither explanation means that of development. Efficiency is key to we should continue on our path of competitiveness and advancement for neglecting to give proper consider- developed countries. I see no reason ation to efficiency issues. Where earlier why it should play a less prominent role efforts failed us, as the experience of the in developing countries. Washington Consensus of the 1990s taught us, was perhaps in carrying

REVITALIZING THE SPIRIT OF BRETTON WOODS | 255 too far a theoretically reasonable con- significant developments in economics cept such as liberalization, making it in this direction. This essay argues that a one-size-fits-all model without due in our attempt to come up with appro- emphasis on individual-country con- priate concepts and measurements in ditions or, more importantly, showing development we should not ignore the little concern for the possibility of seri- issue of efficiency. Rather it should be ous conceptual flaws in that model. embedded in our thinking, and serious When the field of economics faced efforts should be made to come up with major theoretical challenges in the 1930s appropriate measurements. and 1940s, it rose to the occasion by In sum, what experience suggests to devising concepts and measurements that date is that institutions, both domes- helped propel the phenomenal successes tic and global (such as the Bretton of the following decades. Mechanisms Woods institutions), do matter. But just such as the system of national accounts as important is that such institutions and measurements of physical output, use a good economic framework. And prices, and employment/unemployment a good economic framework needs to all were geared toward accounting for the ensure that the issue of efficiency is major economic activities of the times: given serious consideration, not swept agriculture and manufacturing. In my under the rug because of conceptual or opinion, we are at a similar crossroads in practical inconvenience and not pushed development today. To understand today’s aside blindly as dogma. Saudi Arabia’s economies, both developed and devel- Vision 2030 is but one recent attempt to oping, we need systems, measurements, address the weaknesses of the old model and data that go beyond the physical and to give efficiency its proper place and the focus on agriculture and man- in our recent design for our economic ufacturing. The past decade has seen development model.

256 | REVITALIZING THE SPIRIT OF BRETTON WOODS A CALL FOR A PARADIGM SHIFT IN APPROACHING SUSTAINABLE INVESTMENT

THIERRY DÉAU Founder, Chair and Chief Executive Officer, Meridiam

How must the infrastructure investment Achieving the Sustainable Dev­ tool kit of the multilateral development elopment Goals (SDGs) by 2030 will bank (MDB) system be re-envisioned require about US$5–7 trillion of annual to meet the vast global need to achieve investment across sectors and indus- the 2030 Agenda for Sustainable tries. However, only US$1.4 trillion Development? is invested annually in developing Infrastructure is a pillar of the MDB countries. The annual investment system, if not its historic raison d’être. gap in major SDG-related sectors in One anecdote symbolizes this focus: developing countries alone has been the very first loan of the World Bank, estimated at around US$2.5 trillion per signed in May 1947, was a $250 million year. The Organisation for Economic loan to France to rebuild its rail sector. Co-operation and Development Financing infrastructure has of course (OECD) estimates that for infrastruc- remained a hot topic. To the pure eco- ture to be aligned with a 2°C scenario, nomic development dimension, several investment needs amount to US$6.9 other aspects have been added over time, trillion per year in the next 15 years, ending with one of the most dramatic an increase of about 10 percent in total challenges of human history, climate infrastructure investment from the ref- change. erence estimate of US$6.3 trillion.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 257 The infrastructure-financing indus- of the MDB infrastructure investment try, of which MDBs are a cornerstone, tool kit. Blending corresponds to a stra- must adapt to these challenges. The tegic use of public development finance challenge is to channel capital, that is, to catalyze private finance and meet pol- savings, that is primarily collected by icy objectives, such the United Nations institutional investors (e.g., life insurers SDGs, without over-relying on scarce and pension funds) to infrastructure public financial resources. investment everywhere. Such blending can take various forms To leverage the appetite of insti- ranging from a mix of donor funding tutional investors for sustainable with public and private finance to guar- investment in infrastructure, MDBs antees provided by development finance have a critical role to play in this respect institutions, typically MDBs, that help to by building an ecosystem that enables attract private investors or lenders that mobilizing the vast amounts available for would have potentially shied away from long-term investment in infrastructure much-needed infrastructure investments with scarce public resources. in, for instance, a developing country We will first draw lessons from actual or from a project with a certain level of projects involving MDBs and private economic risks. Blending entails risk mit- investors across the globe and show igation strategies as well as mobilization how the MDBs’ tool kit has already of private–capital objectives. been partly adapted to face the infra- The fact that MDBs play a significant structure investment challenge. We role in deploying infrastructure in both will then focus on a concrete proposal developed and developing countries is to bridge the climate finance gap in not novel, but discussions and debates developing and emerging markets. We are ongoing about which instruments will finally analyze what is probably the to use and the best ways to leverage biggest hurdle in infrastructure invest- their resources. ment—that is, lack of infrastructure This blending debate is truly a development capacity—and discuss how global one; it is not limited to devel- MDBs, governments, and private players oping and emerging markets. In Europe, can contribute to overcome it. an example is how the Juncker Plan has transformed the approach to the mobilization of European Union LESSONS LEARNED financing instruments. The setting up FROM INNOVATIVE of the European Fund for Strategic BLENDED FINANCE Investments (EFSI), initiated in 2016, SOLUTIONS is an unprecedented effort in crowding “Blended finance” has become a key in private-sector money by leverag- term in modern development finance. ing the EU budget and the European The concept is central in the revisiting Investment Bank’s (EIB’s) financial

258 | REVITALIZING THE SPIRIT OF BRETTON WOODS strength with more than €344 billion where such markets are still insuffi- of investments triggered by the plan as ciently developed to provide long-term of October 2018. infrastructure finance. But more fundamentally, this plan This is particularly critical for social represents a major cultural shift toward infrastructure projects whose financial a broader de-risking philosophy. As an strength relies primarily on the capacity illustration, the European Commission of the public sector to honor its commit- used to spend its financial resources ments over the long term. In Turkey, the through direct subsidies to large-scale €360 million Elazig project comprises the trans-European transport and energy design, build, finance, and maintenance of projects. Since 2017, the Connecting an integrated health campus with 1,038 Europe Facility (CEF)1 can be deployed beds for an operation period of 25 years partly through so-called “blending following a construction period of 3 calls” under which applicants can ben- years. This project benefited from broad efit from EU funding if and only if public-sector and multilateral support as such funding is matched with private part of a flagship program by the Turkish infrastructure financing. government to develop 38 new health The 2017 blending call organized by care campuses nationwide. It has strong the European Commission could sup- social rationale in a region with limited port new technologies and innovation access to high-quality health care ser- projects such as electric-­vehicle-charging vices. It included a strong focus on ESG infrastructure development, a key bottle- (environmental, social, and governance) neck to the European energy transition. aspects and greater global sustainability Against this background, €29 million throughout development. This formed was granted to the so-called MEGA-E the basis for the project bond’s certifi- project. The European MEGA-E (Metro­ cation by the specialized rating agency politan Greater Areas Electrified) project Vigeo as “green and social.” is an initiative aimed at deploying 322 Meridiam, the European Bank for ultrafast charging locations including 39 Reconstruction and Development multimodal charging hubs in at least 10 (EBRD), and the Multilateral Investment European metropolitan areas. Guarantee Agency (MIGA) of the World Blending also can play a key role Bank Group jointly structured a unique in helping to reduce the political risk credit enhancement structure, enabling perceptions of investors and to stimu- Moody’s to assign a Baa2 rating (two late capital market solutions in regions notches above the rating of Turkey at the

1 The €27.4 billion CEF is a key EU funding instrument to promote growth, jobs, and competitive- ness through targeted infrastructure investment at the European level. It supports the development of high-performing, sustainable, and efficiently interconnected trans-European networks in the fields of transport, energy, and digital services. CEF investments fill the missing links in Europe’s energy, transport, and digital backbone.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 259 time). The structure entailed a combina- package whereby a local commercial tion of political and contractual breach bank will finance the rollout of these cover from MIGA with construction assets across the country (with a target and operation liquidity facilities provided of providing access to electricity to two by the EBRD in order for the bond to million people) but will share the credit remain current under extreme circum- risk with an international commercial stances. Elazig is Turkey’s first “green and lender and the African Development social” project bond, aligning with the Bank (AfDB) under a financial guar- COP21 global commitment to support antee scheme developed specifically for emerging countries’ SDGs. The World this project and to be replicated across Bank Group’s International Finance the continent. Corporation (IFC) and Proparco sup- These examples pave the way for sim- ported the bond as anchor investors, ilar arrangements to be implemented further mobilizing investors from Europe, across the globe across the infrastruc- Japan, and China. The ambition is to ture sector, broadly defined as including replicate this experience of cooperation large-scale projects such as the Elazig between the government, leading devel- health care complex as well as decen- opment institutions, and private investors tralized assets, whose financing is one of in many other jurisdictions, including the bottle­necks constraining the much- in Africa. needed global shift to low carbon. The A last example of innovative blended challenge is to scale up and replicate. finance corresponds to the development of solar off-grid solutions in Africa, a key contributor to access to clean elec- REVISITING THE LUCAS tricity across the continent. Electricité PARADOX: IN DEFENSE de France, Mitsubishi Corporation, and OF AN ENHANCED Meridiam have joined forces to set up, GREEN MIGA OR GREEN together with French start-up NEoT RISK MITIGATION Capital, a platform to finance solar home INSTRUMENT2 systems and microgrids for the provision 3 of electricity to African households and As explained in Lucas’s seminal paper, small businesses. capital does not flow from developed In Côte d’Ivoire, this consortium countries to developing countries. The has put together a senior debt financing reality is the opposite. This macrofinancial

2 This section is to a large extent an update of an article co-authored by Thierry Déau and Julien Touati, “Financing Sustainable Infrastructure,” published in 2018 in Coping with the Climate Crisis, edited by Rabah Arezki, Patrick Bolton, Karim El Aynaoui, and Maurice Obstfeld (New York: Columbia University Press). 3 Robert Lucas, “Why Doesn’t Capital Flow from Rich to Poor Countries?” American Economic Review 80, no. 2 (1990): 92–96.

260 | REVITALIZING THE SPIRIT OF BRETTON WOODS reality has been verified many times Texas. But the counterparty risk is con- on the ground. Whereas raising capi- sidered as being so high that investors tal to finance the low-carbon transition would prefer to invest in Texas even if in Europe is relatively easy, it remains the premium for investing in Burkina extremely difficult in Africa. How many Faso is 10 percentage points and well African investors have we met who are above the extra quantifiable risk for willing to invest in the OECD only, but investing in such a country. not in their region? We have come across To a large extent, to solve that per- a well-managed African sovereign wealth ception gap an investor willing to invest fund fully invested in listed OECD assets. in a project located in Burkina Faso This reluctance has many roots but combatting climate change should face probably not a pure risk analysis ratio- a counterparty/country risk identical nale. We have observed assets offering 10 to that of a Texan project. If that could additional percentage points of return on be achieved through a risk mitigation equity—post–political risk insurance cov- instrument, it would potentially close erage costs—for a photovoltaic project the gap between the Paris goal to attract compared with the same project in the $100 billion a year from the North to North. Africa is, according to Moody’s, the South and the reality of the budget- the continent where the average default ary constraints of the developed world. rate on project finance transactions is, Assuming that good projects exist in by far, the lowest. In spite of that, global Burkina Faso, how can this be achieved? investors still prefer in general to pour By creating a global risk mitigation prod- capital into the same projects located in a uct, easy mobilized and understood by few OECD countries globally. Financial investors, focusing on counterparty risk. regulations could be blamed for encour- Such a product could build on existing aging bubbles. Actually, being an OECD instruments that are already actionable. country opens huge pools of capital as This is, in particular, the case of most regulations almost systematically MIGA, a World Bank Group entity associate OECD countries with “low”- that offers a long-term political risk risk countries.4 insurance product that significantly mit- This is particularly problematic igates the risk of loss of capital should when considering a global challenge a government decide not to honor a such as the fight against climate change. financial obligation in relation to a Climate preservation is a global public given contract. The Overseas Private good. Avoiding a ton of carbon dioxide Investment Corporation, the US devel- emission in Burkina Faso should have opment finance institution, offers similar the same collective value as doing so in instruments.

4 As a recent example, the Solvency II European framework for insurers evolved to introduce a specific favorable treatment for infrastructure investments, but only for assets located in OECD countries.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 261 This works particularly well for an TACKLING THE REAL infrastructure project structured as a ISSUE: CAPACITY public–private partnership (which could BUILDING TO SUPPORT be, for instance, the case of a wind farm receiving a tariff from a national utility INFRASTRUCTURE over the long term). Today MIGA sup- DEVELOPMENT plies $2.8 billion of such political risk Even if risk mitigation is crucial, noth- insurance across all sectors. This is sig- ing will happen on the ground if the nificant but by far lower than what is infrastructure development capacity gap needed for the low-carbon transition is not bridged. Such a concept corre- in emerging markets. And the enhanced sponds to the lack of capacity to develop green MIGA product needs to blend complex infrastructure projects globally. both the political risk insurance with This gap is one of the main reasons highly rated (e.g., above AA) liquidity behind the apparent paradox of a lack instruments to really meet the objec- of investable projects, often denounced tive of fully aligning the perception of by investors, and the huge unserved counterparty risks in the South and the infrastructure needs. North and finally be positively rated by The gap is universal and not spe- the main rating agencies. A first example cific to public authorities in developing is the above-mentioned EBRD/MIGA economies. In developed countries, it enhancement product offered to the is to a large extent the consequence of Elazig green and social bond. budgetary constraints that limit the MCCP (Managed Co-Lending capacity of governments to train and Portfolio Program) Infrastructure is retain infrastructure specialists. This another successful climate-change- situation is even more critical in devel- driven product. Designed by the IFC, oping markets for obvious reasons. AXA, and Allianz, it has allowed the MDBs have long spotted this issue two investors to mobilize significant and have helped launch several initia- capital to co-invest alongside the IFC tives over the last decade from project across its portfolio while benefiting preparation facilities, such as the EBRD’s from a first-loss protection of 10 per- Infrastructure Project Preparation Facility cent provided by the IFC and Sida (the initiated in 2015, to the launch of plat- Swedish International Development forms aimed at identifying and nurturing Cooperation Agency). pipelines of infrastructure investment Building on this risk mitigation opportunities across Europe. The Sustain­ instrument could allow significant able Development Investment Partnership scale-up and provide access to institu- (SDIP) platform launched in 2015 in tional investors with limited capacity to Addis Ababa is an example of such a manage developing-country risk. contribution. Its secretariat is housed by

262 | REVITALIZING THE SPIRIT OF BRETTON WOODS the OECD and the World Economic CONCLUDING REMARKS Forum. Several MDBs (the IFC, the MDBs will not be able to bridge the Inter-American Development Bank, the infrastructure financing gap alone but EIB, the EBRD, the AfDB, and MIGA) can play a crucial role by putting together are members of SDIP alongside other innovative financial schemes that leverage development finance institutions and existing concrete experiences and have private investors and commercial lenders. the goal of attracting private investors. It offers, in particular, project investment Solutions exist and need to be replicated review by specialists whose expertise and adapted to each specific situation. can help to improve terms for projects This requires expertise and persistence mobilizing blended finance. but also requires MDBs to undergo a These initiatives provide a robust profound reform to report transparently base from which to unlock concrete on private capital mobilized through project opportunities and are excellent their investments in order to adequately examples of “soft” actions from MDBs measure the impact of their investments with potentially huge impact. They are according to the standards set by the UN currently being complemented by other SDGs; the banks need to tie such objec- human-capital-focused initiatives. One tives clearly to their loan officers’ rewards the most recent is the Africa Infrastructure in order to trigger a significant culture Fellowship Program (AIFP), whose change away from the deployment of objective is to bring governments and their balance sheet as the sole key perfor- the private sector together to support mance indicator. The shareholders of the an innovative capability-building pro- MDBs also have a great responsibility to gram for public-sector infrastructure define their mandate toward delivering professionals. Supported by the French the SDGs. Coherence and determination Ministry of Foreign Affairs and several are required from them. MDBs, the AIFP initiative focuses on We firmly believe that the most delivering practical training and support critical gap is the above-described infra- that helps facilitate better infrastructure structure development capacity gap. procurement across Africa. The AIFP will Unless our industry mobilizes more deliver a program of tailored education human capital we will continue to see and training for civil servants responsible a large constraint on financial capital for infrastructure procurement and deliv- deployment. ery that will help drive much-needed These solutions can look anecdotal reforms and increase the willingness and to those hoping for a magic wand or ability of the private sector to help deliver “grand soir” revolution as part of a grand infrastructure projects. vision. It is, however, our conviction that

REVITALIZING THE SPIRIT OF BRETTON WOODS | 263 addressing contemporary challenges such only if we keep in mind that, as the as climate change and, more widely, French proverb puts it, little streams make meeting the UN SDGs will be possible mighty rivers.

264 | REVITALIZING THE SPIRIT OF BRETTON WOODS REVIVING THE SPIRIT OF BRETTON WOODS A Development Perspective

ABDLATIF Y. AL-HAMAD Director-General, Arab Fund for Economic and Social Development, and former Minister of Finance and Planning of Kuwait

As the world is commemorating the led to distrust in markets and raised 75th anniversary of the Bretton Woods serious questions about the role of inter- institutions (BWIs), it is opportune to national financial institutions, credit assess the challenges faced by the cur- rating agencies, and regulators. This rent global economic system in order to wake-up call has led many prominent glean some guidance for reviving the intellectuals and world leaders to call spirit of Bretton Woods and harnessing for a serious rethinking of the current international coordination of economic international financial system. policy for global peace and stability. The Skepticism about the role of inter- Bretton Woods system as a platform to national economic cooperation through coordinate global economic policy has the BWIs has been exacerbated by had the tremendous merit of founding a global­ization, which brought oppor- rules-based global governance system in tunities especially to the developed finance and trade. This system has been countries but, for many developing for decades a driver of global growth nations, resulted in more income dis- and stability for industrial, as well as parity, accentuated uncertainty, and developing, nations. eroded policy autonomy. Significant Global economic crises have his- concerns have also been raised as to torically driven reforms in the global whether development aid has achieved governance system. However, the 2008 its objectives in developing countries. world financial crisis marked the climax While some of the skepticism is exag- of doubt regarding the capacity of the gerated and may be ill founded, other current system to provide adequate gov- concerns are legitimate. International ernance for global markets. This crisis institutions have recognized the

REVITALIZING THE SPIRIT OF BRETTON WOODS | 265 challenges they face and have taken exemplified by the British economist significant steps toward changing their John Maynard Keynes, one of the prin- modus operandi and the ways in which cipal architects of the Bretton Woods they extend their assistance. Recently, Agreement. During the closing session the internal governance structures of of the Bretton Woods Conference, he the BWIs evolved to allow more voice stressed that “it has been our task to for developing nations. However, despite find a common measure, a common these evolutionary steps, a lot more standard, a common rule applicable needs to be done to dissipate skepticism to each and not irksome to any.”1 US regarding the fairness and durability of Treasury Secretary Henry Morgenthau the global governance system and to also stressed the cooperative spirit and strengthen the ability of the BWIs to public good nature of the agreements coordinate international economic policy. at the inaugural session of the Bretton This essay will not examine the chal- Woods Conference: “prosperity, like lenges facing the current international peace, is indivisible. We cannot afford to framework for coordinating policy. have it scattered here or there among the Instead, it will focus on how to revive fortunate or to enjoy it at the expense the spirit of Bretton Woods from the of others.”2 perspective of developing countries. In From this premise, we find that this respect, it does not claim to break the Bretton Woods spirit is about new ground. I will distill my views, the common good and prosperity drawing insights from the accumulated that should be enjoyed by all. The lessons of experience as well as the con- first foundation underlying this spirit tributions of prominent writers. is the balance between the domestic priorities of each nation and the com- mitment to abide by common global REVIVING THE SPIRIT OF rules. Countries were left to march at BRETTON WOODS their own pace, with ample room for The Bretton Woods Agreement was policy autonomy. The global rules were premised on the collective commitment not greatly discordant with domestic of the global community to design a policies. multilateral framework for international The paradigm shift toward “market economic and financial cooperation that fundamentalism” during the 1980s and is sustainable and development friendly. 1990s, and the ensuing deep economic The spirit of Bretton Woods is best and financial integration, broke the

1 Keynes speech at closing plenary session of the Bretton Woods Conference, July 22, 1944, in D. E. Moggridge, ed., Collected Writings of Keynes (Cambridge, UK: Royal Economic Society, 1978), 26:101, 103. 2 Quoted in Harold James, “New Concept, Old Reality,” Finance & Development 53, no. 4 (2016): 21.

266 | REVITALIZING THE SPIRIT OF BRETTON WOODS delicate balance between global rules negative implications of increased global and domestic autonomy.3 The new interlinkages and common vulnerabil- international financial regulations and ities, higher inequality of income and trade rules have increasingly encroached wealth within nations, secular stagna- on domestic policy autonomy. tion and financial crises, international However, implicit in the statement of debt, food insecurity, barriers to labor Morgenthau is the responsibility of the migration, groundwater depletion, and global community to see to it that the less climate change. Some of these issues fortunate countries are not disadvantaged may act as triggers for violent conflicts in the process. This development per- and thus represent serious threats to spective represents the second foundation global peace and stability. of the Bretton Woods spirit. In the pursuit of such strategies, the Today the world is evolving into a international framework for coordinating new multipolar international system. policy should be more mindful of the Many centrifugal forces are pushing concerns of developing countries. They the world away from a unified global should be given more voice in global governance system. Policies and trade decisions and better assistance in mitigat- arrangements have increasingly been ing the negative impacts of globalization coordinated in the context of regional and international shocks. Existing mech- integration schemes, periodic forums, anisms to help poor nations mitigate the and accords outside the realm of the effects of international shocks should be BWIs. strengthened and made more systematic Multilateral trade negotiations under and transparent. the World Trade Organization have Addressing these issues requires boost- reached a deadlock, and protectionism ing the resources and capacity of the is rising. Donor countries have been BWIs to manage global risks. The insti- distracted by urgent problems and pri- tutions should also correct the actual orities of their own, which have affected imbalances, as well as help developing their commitment to participating in the countries eliminate trade protection global efforts to provide aid to developing and launch innovative fresh initiatives nations and countries in transition. to reduce their debt. Development aid Countries have to rise above their and assistance to developing countries narrow interests to revive the spirit of should be channeled where and when Bretton Woods. They need to focus they are needed. on the pursuit of shared strategies and There have been numerous efforts to concerted actions to tackle many cru- galvanize international policy coordina- cial development issues, including the tion on major global issues and thereby

3 Dani Rodrik, The Globalization Paradox: Why Global Markets, States, and Democracy Can’t Coexist (Oxford, UK: Oxford University Press, 2011).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 267 address many of the development of the Organisation for Economic Co-­ constraints in developing countries. operation and Development (OECD) The three United Nations–sponsored represented only 0.31 percent of their International Conferences on Financing combined GNI.4 for Development—in Monterrey, Often, ODA flows reflect more the Mexico, in 2002; Doha, Qatar, in strategic interests and preferences of 2008; and Addis-Ababa, Ethiopia, in donor countries than the interests of 2015—have been essential occasions the recipients. In fact, concessional aid is to take cognizance of the challenges inefficiently allocated, in that the share and delineate the required actions to dedicated to the poorest among devel- meet them. oping nations represented, on average, While it is crucial to bring countries only about 30 percent of total ODA together to agree on universal values provided to developing countries during and shared commitments, such efforts the period 2010–2016.5 have to be structured in the framework Development aid should not be used of institutional arrangements whereby as a financial lever to open up devel- pledges are met and commitments are oping countries’ markets and access implemented. Progress should be judged their resources, nor should it be tied by the capacity of these arrangements to the promotion of donors’ products to provide suitable solutions to the real and services. Aid figures that include problems, especially in developing artificially inflated technical assistance countries. and administrative cost components Reviving the spirit of Bretton Woods are often misleading indicators of the should involve addressing some discom- contribution of such aid to development. forting trends about development aid. There is a need to step up efforts Many developed countries still fail to to reach the ODA target and to make reach the annual target of providing 0.70 meaningful changes in the ways in which percent of their gross national income donors’ contribution to development is (GNI) to developing countries in the measured. Aid should be refocused to form of official development assistance meet the interests and address the real (ODA), as agreed to in a 1970 UN needs of the recipient countries. Funds General Assembly resolution. In 2017, should be earmarked for the poorest net ODA provided by the members of nations, which are underserved by inter- the Development Assistance Committee national aid and global private flows.

4 OECD, “Net Official Development Assistance from DAC and Other Countries in 2017” (Organisation for Economic Co-operation and Development, Paris, April 9, 2018), https://www.oecd.org/ development/financing-sustainable-development/development-finance-data/ODA-2017- complete-data-tables.pdf. 5 OECD, Geographical Distribution of Financial Flows to Developing Countries: Disbursements, Commitments, Country Indicators (Paris: Organisation for Economic Co-operation and Development, 2018).

268 | REVITALIZING THE SPIRIT OF BRETTON WOODS Moreover, further efforts are needed to concerted efforts of multilateral institu- find suitable frameworks to better coordi­ tions and donor countries to encourage nate aid in support of reconstruction in more transparent, efficient, and account- postconflict countries. able public sectors in recipient countries More serious thought should be should be pursued. given to automatic aid mechanisms for developing countries. Some of these mechanisms, such as remittances of tar- HOW COULD THE BWIS iffs levied on imports from developing HELP IMPROVE GROWTH countries, taxes on “brain drain” for IN DEVELOPING using skilled labor from these countries, COUNTRIES? charges for the use of international flight Physical and human capital accumulation, and sea lanes, taxes on foreign currency as well as adoption of new technologies transactions, and reduced prices, as well and better ways of organizing and com- as more flexible patent rules for using bining factors of production, are essential industrial countries’ technology, were for economic growth. However, the fun- suggested a long time ago but have not damental source of sustainable growth is 6 received sufficient credence. institutions: their formal rules, such as Nonetheless, recipient countries regulations and laws, and their informal should be responsible for setting their rules, such as customs and social norms. development agendas and priorities. Historical evidence shows countries that While aid can play a catalytic role, develop inclusive economic and political recipient countries are still responsible institutions, and avoid the concentra- for mobilizing domestic resources to tion of economic and political power in finance their own development. Aid the hands of a few, tend to create more should not be dispensed into a perverse wealth and grow faster.7 While institu- institutional environment marked by tional reform is paramount for sustainable lack of transparency and accountability. growth, to be successful, it has to be In this respect, the efforts of the inter- homegrown, based on the historical and national donor community over the past social contexts in each country. 15 years, notably the implementation The BWIs should make more of the 2005 Paris Declaration commit- effort to help countries adopt home- ments to improve aid effectiveness, are grown reforms while maintaining their highly commended. In particular, the respective social and political order. The

6 See, for instance, William R. Cline, Policy Alternatives for a New International Economic Order: An Economic Analysis (Santa Barbara, CA: Praeger, 1979); and Commission on Global Governance, Our Global Neighbourhood: The Report of the Commission on Global Governance (Oxford, UK: Oxford University Press, 1995). 7 Daron Acemoglu and James A. Robinson, Why Nations Fail (New York: Crown Publishers, 2012).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 269 institutions should continuously strive to destabilizing shocks that are inimical to refine their modus operandi, adapting it growth, hence reducing investments in to changing circumstances and aligning much-needed infrastructure, education, it with the new international develop- health, and social safety nets. ment agenda for meeting the Sustainable Development Goals (SDGs). The BWIs should leave no room for determinism or IMPROVING ECONOMIC single-mindedness in prescribing policies AND SOCIAL or reform agendas. INFRASTRUCTURE Based on this premise, a more effec- Economic and social infrastructure is tive way for the BWIs to help developing recognized as key to promoting eco- countries would be to strengthen their nomic growth, reducing poverty, and capacity to pursue reforms such as pro- achieving the objectives of the SDGs. tection of property rights; reduction Investments in the energy, transport, of transaction costs; and adoption of and telecommunications sectors are also transparency, accountability, reasonable vital to improving competitiveness in fiscal and monetary discipline, and ade- global markets. quate incentive mechanisms.8 The BWIs Given the high youth unemployment should make a greater effort to help rates and increasing poverty and income countries more effectively diagnose their disparity in many developing countries, economic and social challenges, identify large infrastructure projects are urgently the binding development constraints needed to generate new dynamics and they face, and strengthen their resil- economic opportunities on a massive ience to internal and external shocks. scale. Roads, railroads, ports, and dams However, countries should own and often generate large positive externali- exercise leadership over their reforms, as ties to the rest of the economy and lead stipulated in the 2005 Paris Declaration to the creation of many new activi- on Aid Effectiveness, without being ties and a great many new sources of burdened by stringent conditionality. income. Also, the creation of large-scale The BWIs should help develop- industrial and agricultural projects is an ing countries create a strong base for essential vehicle for achieving significant more inclusive and sustainable growth leaps in terms of economic transforma- through the mobilization of long-term tion, which is an important lever for funding for crucial economic and social sustainable growth. infrastructure. They should also see to it However, despite the positive impacts that decisions made by developed coun- of infrastructure and large-scale projects, tries and global agreements do not cause and the efforts by many international

8 Dani Rodrik, One Economics, Many Recipes: Globalization, Institutions, and Economic Growth (Princeton, NJ: Princeton University Press, 2007).

270 | REVITALIZING THE SPIRIT OF BRETTON WOODS institutions and development banks social infrastructure are also crucial for to mobilize financial resources, there sociopolitical stability. remains an enormous financing gap for Deficient social infrastructure ser- this type of project. Global investment vices are often compounded by high needs for infrastructure are colossal. population growth, which leads to Recent estimates put global infrastruc- excess demand over limited resources. ture needs at about US$94 billion by Many populous poor nations receive less 2040, half of which is needed in Asia than their proportionate share of conces- and more than 20 percent in Africa.9 sional aid for developing social services. Based on current trends, global invest- The needs are particularly urgent in ment in infrastructure is expected to rural areas, where the majority of the fall short of meeting the SDGs by 2030. population in developing countries lives. While most of the expected gaps are in More investment in the agricultural the areas of roads and electricity, the sector will help countries tackle many needs cut across the whole range of of the endemic development problems, economic and social infrastructure. such as rising poverty, unemployment, Although the investment needs of the and inequality. Among the issues that least developed countries represent only development aid may help address in a fraction of global needs, if adequately this sector are the lack of rural roads, addressed they could have a much higher water shortages, increasing land salinity, impact on the lives of millions of people. and declining agricultural productivity. Further investments should be Over the recent past, numerous ini- encouraged in affordable basic social tiatives have been launched to identify infrastructure services such as educa- financing needs and promote infrastruc- tion, health, clean water, and sanitation. ture investments to potential investors, This type of investment is paramount to especially in support of the SDGs, in secure inclusiveness and meet the SDGs. addition to encouraging joint and inno- In particular, investment in quality edu- vative financing mechanisms.10 However, cation is crucial for making a decisive further collaboration is needed in the leap forward and for overcoming the area of mobilizing concessional financ- formidable impediments to becoming ing. Coordination among donors and more productive and competitive in the multilateral financial institutions could global economy. Further investments in help countries achieve inclusive and sustainable development if sufficient

9 Based on estimates from G20, Global Infrastructure Hub (accessed Feb. 2019), https://outlook. gihub.org/. 10 These initiatives include, among others, the Global Infrastructure Forum, launched during the 2015 International Conference on Financing for Development, held in Addis Ababa, Ethiopia; the World Bank Group’s initiative Maximizing Finance for Development, started in 2017; and the G20’s Global Infrastructure Hub database, created in 2014.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 271 development aid, in the form of con- more dangerous, affecting peace and cessional loans and grants, is allocated to stability in the whole world. support the efforts of developing coun- New international cooperation and tries to step up investments in economic initiatives should be launched to favor and social infrastructure. the developing countries. In this regard, Multilateral development banks could fresh initiatives for debt reduction and deploy their financial resources to mobi- mobilization of long-term funding, espe- lize long-term concessional funds from cially for large-scale projects and crucial other donors. The sectors targeted for economic and social infrastructure, are intervention in beneficiary countries needed. The BWIs are qualified to help should be systematically coordinated mitigate risks and implement reforms and synchronized. This coordination in these countries. The spirit of Bretton also entails further efforts by multilateral Woods should call for the creation of development banks to reduce differences a new global governance system that in their operating models, to streamline enables every country to prosper. The and harmonize their procedures, and to Commission on Global Governance promote common standards for evalu- stressed the importance of establish- ating the risks and returns of large-scale ing a widely representative Economic projects. Security Council, which would delib- erate systemic global economic, social, and environmental issues.11 CONCLUDING REMARKS However, regardless of the form of the Developing countries are facing risks new global governance system, individ- due to the major technological shifts ual countries should look beyond their and greater economic and financial inte- narrow interests and accept reasonable gration brought about by globalization. sacrifices in order for this system to func- The current global governance system tion properly. Every country must have a is insufficiently developed to help these voice, and no country should shrink from countries avoid crises and cope with doing its part. This system can be viable the increased uncertainties and risks only if it is based on a strong commitment they face. Without concerted effort and and provides suitable solutions to the real collaboration on the part of the global problems of all countries. community, these risks are likely to grow

11 Commission on Global Governance, Our Global Neighbourhood.

272 | REVITALIZING THE SPIRIT OF BRETTON WOODS RISING ROLE OF PREFERRED CREDITOR STATUS IN RATINGS OF MULTILATERAL DEVELOPMENT BANKS

MAHESH K. KOTECHA President and Founder, Structured Credit International Corporation

Unlike commercial banks, multilateral PCS is accorded the MDBs by their development banks (MDBs) are non­ member countries. Moody’s 1991 publi- depository financial institutions that rely cation Global Credit Analysis defines PCS on funding from the international capital as follows: “the condition of preferred markets.1 As a result, they pay great atten- creditor is an implicit accord between tion to their credit ratings, which now borrowers and lenders that loans made increasingly depend on their preferred by these institutions receive preferen- creditor status (PCS), also called preferred tial servicing and repayment treatment creditor treatment (PCT), without which above other borrowing-member liabil- their ratings could suffer downgrades. ities such as commercial bank debt.”2

1 The author would like to acknowledge with gratitude the inputs of SCIC colleagues Roger P. Nye (who worked formerly at Moody’s), Donna Davis (who worked formerly at Standard & Poor’s), and Urmila Malvadkar. In addition, he would like to thank David Levey (retired Moody’s sovereign and supranational analyst) and Eric Paget-Blanc, a longtime supranational analyst at Fitch, for their kind inputs. Any errors or omissions remain the author’s responsibility. 2 David Stimpson, Global Credit Analysis, (London: Moody’s Investors Service, 1991), 188.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 273 The concept of PCS or PCT goes Poor’s (S&P), before any lender had a back to the League of Nations. However, significant PCS track record. the modern use of the term for MDBs, The World Bank’s top credit ratings alternatively termed international finan- allowed it market access to become a cial institutions (IFIs) or multilateral major lender and guarantor. The regional lending institutions (MLIs), stems from and subregional development banks estab- the Paris Club renegotiations3 treatment lished since then have similarly sought of sovereign debt obligations to IFIs as high credit ratings, often with the same exempt from rescheduling or default. This one-to-one gearing limit (e.g., for the preferred creditor status or treatment for African Development Bank (AfDB), MDBs has now taken center stage in the Asian Development Bank (ADB), their top credit ratings as rating agencies the Inter-American Development assess their capital adequacy in relation to Bank (IADB), the European Bank for their risks of credit losses. Other rating Reconstruction and Development). But factors include the MDBs’ liquidity risk some MDBs do not have such limits (e.g., and shareholder support. the International Finance Corporation At the 70th anniversary of the Bretton (IFC), which makes loans exclusively Woods institutions, the author was shown to private corporations in developing an early draft of the World Bank’s charter, countries, and the Council of Europe which lacked a key provision limiting Development Bank). the bank’s lending and guarantees to the The backing of callable capital on sum of its paid-in capital plus callable which the one-to-one gearing and hence capital plus unimpaired reserves (the the top ratings relied in the early days “one-to-one gearing” limit). Without this of MDBs has eroded as a foundation of statutory limit, the author told the person their credit ratings with the widening of who shared the early draft with the MDBs’ member states with no or low author (the son of the Mexican Minister ratings. The weight of paid-in capital and of Finance in 1944) that the bank would reserves (which can bear potential losses) not in his view have merited a top rating and of liquidity as rating factors has risen, as PCS had yet to be established for and metrics to assess asset quality—such MDBs. The gearing limit was in fact inserted as PCT or PCS and nonperforming in the final agreement, which enabled the loans (NPLs)—are now more critical in bank to obtain a single-A rating in 1947 assessing capital adequacy. and its upgrades to double-A in 1950 MDBs have experienced relatively and triple-A in 1959 from Standard & low loan losses compared to commercial banks because of their de facto PCS.

3 The Paris Club is an informal group of creditor nations whose objective is to find workable solutions to payment problems debtor nations face. As an informal group, it has no official statutes and no formal inception date, although its first meeting with a debtor nation was in 1956, with Argentina.

274 | REVITALIZING THE SPIRIT OF BRETTON WOODS Accordingly, rating agencies have long enshrined in S&P’s supranationals rat- recognized the importance of PCS or ing criteria in October 1985, which the PCT in protecting the MDBs’ asset author also wrote. quality. The approaches of all three agencies on PCS were broadly similar PCS in S&P Criteria of 2008 until the last decade. PCT has, partic- The 2008 S&P rating criteria continued ularly since 2012, taken a more critical the agency’s focus on financial perfor- role for MDB ratings for each agency, mance and shareholder support. But though in different ways. MDBs must 2008 witnessed the first S&P warning understand these rating agency differ- on PCS: ences to maintain their credit ratings and their capital markets access. Much of the good perfor- mance of the MLIs’ sovereign loan portfolios is the result of STANDARD & POOR’S the preferred creditor treatment The author wrote the agency’s rating generally accorded them…. This criteria for supranationals in 1980. has taken on a broader meaning S&P applied them to a dozen MDBs and is now misunderstood by including the International Bank for some to mean that MLIs with Reconstruction and Development preferred creditor status will not (IBRD), the IADB, the ADB, the suffer defaults on sovereign and European Investment Bank (EIB), the sovereign-guaranteed loans.5 European Coal and Steel Community (ECSC), Eurofima, Euratom, the European Economic Community 2012 S&P Criteria: PCT and (EEC), the Nordic Investment Bank, Single-Name Concentration the AfDB, and the Council of Europe Drive Capital Ratio Model Resettlement Fund, which was renamed In 2012, S&P introduced an MDB eco- Council of Europe Development Bank nomic capital model for supranationals, in 1999. The term “preferred creditor” called the risk-adjusted capital (RAC) first appeared in two published reports ratio, which placed PCT and single-name from S&P: one in April 1984 for the concentration (SNC) assessments at AfDB and the second a year later for its center. The model incorporated the World Bank.4 The term was first

4 The 1984 S&P report on the AfDB was authored by Mahesh K. Kotecha and Barbara Nunemaker, and the 1985 S&P World Bank report was authored by Mahesh K. Kotecha. 5 S&P Global Ratings’ Credit Research, Supranationals Special Edition 2008, https://www.standardandpoors .com. We note here the artful use of the word “treatment” in place of “status” as the former appears dis-� cretionary and thus capable of being different for different institutions at different times whereas the latter can connote a sense of immutability.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 275 probabilities of default (PDs) by rat- SNC Adjustment Is Another ing, loss-given default, and risk weights Critical Factor (RWs) by rating—all driven by PCT—in The 2012 RAC model included SNC a Basel-inspired quantitative model, using adjustments based on a Basel formula granular MDB financial data. devised for large commercial banks and attributed to Michael Gordy and Eva 6 PCT Adjustment Lütkebohmert. These authors warned that their formula overstates concentra- S&P 2012 criteria assessed PCT in two tion risks in small portfolios (typical of parts: (1) qualitatively, based on the MDBs). S&P’s SNC adjustments were repayment record of each lender by as high as 100 percent or higher for the borrowing countries dating back some AAA-rated MLIs, compared to indefinitely (as far back as the beginning the maximum cited by Gordy7 of 3.81 of the institution), and (2) quantita- percent of the exposure for banks with tively, based on a multilateral debt ratio, portfolios of 250 to 499 obligors. defined as the share of multilateral debt in total external debt of each borrowing country (a method it rightly discontin- Impact of PCT in S&P’s ued in December 2018). If very strong, 2012 Criteria PCT led to a sovereign rating uplift of The 2012 S&P criteria led to 12 MDB the sovereign borrower by up to three rating changes (of 32 MDBs it rates) notches, reducing its RWs. But this within about a year, a very rapid pace effect was often insufficient to offset for supranationals.8 the increased risk-weighted assets from Some analysts compared S&P’s 2012 the SNC adjustment plus the high risk economic capital model against a tradi- weights, even after PCT adjustments. tional Monte Carlo simulation–driven economic capital model and found S&P’s RAC model more conservative.9

6 Michael Gordy and Eva Lütkebohmert, “Granularity Adjustment for Basel II” (Discussion paper, Series 2: Banking and Financial Studies, No. 01/2007, Deutsche Bundesbank, Frankfurt, January 2007), table 3. 7 Michael Gordy and Eva Lütkebohmert, “Granularity Adjustment for Regulatory Capital Assessment,” International Journal of Central Banking, (September 2013) 58, table 3. 8 S&P Global Ratings’ Credit Research, “Supranationals Special Edition 2013” (New York: March 11, 2014), 7–9. Report describes the rating changes: “despite six ratings changes following our updated (2012) MLI criteria, four additional ratings changes in the last three quarters of 2013, and two rating changes during the first half of 2014, supranationals’ credit quality has remained broadly stable over the longer term.” 9 See William Perraudin, Andrew Powell, and Peng Yang, “Multilateral Development Bank Ratings and Preferred Creditor Status” (Inter-American Development Bank Working Paper, No. 697, July 2016).

276 | REVITALIZING THE SPIRIT OF BRETTON WOODS To relieve RAC pressures, the AfDB, index or Monte Carlo simulations) are the World Bank, and the IADB under- no better for its purposes. took a sovereign exposure exchange Under its 2018 criteria, S&P deter- for diversification benefits. The AfDB mines PCT primarily on the basis of followed up with its pioneering the MDB’s 10-year average arrears on Room2Run transaction, synthetically sovereign loans (principal or interest past transferring a part of the risk of its pri- due more than 180 days as a percentage vate-sector loans to investors. S&P’s of the total of such loans),10 adjusted by RAC model facilitated quantification of S&P expectations, including for the net the balance sheet benefits. The benefits flows of funds to the country from the were also recognized qualitatively by lender.11 It has dropped the use of its Moody’s and Fitch. multilateral debt ratio. The market has welcomed S&P’s new criteria, including its cap on the PCT in 2018 S&P Criteria PCT-adjusted PDs used for SNC adjust- Based on market feedback, S&P reduced ment, with a floor of a B− rating for the severity of both its PCT and SNC the lowest-rated countries, intended to adjustments in December 2018. But S&P limit RAC ratio volatility. Only about continues to use the problematic Gordy a third of the MDBs’ S&P rates have formula for SNC, on the basis that other been reviewed under the new criteria methods (e.g., Herfindahl–Hirschman (as of mid-March 2019).12

10 S&P’s decision to use both principal and interest past due in measuring arrears penalizes insti- tutions that have chronic sovereign arrears from fragile states (like Zimbabwe) whose payment problems reflect political instability or prolonged economic mismanagement or both and thus an inability to pay rather than a lack of willingness to accord preferred creditor treatment. Using arrears data assesses both PCT and PD together, with the interaction between the two and the unique impact of PCT separate from PD not specifically addressed. 11 “Net flow” reflects the net of financial inflows and outflows between a sovereign and an institu- tion. A positive net flow in this instance means the sovereign is receiving more funding from the institution than it is paying out to service debt to the same institution. Net flows were not consid- ered explicitly in the old criteria. 12 As of March 9, 2019, nine MDBs are rated triple-A by each agency and two are rated double-A plus (or Aa1, the Moody’s equivalent). Of five other MDBs rated by all three agencies, Moody’s and Fitch rate two higher by two notches (EU and Corporación Andina de Fomento [CAF]), two by one notch (the European Financial Stability Facility and IFFIm), and Moody’s rates IDB Invest higher by one notch and Fitch by two notches than S&P. Of 16 MDBs rated by only two agencies, Moody’s does not rate one, Fitch does not rate eight, and S&P does not rate seven.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 277 MOODY’S HISTORICAL • [Their] rating [is] not necessarily APPROACH TO PCS bound by the country ceiling of the country in which they are headquar- According to a former rating executive tered [absence of interference] of Moody’s, PCS was a key factor in MDB ratings from 1985 onward. But • Preferred creditor status results in a the process of evaluating the degree of demonstrated enhancement of their confidence in the strength of PCS in asset quality any particular case was one of discus- sion within rating committees. There were no specific targets or thresholds for PCS in Moody’s 2013 and 2018 NPLs or other quantitative indicators. Criteria 14 It was a more qualitative, judgmental Moody’s criteria from 2013 provide process than in recent times. Moody’s the following rationale for PCS: certainly looked then as well at the long- One reason that governments term averages of NPLs and saw lending treat these entities as their most to private borrowers (as, for example, senior creditors is that these for the IFC) as riskier than lending to institutions are not just another public entities, but it also took into source of finance for them. In account the political stability of the a situation of sovereign stress relationships between major borrowers or general credit market dis- and the MDB in question.13 ruption, an MDB or other supranational may be the only PCS in Moody’s 2011 Criteria available source of external Though PCS was thus considered earlier finance. Even though some by Moody’s, an unpublished Moody’s governments have defaulted on PowerPoint presentation to Structured payments to supranational orga- Credit International Corp. and a mutual nizations, preferred creditor client in September 2011 refers to PCS status is a proven enhancement as follows: to supranational asset quality. (p. 6) • As supranational institutions, they benefit from unusual privileges and While paying heed to PCS as a immunities: market practice, Moody’s hastens to add in the 2013 criteria that a seven-year

13 From a recent email to the author from David Levey, a former managing director of Moody’s for sovereign and supranational ratings. 14 Moody’s, MLI Rating Criteria for Multilateral Development Banks and Other Supranational Entities (December 16, 2013), https://www.moodys.com/research/Multilateral-Development-Banks- and-Other-Supranational-Entities--PBC_161372.

278 | REVITALIZING THE SPIRIT OF BRETTON WOODS average NPL ratio best captures the MDBs that lend to the private benefits of PCS: sector with higher NPL levels while many institutions that lend Assessing potential losses entails to the public sector have zero or evaluating the track-record­ of very low NPLs. (p. 12) asset performance. A commonly used ratio, non-performing assets Moody’s September 2018 criteria as a percentage of total loans repeat the above 2013 language verba- illustrates historical loan port- tim, continuing the practice of using the folio performance…. We do NPL ratio averaged over the last seven not consider the performance years to measure PCS.15 of equity investments in this measure. Given that the ratio Moody’s 2019 Request provides a static, point-in-time for Comment description of loan perfor- mance, we use a seven-year Moody’s January 4, 2019, request for average of the ratio such that we comment (RFC) proposes to depart look beyond a particular cycle from this practice, dropping the 2013 (whether positive or negative). language cited in the last but one para- (pp. 11–12) graph above and proposing to provide, based on PCS, an uplift of three notches It uses the following key criteria in the MDB’s “estimated borrower qual- language in 2013 on NPLs and PCS: ity,” like Fitch. Specifically, Moody’s proposes that for Rather than make possibly inac- MDBs with operations heavily geared curate assumptions regarding toward sovereigns (typically more than the benefits of PCS on asset 75 percent of total development assets) quality, we choose to include it should use a PCS uplift to its estimate the NPL indicator, which cap- of average borrower credit quality. If tures the reality of the benefit (1) the MDB has a track record of no on asset quality. PCS has a vary- arrears or (2) the supranational is being ing impact on an MDB’s asset paid despite the borrower’s defaulting quality based on which sector on other creditors, Moody’s proposes it lends to, with public sector typically to incorporate some uplift, by loans benefitting more signifi- one “alpha score maximum (e.g., from cantly than private sector loans. As a result, it is common to see

15 Moody’s, MLI Rating Criteria for Multilateral Development Banks and Other Supranational Entities (September 17, 2018) p. 12, http://www.moodys.com/researchdocumentcontentpage.aspx?docid= PBC_1137185.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 279 B to Ba)”16—that is, three notches—to portfolio. To compute this figure, Fitch its estimate of borrower credit quality. uses the default probabilities associated The RFC also proposes to include with the ratings of the Banks’ assets, as nonperforming assets impairments or with a credit uplift to reflect the MDB’s losses on equity investments and called preferred creditor status.” This is done, guarantees.17 Furthermore, Moody’s as the report notes on page 7, “by adding proposes to shift from the seven-year three notches to the rating of sovereign average to the weaker of (1) the NPL exposures,” with the uplift assessed on ratio based on the most recently reported a country-by-country basis.18 annual period and (2) the average ratio The use of the three-notch upgrade for the three most recently reported for PCS by Fitch is thought to have origi- annual periods. nated as early as 2000 and continues to be Moody’s has yet to finalize and pub- used today. The ratio of “usable capital” lish its new criteria after the RFC as of to “required capital” initiated then had this writing. continued until about five years ago. In May 2012, Fitch introduced a scoring model for the first time when it also FITCH CRITERIA—2005 moved the term “required capital” and TO PRESENT the synonymous term “expected loss” outside the scoring model to Appendix Fitch Cites PCS as Far Back 2, a practice it continued until 2015, as in Its 2005 Criteria after which it dropped all three terms. Per Fitch’s 2005 supranationals criteria Instead, the scorecard used the ratios of (p. 1), “Fitch uses the ratio of usable (1) “shareholders’ equity” (newly defined capital to required capital” for MDBs, to exclude callable capital entirely) to where (1) “usable capital is defined as total assets and (2) paid-in capital to sub- shareholders’ equity plus callable capital scribed capital. Fitch intended this change of non-borrowing member countries to signal its greater focus on paid-in cap- and countries rated ‘AA−’ or higher” ital at a time of an increasing reliance by and (2) “required capital is equal to MDBs on callable capital, with less and the expected loss of an MDB’s entire less being paid in.19

16 Moody’s, Request for Comment on Proposed Update: Multilateral Development Banks and Other Supranational Entities (January 4, 2019), 9, https://www.moodys.com/researchdocumentcontentpage.aspx?docid =PBC_1147817. 17 Under the September 2018 Moody’s criteria, the numerator includes loans and loan guarantees with interest or principal payments overdue by 90-plus days to ensure comparability across entities, excluding the performance of equity investments, which the RFC proposes to include. 18 FitchRatings, Multilateral Development Banks: Rating Criteria and Industry Review (June 2005), http://globalclearinghouse.org/infradev/assets/10/documents/Fitch%20-%20Mutlilateral%20 Development%20Banks%20Rating%20Citeria%20and%20Industry%20Review%20(2005).pdf. 19 Based on a recent conversation with Eric Paget-Blanc, a Fitch executive.

280 | REVITALIZING THE SPIRIT OF BRETTON WOODS The terms “expected loss” and and liquidity assessment, with a possible “required capital” when used (roughly uplift for shareholder support. from 2005 to 2015) were justified by Fitch’s latest supranationals criteria— Fitch as follows: “the MDB sector is published in May 2018—continue the increasingly using the term ‘required maximum three-notch uplift for the capital’ to monitor and report the level average rating of sovereign loans and of capital relative to risks. For loans, guarantees.21 But Fitch for the first time guarantees and debt securities, the bases the uplift on a four-point assess- required capital is expected credit loss ment of the MDB’s PCS: an excellent (ECL) defined as the exposure at risk PCS merits a three-notch uplift, a strong (EAD) times the default probability PCS a two-notch uplift, a moderate (PD) times the loss-given default (LGD). PCS a one-notch uplift, and a weak To take into account preferred-­creditor status, PCS no uplift. Fitch notches up the ratings of loans to or The agency notes in the 2018 criteria guaranteed by sovereigns by three notches. that a three-notch uplift would typically The rationale for the three-notch uplift be assigned to those MDBs having not rests on a statistical analysis on sovereign only a strong record of low relative defaults to supranational institutions default rates on sovereign loans but also a conducted by Fitch”20 (emphasis added). very low share of non­sovereign exposure The required capital-to-expected in their portfolios. loss ratio was in effect a simple capital model but did not take account of cor- Fitch Study on Preferred relations or unexpected losses and did Creditor Status (October 2018) not use Monte Carlo simulations, which are widely used in economic capital In October 2018, Fitch published a report models but are computationally difficult. surveying the PCS for selected MDBs. It The ratio was dropped after 2015 when plans to update its MDB criteria in 2019 the agency moved to a regulatory-style and could apply more specific metrics building block method for what it calls to PCS assessments by country and/or the intrinsic rating of an MDB, based MDB based on the study. on the lower of its solvency assessment The study finds that the strength (as adjusted for operating environment) of PCS “varies across MDBs, and also

20 FitchRatings, Supranationals Rating Criteria (May 22, 2014), 12, https://www.fitchratings.com/ site/re/748877. This period also reflected a subtle shift from an uplift of the rating of “sovereign exposures” on a country-by-country basis to an uplift of the “ratings of loans to or guaranteed by sovereigns by three notches” on a portfolio basis, partly for computation ease. 21 FitchRatings, Supranationals Rating Criteria (May 24, 2018), https://www.fitchratings.com/site/ re/10031448.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 281 FIGURE 1. SOVEREIGN DEFAULTS TO MDBS, 1998 TO 2017

12

10

8

6

4

2

0

2011 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2016 2017

IaDB BOAD AsDB IsDB IBRD AfDB

SOURCE: Reproduced from FitchRatings, Preferred Creditor Status (October 11, 2018), 9, https://www.fitchratings.com/ site/re/10048061. AfDB = African Development Bank; IBRD = International Bank for Reconstruction and Development; IsDB = Islamic Development Bank; AsDB = Asian Development Bank; BOAD = West African Development Bank; IaDB = Inter- American Development Bank.

evolves over time” (see the reproduced • It notes that sovereign defaults depend chart in figure 1).22 Specifically: also on funds received by a sovereign entity via the Heavily Indebted Poor • Fitch finds clear differences between Countries (HIPC) Initiative, the MDBs in terms of repayment per- lender’s soft loan window, or other formance, with the AfDB and the sources to cure defaults. Islamic Development Bank more exposed to sovereign defaults than To assess capital adequacy, Fitch their peers. looks not only at PCS but also at con- centration risks, impaired loans, and the • It finds that PCS depends in part on share of equity risks and compares asset the credit quality of the borrower. quality to the level of capital.

22 Ibid. The variation in sovereign defaults shown in this figure could result from economic or politi- cal stress, volatility in ratings and their associated probabilities of default, or variation in PCS.

282 | REVITALIZING THE SPIRIT OF BRETTON WOODS CONCLUSIONS ON THE first on a country-by-country basis and IMPACT OF PCS/PCT ON then for the average borrow rating. RATINGS Moody’s has proposed for the first time a similar uplift of an MDB’s average PCT or PCS has been an established borrower rating of up to three notches feature of supranational credit analysis, in its January 2019 RFC, departing from but its impact on ratings has grown for its use of a seven-year NPL ratio that it all three rating agencies. S&P’s quanti- thought captured PCS. tative approach of 2012 was criticized as With a modest easing of highly con- overly conservative. Its December 2018 servative rating criteria, S&P may attract criteria are less severe, but their impact new MDB rating mandates.23 But the has yet to be fully felt: S&P now may upgrade of the Central American Bank uplift an individual sovereign rating by for Economic Integration (CABEI) from up to four (rather than three in the past) A+ to AA on account of improved PCT24 notches to apply the PDs and RWs for and a downgrade of the Corporación the RAC ratio. Andina de Fomento (CAF) from AA− to This compares with a PCS uplift of A+ on account of deteriorating PCT25 three notches for a long time by Fitch, suggest that S&P ratings volatility for

23 The 2018 S&P criteria may lead African subregional MLIs (e.g., West African Development Bank, Afreximbank, and Trade and Development Bank) to consider S&P ratings, which they currently do not have. The PCT of such institutions can be strong because (1) the member states of the sub- regional MDBs typically have a larger percentage shareholding than they do in regional or global MDBs, (2) the share of multilateral debt of member states sourced from the subregional MLI they own is likely to be comparable to that from the regional or global MLIs, and (3) member states are likely to feel a greater degree of commitment to pay “our bank.” 24 CABEI’s S&P rating was upgraded by two notches from A+ Positive to AA Positive on account of “solid preferred creditor treatment” that is “reflected in an improved enterprise risk profile, which supports the bank’s capital position.” The bank has been successful in expanding its mandate and increasing its membership base with the most recent incorporation of the Republic of Korea. CABEI is now the highest-rated credit in Central and Latin America. 25 Reflecting the conditions in Venezuela, the S&P rating of CAF was one of the first to be reviewed under the new criteria and was downgraded to A+ Negative from AA−, reflecting S&P’s revised criteria for rating multilaterals combined with its expectation of weakened PCT as conditions in Venezuela—one of CAF’s largest borrowers—continue to deteriorate.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 283 subregional MDBs may in the future On the horizon also lurk shifts by all be highly sensitive to changes in PCT.26 three rating agencies to more conserva- tive metrics for liquidity risk assessments of MDBs. Implications for MDBs A benefit of a granular capital ade- The top credit ratings of MDBs are quacy assessment using PCT, SNC, and critical for their continued market access other quantitative measures has been at low rates. Given the greater role of the ability of some MDBs to engage in PCT and PCS now for all three rat- balance sheet management transactions, ing agencies, MDBs need to pay more the role of which is likely to grow given attention to safeguarding their preferred a greater interest by major donors and creditor status or treatment. So MDBs shareholders in sustaining MDB lending need to reduce chronic arrears from such for longer without the need for capital countries as Zimbabwe, among others, increases. But the cost is potentially as principal and interest past due may higher MDB ratings volatility. both be counted as arrears, as S&P does.

26 By April 12, 2019, S&P had applied its new criteria to all 32 supranationals it rates (see the S&P repost of April 12, 2019, “What Our New Criteria Has Meant for Multilateral Lending Institutions” at https:// www.capitaliq.com/CIQDotNet/CreditResearch/RenderArticle.aspx?articleId=2195924&SctArtId =469879&from=CM&nsl_code=LIME&sourceObjectId=10944829&sourceRevId=1&fee_ind=N& exp_date=20290414-14:50:53). Rating upgrades or downgrades totaled seven (or 22 percent), and with three rating outlook changes, rating actions affected nearly a third of 32 S&P MDB ratings, mostly based on PCT. There were four upgrades of which three were largely from S&P’s revised approach to PCT: CABEI was upgraded to AA Positive from A+ Positive, the Council of Europe Development Bank to AAA from AA+ Positive, and the Eurasian Development Bank to BBB Stable from BBB−. Only the International Investment Bank was upgraded to A− Stable from BBB+ on account of factors unrelated to PCT (better governance). There were three downgrades. CAF was downgraded from AA− Negative to A+ Negative on expectation of weakened PCT. The Islamic Corporation for the Development of the Private Sector was downgraded to A Negative from A+ Stable and the Arab Investment and Export Credit Guarantee Corporation, Dhaman, from AA to AA− Stable. Both actions were driven by issu- er-specific reasons rather than PCT. S&P changed the outlooks on three supranationals; BSTDB was reaffirmed at A− with outlook upgraded to Positive from Stable on account of a potentially stronger pol- icy role with a new expansion strategy. The outlook on FONPLATA was revised to Positive from Stable on its improving governance structure and strengthening enterprise risk profile, while the negative out- look on FLAR was related to the mounting credit risk from exposure to Venezuela and the implications for its PCT. The remaining S&P’s MDB ratings (22 of 32) were reaffirmed.

284 | REVITALIZING THE SPIRIT OF BRETTON WOODS I fancy that the underlying conception of a joint and several guarantee of all the member countries throughout the world, in virtue of which they share the risks of projects of common interest and advantage … may be a contribution of fundamental value and importance to those difficult, those almost overwhelming tasks which lie ahead of us, to rebuild the world …

—John Maynard Keynes at the 1944 Bretton Woods Conference

REVITALIZING THE SPIRIT OF BRETTON WOODS | 285 John Maynard Keynes addressing the United Nations Monetary and Financial Conference, also known as the Bretton Woods Conference, in July 1944.

Source: Universal History Archive/UIG via Getty Images

286 | REVITALIZING THE SPIRIT OF BRETTON WOODS GLOBAL TRADE AND THE FUTURE OF THE WORLD TRADE ORGANIZATION

REVITALIZING THE SPIRIT OF BRETTON WOODS | 287 WHITHER THE WORLD TRADE ORGANIZATION?

MARTIN WOLF Associate Editor and Chief Economics Commentator, Financial Times

“Protection will lead to great prosperity and strength.” —Donald Trump Inaugural Address, January 20, 20171

Has trade liberalization gone too far? multilateralism, and the rule of power Should the World Trade Organization be over the power of rules. neutered? Donald Trump, US president, The WTO was already in serious believes the answer to both these ques- trouble before Trump arrived. The Doha tions is yes. He believes in protection: it Round, the most recent round of trade is the conviction, above all, on which he negotiations, launched in 2001 (shortly is to be taken both seriously and literally.2 after the terrorist attacks on the United Trump also rejects the fundamental prin- States of September 11, 2001), failed. ciples of the World Trade Organization The last important liberalizing event (WTO)—the body established, with was China’s accession to the WTO in decisive US support, to oversee world 2001. But Trump has made the picture trade—preferring bilateralism over far darker. The United States has blocked the appointment of judges to the WTO’s

1 Donald J. Trump, “Inaugural Address” (Remarks of President Donald J. Trump—as prepared for delivery, Washington, DC, January 20, 2017), https://www.whitehouse.gov/briefings-statements/ the-inaugural-address/. 2 See, on this trope, Salena Zito, “Taking Tump Seriously, Not Literally,” The Atlantic, September 23, 2016, https://www.theatlantic.com/politics/archive/2016/09/trump-makes-his-case-in-pittsburgh/501335/.

288 | REVITALIZING THE SPIRIT OF BRETTON WOODS Appellate Body, thereby threatening to Yet that success occurred despite render it inquorate and thus ineffec- many obstacles. The United States tive.3 It has also launched trade actions failed to ratify the International Trade against its leading trade partners—China, Organization (ITO) agreed to in above all. Arguably, both the US actions Havana in March 1948, which was the and (more understandably) the reactions first attempt to create an international of its trading partners contravene the institution overseeing world trade, letter of the WTO. Beyond doubt, they parallel to the International Monetary contravene its spirit. What makes these Fund’s role in monetary affairs.6 But protectionist actions more menacing is the General Agreement on Tariffs that they have come after a period of and Trade (GATT), which had been sluggish growth of world trade since the agreed to in October 1947, took the financial crisis of 2008. ITO’s place, even though it was merely Those who believe in liberal trade an executive agreement provisionally and a rules-based order built on the applied. In all, eight rounds of trade principles of multilateralism, reciprocity, negotiations were completed under this and nondiscrimination should not yet ramshackle arrangement, culminat- despair. The trading order has survived ing in the Uruguay Round, the first many threats and yet overseen an enor- to include emerging and developing mous rise in world trade: between 1950 countries as actively engaged partners. and 2017, the volume of world trade That negotiation ended in 1994 and was increased 39 times, while that of output followed by the creation of the WTO grew a very impressive 10 times.4 The in January 1995.7 ratio of world trade to output is now the The path of trade liberalization was highest it has ever been.5 This growth also far from smooth. In the 1950s, in trade has certainly been one of the 1960s, and 1970s, the high-income causes of the exceptionally rapid growth countries established a special set of of the world economy since the end of quantitative restrictions on imports of World War II. textiles and clothing from emerging and

3 See Bertelsmann Stiftung, Revitalizing Multilateral Governance at the World Trade Organization: Report of the High-Level Board of Experts on the Future of Global Trade Governance, 2018 (Gütersloh, Germany: Bertelsmann Stiftung, 2018), https://www.wto.org/english/news_e/news18_e/bertelsmann_rpt _e.pdf; Tom Miles, “US Block WTO Judge Reappointment as Dispute Settlement Crisis Looms,” Reuters, August 27, 2018, https://www.reuters.com/article/us-usa-trade-wto/us-blocks-wto-judge- reappointment-as-his-term-nears-an-end-idUSKCN1LC19O. 4 These data are from the WTO. 5 Esteban Ortiz-Ospina, Diana Beltekian, and Max Roser, “Trade and Globalization,” Our World in Data, revised October 2018, https://ourworldindata.org/international-trade. 6 Wikipedia, s.v. “International Trade Organization,” accessed May 3, 2019, https://en.wikipedia.org/ wiki/International_Trade_Organization. 7 Wikipedia, s.v. “International Trade Organization.”

REVITALIZING THE SPIRIT OF BRETTON WOODS | 289 developing countries. Substantial trade strengthens the credibility of the entire friction and rising protectionism arose trading system. during the oil shock–induced recession Are these benefits passé, or have they of the 1970s and, more threateningly, merely been forgotten? The answer is the period of the soaring dollar under the latter. The idea that trade is best Ronald Reagan, in the early 1980s. Yet dealt with or managed bilaterally has no this upsurge in protectionism then led basis in experience or economic logic.8 directly to the Uruguay Round, in large A willingness to scrap commitments, part promoted by policy makers as a way because of specious threats to “national to contain the upsurge in protectionist security,” destroys the stability on which sentiment in the United States. business decisions depend.9 Last but not Why did the system survive and least, while the agreement allows mem- thrive? The answer is that the mem- bers to take protectionist actions and bers found it useful. It was far easier to even withdraw commitments they have achieve the trade liberalization in which made, it also disciplines such actions or, policy makers believed via reciprocal at the least, seeks to manage that process. negotiations. Again, binding inter­ These benefits are as relevant today national agreements generate a degree as when the principles of the system of predictability that is of great value were proposed. Indeed, the need to find to business, especially when making a system able to manage and contain long-term investments. A multilateral relation­ships among great trading powers framework of obligations also makes it is arguably more important than ever, easier to handle relations among great given the rise of China as a great trading powers. More broadly, the existence of power. Yet four background changes have a rules-governed trading system protects by now undermined the political legiti- trade—and thus the economy—from macy of the trading system: the financial the ups and downs of international crisis; real wage stagnation, notably in the relations. Furthermore, even where United States; the rise of China; and the discriminatory trade does emerge, as growth of nationalism. in customs unions or free trade arrange- The most significant impact of the ments, threats to the interests of those financial crisis, beyond the direct eco- outside these arrangements are managed nomic one, is that it undermined, if not by the rules governing them. Finally, destroyed, belief in the competence and the mutually agreed-upon legal process probity of policy-making, financial, and commercial elites. The resulting

8 Martin Wolf, “The Folly of Donald Trump’s Bilateralism in Global Trade,” Financial Times, March 14, 2017, https://www.ft.com/content/ce92ae28-058e-11e7-ace0-1ce02ef0def9. 9 Martin Wolf, “Donald Trump’s Trade Follies Presage More Protectionism,” Financial Times, March 6, 2018, https://www.ft.com/content/995063be-1e0a-11e8-956a-43db76e69936.

290 | REVITALIZING THE SPIRIT OF BRETTON WOODS vacuum opened the way to demagogues Last, various upheavals, including the of right and left. Even where those with prolonged postcrisis economic malaise more traditional viewpoints still control and the rise of China, but also a surge the levers of power, they are under the in immigration, have created a pro- influence of such demagogues. nounced nationalist turn in high-income­ Real wages have stagnated since the countries. Trump’s protectionism and financial crisis and, in the crucial case of bilateralism, though economically ill the United States, well before that.10 The informed, is a reflection of his nation- conclusion of the academic literature is alist idea of “America first.” The idea that trade was not a dominant cause of that putting one’s country first means the longer-term real wage stagnation or putting domestic producers first, albeit the rise in inequality of incomes in the fallacious, is characteristically nation- United States.11 Nevertheless, it is all too alist. Its emergence could have been easy—and characteristically human—to expected. blame trade, and thus foreigners, for the In addition to these shifts in the failures of domestic policy. political and economic environments, The rise of China is the most import- challenging new policy issues and ideas ant change in the trading environment have emerged. One is the straight­forward and in the direction and nature of trade protectionism of a Donald Trump, albeit, since 2000. Among those concerned are in his case, with a narrowly bilateral affected businesses, their workers, and twist. Another is countries’ demand entire countries. This concern is not just for their own “policy space” to meet about the disruption caused by changing demands from the public or pursue more trade patterns or rapid Chinese advances interventionist policies. Another is the in technological development. It is also need to define more precisely what a about the change in the balance of global developing country is, rather than let power, on all dimensions. Some in the countries define this status for them- United States believe that engagement selves. Yet another is the need to manage with China was a mistake and thus that the interface of countries with divergent the objective should now be to curb the economic systems, such as those of China rival superpower’s rising might. and the Western market democracies.

10 See “Rising Employment Overshadowed by Unprecedented Wage Stagnation,” Organisation for Economic Co-operation and Development, July 4, 2018, http://www.oecd.org/newsroom/rising- employment-overshadowed-by-unprecedented-wage-stagnation.htm; and Drew DeSilver, “For Most US Workers, Real Wages Have Barely Budged in Decades,” Pew Research Center, August 7, 2018, http://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-workers-real-wages-have-barely- budged-for-decades/. 11 Zhiyao (Lucy) Lu and Gary Clyde Hufbauer, “Has Global Trade Fueled US Wage Inequality? A Survey of Experts,” Peterson Institute for International Economics (blog), August 30, 2017, https://piie.com/blogs/ trade-investment-policy-watch/has-global-trade-fueled-us-wage-inequality-survey-experts.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 291 Finally, we have seen a revival of con- Second, while each country prob- cerns over the determinants of trade ably wishes for greater “policy space” imbalances, including exchange rate in one domain or another, the existing “misalignments.” set of agreements is the product of a So how can the institutions of the complex balance of costs and benefits trading system grapple with these new across members, reached in previous pressures and demands? How might negotiations. Once members start to the system cope with what are in some reverse these agreements, a risk of com- respects the fruits of its own successes— prehensive unraveling will emerge. So notably the facilitation of the rise of any attempts to rectify existing anom- emerging countries and the opening alies—over the definition of developing up of economies—and in other respects countries, for example—needs to be con- the bitter fruits of other institutions’ ducted in a negotiation of give-and-take failures—especially the huge financial that is not going to call into question crises and the failure to help those who the entire institutional acquis. lose from economic change? Third, given the first two principles, Here are some fundamental one must temper any talk of the threat of principles. “undemocratic liberalism”—constraints First, the bulk of the WTO mem- imposed on democratic freedom by bership continues to see the case for international agreements.12 Dani Rodrik both liberal trade and the rule of law of , for example, in trade. While it is possible to prate of suggests that globalization represents a sovereignty, international trade always significant (and ultimately intolerable) affects at least two jurisdictions, and erosion of democratic sovereignty.13 For today, with the development of value nearly all countries, the economy could chains, it affects a multiplicity of them. not operate at all, let alone successfully, Dominant superpowers might obtain without reasonably free access to global whatever they want through the exercise supply and thus to world markets. If a of their power, but this is an inconceiv- country claims the sovereign right to do able path for the majority of countries. as it pleases on trade, so will others, to Even for superpowers, the danger that the detriment of the countries making this approach will lead to a breakdown of that claim. Democracy is far better relations, going far beyond trade, is large. exercised via agreements with other

12 Yascha Mounck, “Illiberal Democracy or Undemocratic Liberalism,” Project Syndicate, June 9, 2016, https://www.project-syndicate.org/commentary/trump-european-populism-technocracy-by- yascha-mounk-1-2016-06. 13 Dani Rodrik, “The Inescapable Trilemma of the World Economy,” June 27, 2007, Dani Rodrik’s Weblog, http://rodrik.typepad.com/dani_rodriks_weblog/2007/06/the-inescapable.html.

292 | REVITALIZING THE SPIRIT OF BRETTON WOODS sovereigns than by insisting on one’s defensive and minimal. It is indeed right to do as one pleases. largely an attempt to hold the line. Finally, the WTO does not prevent More than these actions will surely member countries from dealing with the be needed. Thus, if certain major difficulties of their economies or of vul- powers cannot abide by the existing nerable groups within them. The WTO rules, the rest of the membership needs did not cause the global financial crisis. to proceed without these members, if Nor does the broadly liberal trade agreed necessary, through informal arrange- to within GATT and the WTO cause ments—over dispute settlement, for trade imbalances, which are essentially example. Plurilateral agreements among macroeconomic phenom­ena. Nor does some members, but open to all of them, the WTO prevent countries from assist- are a possible direction, though the ing those adversely affected by economic presence of significant free-riders will change, be that due to trade or any other make that approach difficult to make cause. The right response to these diffi- workable. A better alternative would culties lies in macroeconomic, exchange be to develop free trade arrangements rate, or domestic welfare policies. open to all countries willing to accept In brief, an attempt has to be made to their discipline. An ambitious free trade hold the line on the world trading system arrangement among the 11 members of and, where possible, to go forward. Going the current version of the Trans-Pacific backward will lead to disintegration. The Partnership, minus the United States system is too important to the world to (now called the Comprehensive and let that happen. Progressive Agreement for Trans-Pacific A recent report titled Revitalizing Partnership), plus the EU and the UK, Trade Governance, under the chairman- post-Brexit, might be the foundation ship of Bernard Hoekman of the Centre of such a mega-arrangement. for Advanced Studies at the European Big emerging countries, especially University Institute, was revealingly China and India, will also need to take modest in its proposals: no new round; on a leadership role within the system. more “policy dialogue”; support for Xi Jinping has committed himself rhe- “open pluralism”; enhancement of the torically to the idea of globalization.15 role of the secretariat; and review of But China has yet to take the lead in the WTO’s institutional performance.14 promoting liberalization. On the contrary, This agenda is, understandably, both it is widely seen to be dragging its feet. The insistence that it is still a “developing

14 Bertelsmann Stiftung, Revitalizing Multilateral Governance. 15 “Full Text of Xi Jinping Keynote at the World Economic Forum,” CGTN (China Global Television Network) America, January 17, 2017, https://america.cgtn.com/2017/01/17/full-text-of-xi-jinping- keynote-at-the-world-economic-forum.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 293 country” is unworkable. Size matters: it Jan Tumlir, erstwhile chief econo- brings the disadvantages of responsibility mist at GATT, who died in 1985, used but also important advantages. to say, “It is not true we do not learn Today, the trading system confronts from history; we do—and then we challenges bigger than any it has faced forget.” The great threat to the trading since its inception. But it remains the system comes from the fact that too only orderly way to manage trading many people have indeed now forgot- relations among countries that differ so ten. They take for granted the openness much in power, levels of development, and predictability that has been achieved and political systems. It is a foundation in our trading relationships. Those who of prosperity and peace. No safety is to do forget the past are condemned to be found in going back, and no easy way repeat it. We must not forget. exists to move forward. But the effort to achieve the latter must be made.

294 | REVITALIZING THE SPIRIT OF BRETTON WOODS IS THE MULTILATERAL TRADING SYSTEM FIT FOR PURPOSE?

MARI PANGESTU Adjunct Senior Research Scholar, Columbia University, and former Minister of Trade of Indonesia

The multilateral trading system (MTS) membership. Thus, the current threat to that facilitates open and rules-based trade the MTS should be seen as an oppor- between countries has lifted hundreds of tunity to address the past and present millions out of poverty. However, in the challenges in a way that will ultimately last two years, the MTS as we know it strengthen the MTS and make it fit for has come under serious threat from one purpose into the future. of its leaders since the inception of the General Agreement on Tariffs and Trade: the United States. The public good of THE CURRENT an open and nondiscriminatory trading CHALLENGES TO system is being seriously undermined just MULTILATERALISM AND as the Bretton Woods system turns 75. THE INTERNATIONAL This sharp turnaround is unprece- ORDER dented; it is a nightmare for multi­lateralism and the international economic order as The Rise of Populist Nationalism we know it. Is the protectionist senti- and Protectionism ment of the current US administration an aberration or a symptom of a larger Since the global financial crisis, and problem? Prior to the disruption of the especially in the last three years, global- system, there were signs of doubt that the ization and multilateralism have been MTS is fit for purpose, namely, the stalled challenged as never before. After the Doha Round of trade negotiations and effects of the stimulus wore off, 2012– the changing circumstances in terms of 2016 saw countries trying to adjust to

REVITALIZING THE SPIRIT OF BRETTON WOODS | 295 growth without stimulus on the fiscal followed by renegotiating the North and monetary sides as quantitative eas- American Free Trade Agreement ing tapered off. This situation led to (NAFTA) and the US-Korea Free Trade volatile capital flows, which affected Agreement (KORUS). Subsequently, emerging economies. Growth and trade the United States zeroed in on 20 slowed down, and concerns about the countries with which it had a deficit unequal distribution of the benefits of by imposing tariffs on steel and alu- globalization began to influence politi- minum, based on section 232 of the cal outcomes and precipitate the rise of US Trade Expansion Act (1962), citing protectionism. national security grounds. China was These developments occurred amid specifically targeted with increased tar- growing perceptions that international iffs on steel and aluminum as well as trade has led to loss of jobs, wage stagna- a range of other products deemed to tion for midlevel workers, and increased be subject to unfair trade practices.1 inequality. After the crisis, the subsequent China responded by increasing tar- antiglobalization and protectionist stance iffs on an equivalent amount of trade in the name of protecting jobs at home from the United States. There is major became a compelling story and, as we concern about continued escalation of have witnessed in the last few years, led trade tensions between the United States to the election of far-right and far-left and China. The uncertainties the trade populist leaders. In particular, the election dispute is causing are already beginning of President Trump in 2016 reversed to affect the world economic growth the position of the United States; for 75 outlook negatively.2 Furthermore, the years, it was the protector of the inter- United States has also been questioning national order, and now it is becoming the relevance and effectiveness of the its greatest threat. World Trade Organization (WTO). The greatest uncertainty is coming Of greatest concern is the US decision from the unilateral actions and pro- to block the nomination of new judges tectionist stance of the United States. to the Appellate Body (AB). There are Shortly after becoming president in currently only three sitting AB judges, January 2016, among President Trump’s which is the minimum number required first actions was to leave the Trans- to sign off on any ruling, and their terms Pacific Partnership Agreement (TPP), expire at the end of 2019.

1 The United States also imposed safeguard duties on washing machines and solar panels, but at least these come under the purview of trade remedies, even though one could take issue with the inves- tigation process. 2 See, for instance, various editions of the International Monetary Fund’s World Economic Outlook and the World Bank’s Global Economic Prospects for information on the volatility of the stock market and companies deemed vulnerable to the tariff wars.

296 | REVITALIZING THE SPIRIT OF BRETTON WOODS The Proliferation of Regional an action that was seen as a pivot to Asia Agreements and a balance to the growing influence It should be noted that the shortcomings of China. In fact, President Obama stated of the MTS in addressing the trade and that the TPP was intended to keep China investment issues faced by countries from writing the rules—an indication were also evident for many years before of the issues to come and the current the Trump administration turnaround challenges. During the same period, the on trade policy in 2016. The failure to cross-Atlantic EU-US Transatlantic Trade conclude the Doha Round of negoti- and Investment Partnership (TTIP) was ations as a single undertaking after 17 launched, focusing on regulatory harmo- years since its launch in 2001, and 13 nization rather than market access, given years since the negotiations began in the already low trade barriers between earnest, meant that the WTO was not the two. However, the TTIP failed to able to provide continued opening up make much progress, whereas the TPP, of market access or remain relevant in after getting a boost with Japan’s joining addressing trade distortions in agricul- in 2013, was concluded in 2015. It was ture; updating the rules; and addressing not ratified in the US Congress in time new issues of trade such as investment, for the end of the Obama administration, competition policy, and e-commerce and one of the first actions of President and data flows. Trump upon assuming office in January As a result, in the last two decades, 2017 was to pull the United States out countries seeking deeper economic of the TPP. integration began to look at alterna- Interestingly, under the leadership of tives by undertaking bilateral, regional, Japan, the remaining 11 members agreed and mega-regional free trade agree- to continue the TPP without the United ments (FTAs) predicated on the goal States, and negotiations were completed of increased economic integration, as in 2018 for a renamed Comprehensive well as geopolitical and strategic con- and Progressive Agreement for Trans- siderations. The major regions, such as Pacific Partnership (CPTPP). Most the European Union, Asia-Pacific, East countries have ratified the agreement, Asia, Southeast Asia, and Latin America, and even though its economic size all pursued bilateral as well as regional is much smaller without the United agreements, including expanding and States, from covering 40 percent of deepening existing agreements. global GDP and trade to now around The Obama administration (2008– 25 percent, the agreement is still a sig- 2016) turned seriously to trade policy nificant development. only in its second term, but then it Besides the CPTPP, the Asia-Pacific focused on mega-regional agreements region, notably East Asia, has seen a and bilaterals. The United States began proliferation of bilaterals and mega-­ to promote the TPP aggressively in 2012, regionals. On the latter, in Southeast Asia,

REVITALIZING THE SPIRIT OF BRETTON WOODS | 297 the ASEAN (Association of Southeast economies that have been able to main- Asian Nations) Free Trade Agreement tain a reform agenda and trade openness, progressed beyond tariffs and trade in such as Chile, Costa Rica, Mexico, and goods to become the ASEAN Economic Peru, has been successfully negotiated. Community in 2003. Furthermore, in the Although these partnerships are 2004–2009 period, ASEAN negotiated mainly intended to increase coopera- five FTAs or comprehensive economic tion and economic integration among partnerships with its main dialogue member states, their existence shows partners, China, South Korea, Japan, countries’ response to the slow pace of Australia-New Zealand, and India. The negotiations in the WTO; potentially “ASEAN plus one” FTAs or comprehen- poses a threat to the WTO’s nondis- sive economic partnership agreements criminatory principle; creates stumbling did not focus just on trade in goods blocks rather than building blocks for but also on trade in services and invest- MTS negotiations, with the emergence ment, and they increasingly addressed of the famous spaghetti bowl effect of environmental and labor issues, albeit inconsistent schedules and rules; and risks still mainly in relation to transparency. creating trade diversion.3 At the same In 2012, ASEAN agreed to consoli- time, these agreements could function as date all the plus-one agreements into a catalysts to more multilateral agreements new East Asia Regional Comprehensive and as a guide to new issues not yet Economic Partnership (RCEP) agree- addressed in the WTO, such as investment ment. Negotiations are ongoing, with and e-commerce. some expectation of substantial con- clusion by the end of this year. Apart from trade in goods, services, and invest- MOVING FORWARD ment, the RCEP includes chapters on TO SAFEGUARD THE competition policy, e-commerce, the MTS: ADDRESSING environment, and labor, although the THE CHALLENGES agreement has been described as having The MTS and international economic a lower level of ambition than does the order as we know it are under serious CPTPP. threat, and it is of utmost importance Meanwhile, in the Latin American that we safeguard and strengthen them region, there was failure to conclude to face the current challenges. US-China the Free Trade Area of the Americas. trade tensions are unlikely to be resolved However, the emergence of the Pacific in a satisfactory way if dealt with unilat- Alliance, made up of the Latin American erally or even bilaterally, either of which

3 Chad P. Bown, “Mega-regional Trade Agreements and the Future of the WTO,” Global Policy 8, no. 1 (2017): 107–12. Literature on trade diversions can also date back to Jacob Viner, The Customs Union Issue (New York: Carnegie Endowment for International Peace, 1950).

298 | REVITALIZING THE SPIRIT OF BRETTON WOODS would mean doing deals outside of the Since its accession to the WTO, system, diverting trade, and undermining China has benefited from numerous confidence in the MTS. exceptions under special and differen- tial treatment (SDT) clauses. China’s exponential growth since its accession The Developing-Country Issue to the WTO and its status as the second-­ The role of developing countries in biggest trading player in the world have the MTS, and China in particular, sparked debate about whether these requires attention. There has been exceptions, which are reserved for devel- a rise in antiglobalization sentiment oping countries, should still apply to worldwide, but it is more pronounced China. Arguably, despite its economic in developed countries, whose support size, low per capita income and poor of the WTO as the vanguard of the progress on other development indica- MTS is in decline. In a recent survey tors in inner provinces should mean that conducted by Bertelsmann Stiftung, China still qualifies for them. The same more than 60 percent of respondents in may be said for other major developing emerging countries believe the WTO countries. is an important institution, relative to On the one hand, classifying coun- only 30 percent of respondents in the tries as “developed” or “developing” United States.4 Populist rhetoric often based on a set of selective economic includes dissatisfaction with the WTO’s indicators would lead to an arduous “unfair” treatment of China and other negotiation process around acceptable developing countries. The EU, the development indicators.5 On the other United States, and Japan have not yet hand, given the levels of development given China market economy status, reached by some emerging economies, related to what they perceive as lack of the issue of flexibility in SDT status a level playing field and transparency does need to be revisited and made around industrial subsidies, preferential more nuanced for the continued rele- treatment of state-owned enterprises, vance of the institution. One possible violation of intellectual property rights, approach could be a design similar to and technology transfer requirements that of the Paris Agreement on climate for foreign firms. change, which differentiated levels of responsibility and commitment relative

4 Bertelsmann Stiftung, Revitalizing Multilateral Governance at the World Trade Organization (Gütersloh, Germany: Bertelsmann Stiftung, 2018), https://www.bertelsmann-stiftung.de/fileadmin/files/ BSt/Publikationen/GrauePublikationen/MT_Report_Revitalizing_Multilateral_Governance_ at_the_WTO.pdf. 5 “An Undifferentiated WTO: Self-declared Development Status Risks Institutional Irrelevance” (Communication from the United States, WT/GC/W/757, General Council, World Trade Organization, Geneva, Switzerland, January 16, 2019).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 299 to development progress. We must first such possibilities are (1) completion acknowledge that this is an issue that of the rules on discipline for harmful must be discussed in more depth to fishing subsidies, which will address define a way forward that is acceptable market distortions as well as have sus- to all stakeholders. tainable outcomes on overfishing and overcapacity issues, and (2) transparency and notification of trade policies and An Agenda for WTO Reforms WTO commitments. Also needed are At the 2018 G20 meeting in Buenos ongoing and continued discussions on Aries, leaders called for commitment to the more complex and potentially sensi- improving a “rules-based international tive issues, including a strategic process order” that is capable of responding to to strengthen the MTS and build con- the rapidly changing world, and they fidence in the institution and processes supported “the necessary reforms of of the WTO. the WTO” to improve its functioning. A range of new issues falls into this Defining a process of WTO reforms category, including the set of traditional involves identifying the priorities for issues, such as completing the agriculture these reforms and setting their strategic negotiations, improving the rules on direction. intellectual property rights, addressing In the immediate and short-term services, and expanding the Agreement period, the urgent issue of reform is on Government Procurement. Another settling the nomination of judges for set of issues have not yet been dealt the AB and other reforms of the dispute with in the WTO but are already an settlement mechanism. AB nominations integral part of trade and investment should be prioritized, and at the same relations today, as well as already being time the WTO should address the pro- addressed in FTAs, and thus are in need posed reforms that are already on the of being addressed in the MTS. This table in response to US concerns, includ- group includes issues such as investment ing the transition period of AB judges, and investment facilitation, a framework time frames for rulings, and the issue of for addressing trade distortions such precedence. as subsidies, a competition policy, and Furthermore, to ensure confidence a policy of neutrality vis-à-vis state- in the WTO, its members need the owned enterprises. Levy has argued political will to resolve outstanding that the existing WTO rules are inad- issues that are already well advanced in equate to compel economic reforms the process of negotiations—what we related to the treatment of state-owned would call “low-hanging fruits.” Two enterprises.6

6 Philip I. Levy, “The Treatment of Chinese SOEs in China’s WTO Protocol of Accession,” World Trade Review 16, no. 4 (2017): 635–53.

300 | REVITALIZING THE SPIRIT OF BRETTON WOODS Currently, the WTO lacks regulations issue of subsidies to state-owned enter- related to e-commerce, data flows, and prises is addressed in the TPP. data privacy.7 Little progress has been Other areas for reform relate to made toward WTO agreements cover- labor and the environment, which are ing e-commerce and Internet-enabled noneconomic, nontrade issues but can transactions involving goods and ser- lead to trade-related outcomes. Thus, vices. Concerns about the rules also point almost all FTAs, including the TPP, to the lack of national efforts in WTO now include labor and the environ- members’ jurisdictions toward providing ment, but there is still a need for links to measures for protected digital trans­ accepted international standards. In the actions and foreign goods and services. case of labor, there are the International The recently announced 73-country Labour Office standards, whereas for the negotiation of a plurilateral agreement on environ­ment the universal standards and e-commerce is looking at many of these measures are still in process. issues. It is an important step of progress The existing WTO agreement does in the WTO negotiation framework not provide any rulings on environ- and toward establishing a plurilateral mental protection. In fact, there has approach, given the difficulties in reach- been continuous debate on whether ing consensus among 164 members. The environmental protection could fit most comprehensive approach on this somewhere in the scope of WTO law. issue so far in regional agreements can Regarding this issue, Hufbauer and be seen in the TPP. Kim discussed several options, such as In the case of subsidies, many member negotiating a new code under pluri­ states enforce national laws contradicting lateral agreements to create policy space the rules in the Agreement on Subsidies for climate measures, amending parts and Countervailing Measures, reason- of WTO legal texts to accommodate ing that the subsidies are being used environmental controls, or sticking to for governmental stabilization policies, the Doha mandate by reducing trade national security, or other reasons that barriers to environmental goods and qualify them as nonprohibited measures. services as well as to the dissemination Furthermore, there is also a large number of intellectual property with a bearing of unreported subsidy measures.8 The on climate change.9

7 Gary Clyde Hufbauer and Cathleen Cimino-Isaacs, “How Will TPP and TTIP Change the WTO System?” Journal of International Economic Law 18, no. 3 (2015): 679–96. 8 The Library of Economics and Liberty, s.v. “Agricultural Subsidy Programs,” by Daniel A. Summer, accessed March 2019, https://www.econlib.org/library/Enc/AgriculturalSubsidyPrograms.html. 9 Gary Clyde Hufbauer and Jisun Kim, “The World Trade Organization and Climate Change: Challenges and Options” (Working Paper No. 09-9, Peterson Institute for International Economics, Washington, DC, 2009).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 301 Process and Leadership the process, open accession clauses, and Given the current situation, whereby it whether to give a category of goods or would seem that a single undertaking services MFN treatment or not. such as that envisaged by Doha is no The most difficult question is the longer workable, there remain different role of leadership in an increasingly pathways to push forward the process of uncertain world in which the values opening up and updating the rules of the of Bretton Woods are at stake. Major WTO. For instance, often the negotia- developing countries that have benefited tion of one issue—especially one whose a lot from opening up to trade via the negotiating points have mainly been MTS should play a bigger leadership resolved and that has a lot of support role to push WTO reforms. Additional and pressure from stakeholders, such as developed countries, such as Australia, the private sector—can be completed a Japan, those in the EU, and others, have sequential way, for example, the trade to commit to maintaining the rules- facilitation agenda. Another example in based international order. the current context would be discipline for fisheries subsidies. Another approach is for a cluster CONCLUSIONS of members that make up a “critical The disruption to the order of the MTS mass” to agree on an issue and then caused by the United States should be take it up for negotiation in the broader seen as an opportunity not only to WTO. This negotiation may result in strengthen the MTS but to undertake certain products’ gaining most-favored-­ reforms on various fronts to make it nation (MFN) access to foreign markets. fit for the purpose of addressing the Examples of this mechanism at work are challenges of today. Needed reforms the Information Technology Agreement relate to the changing balance of eco- (ITA), ITA-2, and a list of environmen- nomic power and the multipolar world, tal goods, which were agreed upon by which will necessitate changing the the Asia-Pacific Economic Cooperation division between developed and devel- (APEC) and then brought to the WTO oping countries to better reflect today’s for negotiations; upon completion of reality. There also needs to be a more WTO negotiations, certain items were effective means to address the devel- given MFN treatment. The intention, opment dimension of trade, whether mentioned above, by 73 countries to it is ensuring effective trade with or negotiate an e-commerce agreement effective capacity building within least falls under this plurilateral approach. developed countries. Negotiations would need to cover issues Reform will also necessitate working such as nonmember countries’ ability to complete the current issues under to join as observers, transparency of negotiation, notably the AB nomina- tions and rules on dispute settlement

302 | REVITALIZING THE SPIRIT OF BRETTON WOODS and fishery and agriculture subsidies, discussions on the issues and rules to be and to strengthen aspects of the system negotiated multilaterally. such as the transparency and monitoring To the extent that such reforms of notifications of policies. At the same will reinforce a national coordination time, we must begin to address the “new process, they should be seen as a pos- challenges” posed by issues of pertinence itive means to find the right balance to the conduct of trade and investment for dealing with a myriad of questions today, which are not yet covered in the related to completing urgent matters rule book. These include trade- and in the countries’ interests, considering market-distorting­ policies such as indus- new issues that they will have to deal trial subsidies; competitive neutrality with eventually and weighing trade in the case of state-owned enterprises; against both development needs and reforms on intellectual property rights, downside risks. Needless to say, the e-commerce, and digital trade; and sus- national coordi­nation process should not tainable development issues such as the be confined to governments but needs to environment and labor. incorporate all stakeholders—including Top-down impetus comes from the the private sector and civil society. highest level of political leadership, This essay ends with a hope. Let’s not which can call for concerted action despair about the collapse of the MTS through the G20 process. Bottom-up given the unpredictable uncertainties and energy can come from various path- challenges. Let’s not give up—that is too ways, including plurilateral approaches, easy. While many of these recommen­ which can all be complementary. It dations may not work out in reality due can start from the various sherpa and to political or institutional constraints working groups in the G20 that feed and lack of clear leadership, they are a into the WTO negotiating process. starting point for continued discussion Another complementary process is that toward finding creative paths to multi- of the mega-regionals, which are already lateralism with shared vision and values addressing all the new issues and can be of international cooperation for national used as a reference point for beginning and global good.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 303 CHALLENGES TO THE WTO DISPUTE SETTLEMENT SYSTEM

CELSO LAFER Professor Emeritus, University of São Paulo, and former Foreign Minister and Commerce Minister of Brazil

Objectives and ideas related to shaping in international trade, to the maximum the world order after World War II practical degree, as a way to achieve the were part of the diplomatic concerns peace and welfare of nations. of the United States and Great Britain The Bretton Woods Agreement beginning with the Atlantic Charter of acknowledged that additional mea- 1941. Among these objectives was the sures of economic cooperation were establishment of institutions with the necessary to facilitate the expansion ability to foster economic cooperation and growth of international trade, thus among nations that had been hindered recognizing the complementary need to in the prewar period. This objective establish a multilateral trading system. led to the Bretton Woods Agreement The first public proposals related to this of July 22, 1944, which created the matter were made in 1945 and led to the International Monetary Fund (IMF) manifold negotiations that concluded and the World Bank. Neither of these in the Havana Charter of 1948, which institutions, however, dealt with the provided for the establishment of an trade pillar of economic cooperation. international trade organization but Trade was part of the policy planning never entered into force. concerns of the United States and Great The General Agreement on Tariffs Britain, who also conceived the idea and Trade (GATT), which had been of an international trade organization. negotiated separately in 1947, entered During the war, US Secretary of State into force provisionally on January 1, Cordell Hull was the vigorous sponsor 1948, and contained much of the content of the objective of promoting freedom related to commercial policy that came

304 | REVITALIZING THE SPIRIT OF BRETTON WOODS to be included in the Havana Charter. trade disputes and consequently to the Thus, the beginning of the multilateral need to put into place mechanisms for trading system started in 1948, much their settlement. later than the IMF and the World Bank. The GATT system evolved through As a result of its provisional dimen- practice, and its articles provided the sions, GATT was, from its very beginning, legal foundation for action. It was a much weaker and less formalized based on an obligation of conduct, arrangement in the world sphere than enshrined in article 22, which pro- the IMF and the World Bank, which had vided for consultations, explicitly stating been created with the Bretton Woods that contracting parties “shall accord Agreement. In this context, GATT sympathetic consideration … regarding articles conferred a preeminent role to such representations as may be made by consultations with the IMF when any another contracting party with respect contracting parties were called on to to any matter affecting the operation” deal with problems related to monetary of the agreement. The next step, pro- reserves, balance of payments, and for- vided in article 23, was the possibility eign exchange arrangements that affected of referring representations regarding international trade. nullification and impairment of the objectives of GATT to the contracting parties if no previous satisfactory adjust- THE PROGRESSIVE ment on the matter has been reached. DEVELOPMENT In dealing with these representations, OF GATT AND THE in the mid-1950s the contracting parties, ESTABLISHMENT OF exercising so-called quasi-judicial powers, DISPUTE SETTLEMENT started to establish independent panels, MECHANISMS usually composed of three members not chosen by the parties, to review the facts Notwithstanding its precarious begin- of a case and the applicability of GATT’s ning, GATT was able to affirm itself as provisions so as to arrive at an assessment an institution and expand its international of the matter. Consensus was required role in trade matters. Successive rounds to establish a panel and subsequently to of tariff negotiations reduced barriers to adopt its findings and recommendations. trade, even though they failed to address The corpus of solutions produced by important matters such as agriculture. The this system was significant, in both num- number of contracting parties expanded, bers and substance. These solutions were enhancing the multilateral dimension qualified as “diplomatic jurisprudence,” of the most-favored-nations clause and a special blend of law and power, and as the principle of nondiscrimination. The such, they were not necessarily helpful increase in international trade stimulated in dealing with the representations of by the action of GATT naturally led to

REVITALIZING THE SPIRIT OF BRETTON WOODS | 305 the contracting parties, who were less its field to thelocus standi of the IMF and powerful trading partners because they the World Bank. Thus, one of the func- were not key suppliers or consumers in tions of the WTO is its role in achieving international trade. greater coherence in global economic GATT left room for unilateral inter- policy making through cooperation, as pretations of the scope and application appropriate, with the IMF and the World of its rules. It also left room for the uni­ Bank. Cooperation with the Bretton lateralism of “self-help” in the application Woods institutions was formal­ized of its rules through employment of trade by agreements between them and the retaliation measures that included raising WTO. For the purpose of this article, it tariffs beyond what had been agreed to is important to recall that in the agree- in GATT negotiations. ment with the IMF, the autonomy and The World Trade Organization independence of the dispute settlement (WTO) system of dispute settlement system was duly preserved, as appropri- was negotiated in the broader context ate, for a new rules-based multilateral of the Uruguay Round as a progressive trading system. development of the GATT system and, as The added relevance of the WTO such, a response to the latter’s perceived when compared with the GATT is a imperfections. These imperfections were result of both a trend, consolidated over seen as impairing the development of time, toward universality in its member- a more ambitious multilateral trading ship and a very substantial increase in the system in an era of expanded trade rela- scope of its rules. The WTO rules were tions favored by globalization. embodied in a single undertaking that went far beyond what was contemplated in the rules and practices of GATT. THE SPECIAL ROLE OF The objective of the WTO was to set DISPUTE SETTLEMENT up not just a multilateral trading system IN THE WTO of greater scope and greater membership The long and complex negotiations of than that of GATT but an integrated, the Uruguay Round of GATT, initiated more viable, and durable rules-based mul- in 1986 and concluded in 1994, led to tilateral trading system. This explains the creation of the WTO, a full-fledged thickening dimension of legality that is international organization with a legal present in the dispute settlement pillar personality and an institutional dimen- of the WTO. sion that GATT did not possess. The One of the reasons for this thick- negotiated transition of GATT to its ening of legality resides in the fact that successor, the WTO, gave the multilat- the assets of the WTO differ from those eral trading system added relevance in of the IMF and the World Bank. The the international sphere, comparable in Bretton Woods institutions manage

306 | REVITALIZING THE SPIRIT OF BRETTON WOODS resources and, especially in the case of reasoning of lawyers and legal scholars the IMF, have regulatory functions. has stressed, and continues to stress, that The WTO, however, does not have societies and markets do not operate in resources of its own. The assets of the a void but require rules and institutions WTO are its rules, and it is the thick- to function adequately. ening of legality that provides erga omnes This concern about rules and insti- credibility, acceptance, and observance tutions made administration of the of its rules. Understanding on Rules and Procedures In this context, it is worthwhile to Governing the Settlement of Disputes observe that the results of the Uruguay (DSU) one of the functions of the Round were crafted and negotiated WTO. It also led to the establishment, at the crossroads of economic, politi- in the very structure of the WTO, of cal, and legal reasoning. This explains the Dispute Settlement Body (DSB), why the WTO and its rules are not an convened as a specialized organ of the unrestrained free trade charter. They General Council in charge of responsi- provide, to the maximum practical bilities related to the DSU. The DSU was degree, a structure to harness the value conceived as “a central element in pro- of open trade to rules and realities. viding security and predictability to the Economic reasoning stressed, and multilateral trading system,” preserving continues to stress, the importance of “the rights and obligations of members the role of international trade in foster- under the covered agreements,” enabling ing development and competitiveness, clarifications “of the existing provisions as well as the potential for reciprocal of these agreements in accordance gains through increased liberalization with customary rules of interpretation in the trade of goods and services. By of public international law” with the virtue of their position, diplomats are caveat that recommendations and rulings well aware of the issues of power in “cannot add to or diminish the rights the international system and, in their and obligations provided in the covered reasoning and concerns, did not, and do agreements” (DSU, article 3.2). not, ignore the fact that power is inher- In this context, one of the key ele- ent in economic life. Furthermore, as ments of the system was the explicit representatives of countries, they know purpose of containing the uni­lateralism that competition and the market can be of power-oriented action and self-help both constructive and destructive in the that was a possibility inherent in GATT’s internal economic sphere. Hence, in the practice. This is why the strengthening singular undertaking of the WTO, addi- of a rules-based multilateral system was tional concern was given, for example, mandated in article 23 of the DSU, to antidumping, subsidies, and counter- which states that the “redress of a viola- vailing measures and safeguards. The tion of obligations or other nullification

REVITALIZING THE SPIRIT OF BRETTON WOODS | 307 or impairment of benefits” can occur been 566 requests for consultations, only through the procedures set forth 316 panels established by the DSB, 275 in the DSU. panels composed, 246 panel reports The effectiveness of the system circulated, 230 panel reports adopted, required the end of the GATT prac- and 156 Appellate Body reports adopted. tice of any member’s blocking, per se, Nevertheless, in light of the implemen- the dispute mechanism. Hence, in the tation disputes that have been brought WTO, the dispute resolution process under article 21.5 of the DSU, it cannot is automatic. It offers the right to a be said that all the disputes with a report panel and the right to adoption of a adopted by the DSB have been settled. panel report, or alternatively, the added juridical security of the right to appeal to a standing Appellate Body, composed THE POLITICAL of seven members who are entitled to LANDSCAPE AT THE TIME review the findings and the legal inter- WHEN THE WTO DISPUTE pretations developed by the panel and, SETTLEMENT SYSTEM subsequently, the right to adoption of WAS NEGOTIATED AND the Appellate Body report. In every CONCEIVED situation, the DSB conducts institutional collective surveillance of the WTO The WTO is the first significant post– regarding implementation of recom- Cold War international organization. As mendations and rulings by the dispute such, it was politically favored by coming settlement system. at the end of the East/West and North/ I will not examine the technicali- South polarities of the Cold War, based ties of the system, but it is important on regions’ and countries’ distinctive and to emphasize that the complexity and different views regarding the shape of ratione materiae extension of the issues the world economic order. This political covered by the rules of the WTO, along background of eroding polarities created with the expansion of international a climate of opinion that helped identify trade, opened up a vast array of poten- shared interests regarding the potential tial trade disputes. This development for in-depth cooperation on matters of has led the WTO, over the course of trade. The WTO was also favored from its existence and up to the present, to an economic perspective, by positive make very significant use of its dispute expectations for globalization through settlement system, resulting in a steady a progressively more open trading envi- increase of its jurisprudence, which has ronment in accordance with the rules become a substantial body of “living embodied in the results of the Uruguay law.” As of October 2018, there had Round, an environment that would have a worldwide impact on growth

308 | REVITALIZING THE SPIRIT OF BRETTON WOODS and would increase living standards and the WTO, that precludes legal activism. employment. States have different interpretations of In terms of trade disputes, these cir- the scope and application of the rules cumstances led to weakening of the and of the impact these rules have on diffuse tensions that had emerged due their respective national economies. In to conflicting conceptions regarding other words, they have different inter- the way international economic life pretations of the relative significance, in operates. In this context, trade disputes their own political and economic views, in the WTO were considered to be a of any nullification or impairment of by-product not of conflicting concep- benefits under the covered agreements. tions but, rather, of conflicts of interest Furthermore, the living law of the cases on matters sufficiently circumscribed to settled by the WTO system has become lend themselves to claims and represen- very complex since such cases have dealt tations susceptible to reasoned analysis with new dimensions of trade brought that can be sorted out by applying and about by the ratione materiae amplitude interpreting established and accepted of the covered agreements. rules. This approach paved the way for In this context, it is not the result of the acceptance of legal settlement of any given case that sustains the WTO disputes and to the rule of law in taming dispute settlement system. Instead, it is power-oriented behavior by WTO mem- acceptance of the legitimacy of the pro- bers, in a rules-based multilateral trading cedures contemplated in the DSU that system. Conflicts of interest, not conflicts provides legitimization for its function- of conception, explain the significance ing. The WTO, its covered agreements, of article 3.10 of the DSU: “it is under- and the DSU proceed from a climate stood that requests for conciliation and of political opinion that offers room the use of dispute settlement procedures for a Grotian reading of international should not be intended or considered relations, that is, for the possibility of as contentious acts and that, if a dispute managing both conflict and cooperation arises, all members will engage in their in a rules-based multilateral trading procedures in good faith in an effort to system through a process that stems resolve the dispute.” from the rationality and functionality The taming of power-oriented of a broad reciprocity of interests. behavior through the rule of law is For several reasons to which I now not an easy matter in the international turn, it is the questioning of this Grotian sphere. The interpretation and applica- reading that explains the very significant tion of rules according to the logic of and overall challenges that the WTO legal experience is never unequivocal dispute settlement system presently faces. or consensual, even in a system, such as

REVITALIZING THE SPIRIT OF BRETTON WOODS | 309 THE CRISIS OF THE role. The crisis of the WTO and its WTO AND CHALLENGES dispute settlement system is part of this TO THE DISPUTE larger picture in the specific context of the multilateral trading system. SETTLEMENT SYSTEM: Technological and scientific inno- THE BROAD PICTURE vations have reorganized the way goods Today’s international system is very and services are produced and distributed different from the one that led to the today as well as the manner in which creation of the WTO. In a nutshell, people interact with each other. These the world has moved from a context changes have occurred at a pace and scale that favored a Grotian understand- that was not foreseen in the Uruguay ing of international relations to one Round. E-commerce and global produc- that embraces a Hobbesian context of tion chains are part of the new landscape. greater unpredictability, uncertainty, Yet the fruits of globalization are sour and violence. The antagonism of dif- for those around the world who face fuse tensions of differing degrees and social and economic insecurity brought intensity is not offering room to identify about by the dwindling of low- and shared common interests. The spread medium-skilled jobs that has derived of tensions is one of the political con- from this landscape, with consequences sequences of multipolarity, that is, of a for countries’ internal political agendas world in which economic and political regarding the WTO. One such agenda is power is more widely distributed than in a misguided perception of the potential the past. Multilateralism, as conceived and of old-fashioned protectionism as an practiced, with due adjustments by the economic response to the new realities institutions created in the post–World of an interconnected world. War II period, has not been effectively Economic dynamism has shifted capable of absorbing the new ingredi- toward the Pacific. The rise of China ents of the distribution of economic has changed the political economy of and political power in a multipolar, international relations, raising concerns globalized world. The overall diffuse as to whether the trade remedies of the reciprocity that sustains the preservation WTO, and its trade rules in general, are and standing of multilateral chessboards adequate for dealing with the compet- as a space of diplomatic articulation, itive challenges of an economy that is capable of handling the complexity of so very much guided by state action. the present problems of international The rise of emerging economies society in a more integrated way, is has rebalanced the decision-making being challenged, with added emphasis process in the WTO, and the agenda provided by President Trump’s “America of the negotiating pillar reflects prior- first.” Centrifugal forces and the impetus ities on the part of both developed and of unilateral actions are playing their developing countries, amid difficulties

310 | REVITALIZING THE SPIRIT OF BRETTON WOODS in fostering convergence. The WTO is have two objectives. The first is to point a member-driven organization that fol- out that throughout the years, dispute lows the practice of consensus decision settlement has been the most effec- making, explainable because compli- tive of the functions of the WTO. The ance with overall rules requires that second is that this function, carefully the rules be created and accepted by crafted in the Uruguay Round as a all. This practice, however, has become progressive development of GATT, has a problem for one of the functions of made constructive room for peaceful the WTO, namely, that of providing a solutions to trade disputes, prevent- forum for further negotiations among its ing them from becoming unilateral members concerning their multilateral power-­oriented political disputes with trade relations. the potential to escalate into trade wars. These changes, together with a more Present-day challenges to the dispute general erosion of the Grotian outlook, settlement system, if not adequately are among the explanations that led to surmounted, may destroy this most the foundering of the ambitious mandate important achievement of the WTO. of the Doha Round of negotiations of 2001, a fact that became clear in 2008. The 2013 Trade Facilitation Agreement THE CRISIS OF THE WTO reached in Bali and the 2015 Agreement DISPUTE SETTLEMENT on Agriculture obtained in Nairobi, the SYSTEM: DEADLOCK latter prohibiting export subsidies, are Throughout the years, suggestions have relevant but modest achievements. With surfaced related to improving the rules the spread of regional trade agreements, of the DSU. Such suggestions contem- centrifugal tendencies have reduced the plate adjustments based on the practice centrality of the WTO. of some members in relation to their It is important to stress, however, that experience with the functioning of the the institutional existence of the WTO DSU. An examination of such adjust- and its rules was strong enough to serve ments is not relevant here, since they as a hedge to contain the protectionist are not a result of conflicts of concep- tendencies that came to the forefront tion and do not question the logic and with the very significant impact of legitimacy of the system. the 2008 global financial crisis. This There are also concerns of a more strength is a very relevant contribution general nature regarding the manner in to the achievement of greater coherence which the system as a whole operates in global economic policy making that today. Some of these concerns relate is one of the functions of the WTO. to system overload and its consequent All of these observations, as well as impact on the capacity of the Appellate trust in the reasoning of this article, Body to deliver high-quality reports

REVITALIZING THE SPIRIT OF BRETTON WOODS | 311 on very complex matters within the overloaded with cases. Moreover, any time frames prescribed by the DSU. case of possible conflict of interest on the Others express members’ discomfort part of any one of the three remaining with the consequences of the slow pace members will prevent the formation of of the WTO negotiation pillar, which a three-member panel, required by the generates additional pressure on the DSU for examining an appeal. dispute settlement pillar as it deals with In short, US obstructionist policy is more complex cases in the context of suffocating the dispute settlement pillar significant changes in the global eco- of the WTO. The Appellate Body and nomic environment. The importance of the panels are essential to the system deference to national decisions on trade conceived by the DSU. Panels cannot matters has increased in a multipolar properly function without legal guar- world, with the impact of increasing anty of the active presence of a standing appreciation for the multilateral dimen- Appellate Body. When a panel report is sion of the DSU’s activities and work. appealed but an Appellate Body divi- I will not, however, address these con- sion cannot be formed, the adoption of cerns and other issues that, if properly the panel report is suspended until the sorted out, will enhance the merits of Appellate Body can complete its pro- the system. I will focus instead on the ceedings. Therefore, any losing party deadliest challenge that the dispute would be able to prevent the adoption settle­ment system presently faces. of a panel report by appealing to a par- This challenge is a result of the delib- alyzed Appellate Body. This situation erate blocking by the United States of leaves open the possibility of a unilateral appointments of members to fill vacan- blocking of the system and its auto- cies on the Appellate Body. “Vacancies maticity and, as such, a return to the shall be filled as they arise,” prescribes imperfections of the GATT system as the DSU (article 17.2). This rule was well as an erosion of the rules dimensions conceived to ensure the effectiveness and of the multilateral trading system created automaticity of WTO members’ right by the WTO, all within a complex new to appeal regarding panel findings and trading environment. recommendations. It is this right of all If the United States continues that is being threatened by US obstruc- pursuing this deadlock, with no new tionist policy. Since 2017, none of the appointments by December 2019 and required nominations to fill vacancies on only one remaining member, the the Appellate Body have occurred, and as Appellate Body will cease to function. of October 2018, the Appellate Body has That is certainly a Hobbesian perspec- been reduced to three members instead tive that will supersede the safety-net of the prescribed seven. Three is the Grotian potential of addressing conflict bare minimum needed for the function- in trade matters through the instruments ing of an Appellate Body that is already of law.

312 | REVITALIZING THE SPIRIT OF BRETTON WOODS Qualified legal scholars have floated part-time body, which it never was in creative ways to make the system work practice and certainly cannot be under without an Appellate Body as a way to the present circumstances. Resources bypass the deadlock. While I appreci- compatible with the responsibilities of a ate these individuals’ inventiveness and larger, full-time Appellate Body should commitment to the WTO, such solu- also be made available. tions would serve only as a provisional There are concerns related to the bypass and would require the support of time frames prescribed by the DSU— many members. In my view, the heart the rule of a maximum of 90 days—for of the system cannot survive if a sys- the Appellate Body to circulate a report. temic response is not put into place. More reasonable flexibility, with the Such a response would need to maintain agreement of the parties concerned, the system’s automaticity and safeguard could be incorporated into the rules, the independence and impartiality of bearing in mind the complexity of any the Appellate Body. So I will conclude, given case. having as a point of departure my very Finally, in underscoring the merits positive view of preserving the merits of the multilateral chessboard that is the of the WTO in the international sphere, WTO, I note that members have the with the following considerations. right to voice their views on an Appellate In light of available information and Body report when it is adopted, accord- without going into the technical details, ing to the automaticity of the system, by I concur, in the first place, with pro- the DSB (article 17.14 of the DSU). This posals that have been raised in several rule provides an institutional opportunity quarters regarding an increase in the size to go beyond a specific case and also of the Appellate Body from seven mem- discuss any trends in the interpretations bers to nine, with each member serving of findings and recommendations of the a single term of seven or nine years. dispute settlement system. This change would prevent intimidation If the voicing of dissatisfaction and avoid the political issues that have increases in a generalized way, there is a been raised regarding reappointments multilateral remedy at the disposal of the of Appellate Body members. Increasing membership. According to the Marrakesh the Appellate Body to nine members Agreement (article 9.2), the Ministerial would also make it more representa- Conference and the General Council tive of the WTO’s membership today have exclusive authority to adopt an and enhance the number of available interpretation of the WTO Agreement divisions that, without overlapping, and of multilateral trade agreements. A could help in handling the overcrowded “decision to adopt an interpretation shall agenda of cases. The Appellate Body be taken by a three-fourths majority should be made a full-time tribunal, of members” and, of course, not used unlike what it is today, a nominally in a manner that would undermine

REVITALIZING THE SPIRIT OF BRETTON WOODS | 313 prescribed amendment procedures. Any the membership to multilaterally handle such decisions—up to now none has extreme situations involving substantive been made, given the practice of consen- problems related to the way jurisdiction sus—will be binding in the WTO dispute of the WTO dispute settlement system settlement system. So it is in the hands of operates.

314 | REVITALIZING THE SPIRIT OF BRETTON WOODS GLOBAL GAINS FROM THE WTO

JAMES BACCHUS Distinguished University Professor of Global Affairs and the Director of the Center for Global Economic and Environmental Opportunity, University of Central Florida, former U.S. Representative (FL-11) and former Chair, Appellate Body of the WTO

The gains from trade can be maximized The flow of trade in world mar- globally only within the enabling con- kets is smoothed by the certainty that text of an international framework of comes from having rules for world trade. rules. Within this framework, there Traders need to know that mutual obli- must be rules that facilitate the flow gations will be met. International traders of trade, and those trade rules must especially need to know that obligations be followed and enforced globally. In will be met in and by other countries. realization of this need, many of the Why ship a widget to the far side of governments of the world have long the world if you are not sure you will labored to build and strengthen a global be paid? And why take the risk if you framework of rules for the international fear your product will face trade dis- rule of law in trade. They have agreed crimination? The WTO treaty refers on global trade rules. They have agreed to the sense of certainty traders need as to try to continue to improve these rules “security and predictability.”1 Security to meet the ever-changing challenges and predictability in trade have long of an ever-changing global economy. been sought through rules. Throughout And they have agreed to uphold and history, the gradual spread of trade has enforce these rules together through coincided with the development of their cooperative efforts as the World rule-making and rule-enforcing institu- Trade Organization (WTO). tions.2 In supporting the spread of trade, these institutions have supported the

1 World Trade Organization, “Understanding on Rules and Procedures Governing the Settlement of Disputes,” article 3.2. 2 Daren Acemoglu, Simon Johnson, and James Robinson, “The Rise of Europe, Institutional Change and Economic Growth,” American Economic Review 95, no. 3 (2005): 546–79.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 315 spread of freedom. As William Easterly rule-making and rule-enforcing insti- has said, “Free institutions create free tution known as the World Trade values, and vice versa, for a virtuous Organization has worked because all of feedback loop.”3 The WTO is an inter- its members have taken the broader and national institution that seeks through the longer view. They have all rightly international cooperation to maximize understood that it is in their own self-­ the gains from trade and thus maximize interest for the WTO to work. Through the opportunities for freedom by agree- the decades, the WTO has worked and ing on and abiding by rules. has progressed, whenever and to the extent that WTO members have made a priority of their mutual perception of THE EVOLUTION OF a shared self-interest in advancing trade. TRADE RULES The WTO will work and will progress in Since its modest origins with the con- the future only if this enlightened view clusion by 23 countries of a General endures and prevails. Agreement on Tariffs and Trade According to Nobel Prize–­winning (GATT) in the hopeful wake of the economist Michael Spence, who echoes Second World War, the international many others, “The GATT was the institution that has evolved into the beginning of the creation of what WTO has labored to lower barriers to we now call the global economy…. trade by establishing the international Together with cost-reducing technolog- rule of law in what has gradually grown ical advances in travel, transportation, into a world trading system. The “main and communication, the GATT was an function” of the WTO “is to ensure essential catalyst to a second economic that trade flows as smoothly, predictably revolution, a much more inclusive one and freely as possible.”4 The members of in which hundreds of millions of people the WTO are currently 164 countries started to experience the benefits, if and other customs territories that, alto- also the turbulence, of growth. It is gether, account for about 98 percent of this revolution, now much easier to see all world commerce. Not much affects than it was at the start, that is shaping world trade that does not fall within the the way we live.”5 purview of the WTO. Thanks to this economic revolution, From its beginnings as GATT, and during the last half of the 20th century, throughout its expansion and evolu- “the world performed better … than tion into the WTO, the international at any time in the past. World GDP

3 William Easterly, The Tyranny of Experts (Philadelphia: Basic Books, 2014), 139. 4 “WTO in Brief,” World Trade Organization (accessed January 2019) https://www.wto.org/ english/thewto_e/whatis_e/inbrief_e/inbr_e.htm. 5 Michael Spence, The Next Convergence (New York: Picador, 2011), 28–29.

316 | REVITALIZING THE SPIRIT OF BRETTON WOODS increased sixfold from 1950 to 1998 with “beggar-thy-neighbor” trade restrictions an average growth rate of 3.9 percent that contributed to the outbreak of the a year compared [with] 1.6 percent a war by causing the global collapse of year from 1820 to 1950, and 0.3 percent trade during the Great Depression. Trade from 1500 to 1820.”6 Even with the protectionism did not cause the Great turmoil of the global financial crisis, Depression, but it deepened and widened beginning in 2008, and with the wide- it. By far the most notorious of those spread backlash against globalization harmful protectionist measures were since that crisis, the growth inspired by the high Smoot-Hawley tariffs imposed this economic revolution continues in by the United States in 1930, which the 21st century. raised US tariffs on more than 20,000 The conference at Bretton Woods in goods to record levels. The US decision New Hampshire toward the end of the to turn inward economically inspired Second World War was the beginning other countries to do the same, caus- of what became GATT and of what has ing a downward spiral in world trade.8 since become the WTO-based multi- Unfortunately, the idea of an ITO as a lateral trading system. The victorious “third leg” of the Bretton Woods system Allies agreed there on much of what to facilitate the freer flow of trade and later became the architecture of “global investment fell victim to the isolation governance” for the entire postwar eco- that soon returned following the war. nomic system. Both the World Bank—to Proving anew that the acts of individuals promote global development—and the do matter in the making of history, Harry International Monetary Fund—to sta- Truman simply did not have enough bilize global monetary policies—were votes to pass the ITO in the US Senate. born at Bretton Woods.7 Also born at Fortunately, an initial international agree- Bretton Woods was the global idea of ment on the most basic rules of trade an International Trade Organization had been negotiated as a prelude to the (ITO) to promote the liberalization of ITO in Havana, Cuba, in 1947—GATT. world trade and investment. Because of the urgent need for some The so-called ITO was supposed to ground rules for trade to help guide prevent a renewal in the postwar world global economic recovery from the war, of the short-sighted and self-defeating

6 Angus Maddison, The World Economy: A Millennial Perspective (Paris: OECD, 2001), 125. 7 On the Bretton Woods Conference, see Benn Steil, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of the New World Order (Princeton, NJ: Princeton University Press, 2014); and Ed Conway, The Summit: Bretton Woods, 1944: J.M. Keynes and the Reshaping of the Global Economy (New York: Pegasus, 2014). 8 Theodore Phalan, Deema Yazigi, and Thomas Rustici, “The Smoot-Hawley Tariff and the Great Depression,” Foundation for Economic Education, February 29, 2012, https://fee.org/articles/ the-smoot-hawley-tariff-and-the-great-depression/.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 317 the GATT rules entered into force on a tariffs were gradually reduced by these provisional basis. trade rounds, protectionists everywhere It turned out that, as those at Bretton became more creative in imposing bar- Woods had anticipated, the postwar riers to trade other than tariffs, so later world not only needed rules to facilitate rounds addressed not only tariffs but the increased flow of world trade but also the growing global proliferation also needed some kind of supportive of so-called nontariff barriers to trade. institution to uphold and enforce those Round by round, GATT lowered rules. Soon the provisional piece of many of the global barriers to trade on paper called “the GATT” also became a multi­lateral basis. a permanent place called “the GATT” The eighth round of global trade in Geneva, Switzerland. From this de negotiations was the Uruguay Round, facto trade institution in a villa on the which began in Uruguay in 1986, shores of Lake Geneva, generations of concluded in Morocco in 1994, and cul- trade negotiators labored through the minated in the adoption of the Uruguay years that followed to create a “rules- Round trade agreements. Notable among based” world trading system. these new international agreements was The gradual evolution of GATT into the Marrakesh Agreement establishing the WTO occurred over the course of the WTO—the “WTO treaty.” Much— nearly five decades. Through the years, but not yet all—of what was originally the 23 countries that were the original envisaged in the charter of the ITO is “contracting parties” to GATT multi- found today in the text of the WTO plied, and the limited scope of the trade treaty. With the historic approval of the coverage of GATT broadened to include WTO treaty, the initials on the door of most of world commerce touched by the world headquarters of the world trade. Over time, what began as the trading system in Geneva were changed international footnote of GATT grew from GATT to WTO. toward maturity in what became the WTO through a series of extended and increasingly complicated “rounds” of THE ROLE OF THE WTO multilateral trade negotiations involving IN GLOBAL PROSPERITY an ever-increasing number of countries. Contrary to popular misunderstand- There were eight such “rounds” during ing in many places, the WTO is not a the nearly five decades between the free trade organization, and the WTO agreement on GATT and the establish- treaty is not a free trade agreement. ment of the WTO. The earliest were The WTO treaty does not require free largely talks on reducing conventional trade. Although the abundant benefits of trade barriers in the form of tariffs— freeing trade are assumed in numerous import taxes imposed at the border. As provisions throughout the treaty, the

318 | REVITALIZING THE SPIRIT OF BRETTON WOODS phrase “free trade” appears nowhere have increased by even greater levels. As in the treaty. The WTO treaty is an summarized by the WTO and World agreement that establishes the WTO as Bank, “Tariffs have fallen steadily since an enabling framework for facilitating the end of the Second World War, along trade negotiations, trade oversight, and with progressive liberalization of cap- trade dispute settlement. The WTO is a ital controls, and greater connectivity global rule book that gives its members through new technology in transpor- an opportunity to maximize their trade tation and communications.”10 The gains by lowering the barriers to trade. result has been vastly increased global Time and again, they have seized this prosperity. opportunity. An increasing openness In addition to increased trade flows, to trade within the international legal today’s level of global prosperity can framework of the WTO-based world likewise be traced, to a great extent, trading system has enabled more and to the existence and persistence of a more people in more and more countries supportive legal framework for more “to reap the benefits of specialization global openness. The WTO reports, and focus more productively on what “This accelerating circle of develop- they do best, through the sectors where ment was only possible because the they demonstrate comparative advan- world economy grew more open and tage. Trade has fueled competition, integrated. At each stage, expanding innovation and economies of scale, trade was a powerful driver of economic allowing the world to ration its finite development—opening up new mar- resources more efficiently.”9 kets, improving access to raw materials, Today’s global economy is global in promoting international specialization no small part because of this enabling and stimulating technological diffu- framework of world trade rules. Since sion and innovation—which in turn the establishment of the GATT/WTO drove further trade expansion.”11 Over trading system, the share of world GDP a longer term, according to WTO sta- from trade has grown dramatically, and tistics, the value of world exports of the volume of world trade has grown goods has multiplied more than fourfold exponentially. During that time, the since 1980.12 Commercial services trade global flows of foreign direct investment has grown even faster over the same

9 Organisation for Economic Co-operation and Development, Towards a More Open Trading System and Jobs Rich Growth (Paris: OECD Publishing, 2012), 3. 10 World Trade Organization and World Bank, The Role of Trade in Ending Poverty (Geneva, Switzerland: World Trade Organization, 2015), 13. 11 World Trade Organization, World Trade Report 2014: Trade and Development—Recent Trends and the Role of the WTO (Geneva, Switzerland: World Trade Organization, 2014), 44. 12 WTO, World Trade Report 2014.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 319 period.13 Much of this trade growth and Latin America have advanced as can be attributed to the successes of well. China and India especially have the WTO-based multilateral system in lifted hundreds of millions of people lowering barriers to trade. The WTO from the depths of poverty. The United secretariat has explained, “Many factors States has grown and prospered. The may have contributed to this remarkable integration of the global economy has expansion of trade but the fact that it benefited every country that has chosen coincided with a significant reduction to connect to it. Opening up and con- in trade barriers is inescapable.”14 necting to a globalizing economy has Through all the years since the pass- been the key everywhere to sustained ing of GATT in 1947, there has been an economic growth. international emphasis on the need for Yes, we are still far short of where rules for trade and on the equal need we hope to be in achieving gains for for an effective international institu- sustainable global prosperity through the tion to support these rules. From the rules-based trading system of the WTO outset, a central part of the challenge and through the ongoing endeavors of for the world trading system has been the other Bretton Woods institutions as “the development of international well as other examples of international rules and structures capable of helping cooperation. Yes, it remains all too true countries to coordinate their increas- that only about 16 percent of the people ingly international economic interests, in the world have incomes reaching the and of managing the powerful forces level of the poverty line in the United and stresses unleashed by economic States.16 And yes, we still face many change, such as the rise of new eco- challenges in international trade, and nomic powers, the spread of technology still more new trade challenges appear and production, and the deepening of and confront us every day. All the same, global economic integration.”15 Martin Wolf of the Financial Times has it This challenge has been met, so far, right in saying that “never before have with an unprecedented extent of global so many people—or so large a portion prosperity. The European countries left of the world’s people—enjoyed such devastated in the wake of the Second large rises in their standard of living.”17 World War have recovered and grown. And a crucial catalyst for these and many Developing countries in Asia, Africa, other gains worldwide has been freer

13 WTO, World Trade Report 2014. 14 WTO, World Trade Report 2014, 55. 15 WTO, World Trade Report 2014, 44. 16 Rakesh Kochhar, “A Global Middle Class Is More Promise Than Reality” (Pew Research Center, Washington, DC, July 2015). 17 Martin Wolf, Why Globalization Works (New Haven, CT: Yale University Press, 2004), 141.

320 | REVITALIZING THE SPIRIT OF BRETTON WOODS global trade through the workings of as trade in goods must succeed. WTO the WTO. members must agree on new and revised Much more can and must be achieved rules on such 21st-century trade issues for sustainable global prosperity through as digital trade, intellectual property, continued global cooperation in the technology transfer, investment, gov- WTO. The WTO-based world trading ernment subsidies, and other aspects system must be reinforced as an essential of international competition. Most of bulwark against economic unilateralism all, international trade rules must be and protectionism. WTO members must reconciled with the emerging inter- prove anew that they can reach mutu- national rules on addressing climate ally beneficial multilateral solutions. change and other urgent environmental Long-standing issues such as agricultural and ecological challenges. And all of protectionism, remaining manufactur- this must continue to be made effective ing tariffs, and other barriers to market by a WTO dispute settlement system access for trade goods must be resolved. in which impartial and independent The continuing effort to extend WTO WTO judges uphold the international rules to cover trade in services as well rule of law.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 321 TRADE POLICY The Legacy of Bretton Woods and the Politics of Today

JIM KOLBE Co-Chair, Bretton Woods Committee; Senior Transatlantic Fellow, German Marshall Fund of the United States; and former U.S. Representative (AZ-8)

One of the most important legacies Thirty-five years later, GATT of the Bretton Woods Conference was to morph into the World Trade and its aftermath was the emergence Organization (WTO). While GATT of an institutional framework to gov- had lacked any enforcement mechanisms, ern international trade. The year 1947 the WTO at least had an assembly in brought the founding of GATT—the which all members had an equal voice, General Agreement on Tariffs and and it had a method for bringing and Trade. Though not a direct result of resolving trade disputes, albeit imperfect the Bretton Woods Conference, it was in both design and implementation. The an important auxiliary institution to groundbreaking North American Free complement the creation of the World Trade Agreement (NAFTA) and the Bank, the International Monetary Fund, admission of China—a growing global the Bank for European Reconstruction economy—into the WTO were also and Development, and the other finan- turning points in the history of global cial institutions that emerged from the trade. It seemed to be the dawn of a carnage of World War II. Like flowers new era of international cooperation on sprouting in the spring soil, these insti- trade that would stretch for the foresee- tutions were followed by others on the able future and be only improved with security and economic fronts—notably further, broader trade agreements—both the North Atlantic Treaty Organization multilateral and bilateral. (NATO) and the European Economic Such optimism has turned out to be Community, the latter the precursor to misplaced, as the lessons of past cen- the European Union. turies have been either forgotten or

322 | REVITALIZING THE SPIRIT OF BRETTON WOODS brushed aside. Nearly 500 years ear- the interdependence of the European lier, a British diplomat, Sir Thomas countries and would preclude a major Smith, who fancied himself to be an conflict from erupting. economist as well, had said the British Then came World War I. An appar- should “always take heed that we buy ent interdependence in trade did not no more of strangers than we sell to prevent countries from going to war. them, [lest] we impoverish ourselves In the brutal aftermath of a four-year and enrich them.” Two centuries later, conflict, the world’s trading system was such thinking was forcefully countered in shambles—the defeated countries by Adam Smith, who introduced the impoverished by crippling reparations concept of comparative advantage: each to the victors, the victors by the sheer country should make what products it cost of the war in human and other could do best and buy from others what resources. Less than a decade later, those countries produced more cheaply it was followed by a depression that or efficiently. Over the next century plunged the world into a downward and a half, these conflicting economic spiral of economic activity and wide- views competed, accompanied by other spread unemployment. In a frantic and economic theories and practices, such fruitless effort to stave off the economic as those of the infamous Luddites, who impact of the depression, countries piled smashed weaving machinery because tariff upon tariff, quota upon quota, and workers would be displaced by their restriction upon restriction. The depres- advent, and of Karl Marx, who argued sion was thus turned into the Great for the redistribution of wealth. Depression—the first truly worldwide But by the end of the 19th century, economic decline, which engulfed the the trading world—mostly Europe and entire developed world. North America—had evolved into the The world gradually began to climb most open and competitive trading out of this dark hole, led by the United system in a millennium. Trade in ser- States. The reciprocal tariff arrange- vices was virtually unheard of in those ments negotiated by Secretary of days, and agricultural trade was limited State Cordell Hull in the 1930s began to countries in near proximity by the methodically to lift the crippling tariffs, perishable nature of the goods. So this one country, one product at a time. system was about manufactured goods, But then the world was soon plunged but trade in those items by the early into another world war, and once more 20th century was robust and mostly all nonessential, non-war-related trade unencumbered by tariffs or other limita- came to a halt. World War II left much tions. Indeed, the view was widespread of the developed world in ruins but gave among European political leaders of the United States unparalleled dom- the day that all of this trade guaranteed ination of the political and economic

REVITALIZING THE SPIRIT OF BRETTON WOODS | 323 apparatus that remained. And this time barriers and the elimination of pref- the country was determined not to erences, on a reciprocal and mutually repeat the mistake that followed the advantageous basis.”1 century’s first world conflagration. Even GATT became the organizing prin- as the war was at some of its darkest ciple for seven subsequent rounds of moments, the framework for a new negotiations as the organization grew world order was beginning to emerge: from its original 23 members to 123, the Bretton Woods Conference, held each round successfully reducing more even as the armies battled their way tariffs and trade barriers. GATT, and its across Europe, and the organizing con- successor the WTO, steadily reduced ference of the United Nations, which tariffs. While the average tariff level for commenced days before the Nazi sur- participating countries in the opening render in Europe. round was 22 percent, by the conclusion of the Uruguay Round in 1999 (13 years after it commenced), the average A NEW INTERNATIONAL tariff rate was 5 percent. During that ORDER lengthy round of negotiations, the most These constructs became the foundation important regional trade agreement up of the new international order that was to that time—NAFTA—was negotiated supposed to guarantee against another and implemented, linking and integrating world war like the two that had con- the economies of Canada, the United sumed the world in the first half of the States, and Mexico. The United States century. But lacking was a component normalized trade relations with China, to manage international commerce and opening the door for Asia’s rising eco- prevent a repetition of the ruinous tariff nomic power to join the WTO. walls that were erected in the lead-up Thus, at the beginning of the new to the Great Depression. That gap was millennium it seemed the world was supposed to be filled by the International entering an accelerated phase of trade Trade Organization, but the handful of liberalization. The next round of trade nations involved couldn’t agree on the negotiations was launched with fanfare breadth or scope of such an organization. at Doha, Qatar, in 2001, promising to The result was a “provisional” agreement, include liberalization for services—the first discussed at a United Nations con- fastest-growing component of trade. ference on trade and employment, and But the next two decades resulted in then signed by 23 countries in Geneva a stunning reversal of trade liberaliza- in October 1947. Thus, GATT came tion. The Doha Round never reached into being with a purpose of “substan- agreement, the first such round of trade tial reduction of tariffs and other trade negotiations to end in failure since

1 Preamble, General Agreement on Tariffs and Trade (Geneva, Switzerland, 1947).

324 | REVITALIZING THE SPIRIT OF BRETTON WOODS the inception of GATT. The Chinese other economic concepts, the very engaged in flagrant efforts to obtain notion of competitive advantage seems proprietary technology by demand- counterintuitive. How can it possibly ing it as a condition of investment in be that I am better off purchasing a the China market. The WTO dispute good from another country because settlement mechanism has been crip- it is less expensive or of better quality, pled by the failure to appoint enough when I have to forgo all the benefits panelists to hear disputes. The United of labor and profit by not making the States withdrew from the Trans-Pacific same good myself? Such logic is easy to Partnership, which would have linked promulgate when one group of people 12 Pacific Rim countries in new trade receives the benefits ofproduction while arrangements, even before it could be a much larger group of people is only submitted to Congress for approval. dimly aware of the benefits they receive Trade disputes flared up between the from consumption of higher-quality or United States and several major trading less expensive products. The concept partners, resulting in crippling tariff is encapsulated in what this writer has penalties followed by retaliatory tariffs. dubbed the “Kolbe mantra” of trade, NAFTA was forced into a renegotiation, to wit, The benefits of free trade are wide the results of which remain in doubt and diffused; the benefits of protectionism are even today. narrow and focused. Who wins with this scenario? Almost invariably the group that finds a specific benefit and is sharply THE REASONS FOR focused on achieving its ends. PROTECTIONIST This simple statement about trade is SENTIMENT validated by polling data. A 2017 Wall What went wrong so quickly? The Street Journal/NBC poll asked Americans answer is probably that the era of good if they thought free trade helped them, feelings about trade in the last half of the hurt them, or made little difference. 20th century was something of an aber- While 43 percent of those polled said free ration and that protectionist sentiment, trade had a positive impact, 34 percent never far below the surface, easily filled thought otherwise—not a resounding the vacuum. But how could this be so if endorsement of the economic argument what Adam Smith and David Ricardo for unrestricted trade put forth for at told us 250 years ago about competitive least 250 years. When the question was advantage and decentralized markets’ phrased differently, however, using the creating a more abundant array of goods word “globalization,” the response was at lower prices is still valid economic quite different. Asked if the United States theory today? has gained or lost more as a result of Again, the answer is probably found globalization, the response was decisively in the very nature of trade. Unlike most negative—55 to 35 percent. Similarly,

REVITALIZING THE SPIRIT OF BRETTON WOODS | 325 when asked if trade created jobs, only 29 would endorse the idea of inexpensive percent thought it did while 48 percent sugar, its cost in products they consume answered that it destroyed jobs.2 is largely hidden, and they have no voice What we can conclude from the speaking for them on the issue, whereas extensive polling data accumulated over the producers are well organized, louder, the past several decades is that people sup- and very focused. port free trade as a concept, but not the The decline in support for measures specifics of its implementation. Perhaps that would open trade is not confined the best illustration of this dilemma can to the United States. But it is most pro- be found in the restrictions the United nounced in this country. Europe, within States places on sugar imports. Sugar is the narrow confines of its continent, found in countless products we consume knows instinctively that trade is the only every day—from cakes to jams to candy way for countries there to prosper. The to cereals to sodas. Yet few people are same can be said for a natural resource– aware that every product they consume poor country like Japan, while China with sugar costs them more because the has used and abused trading privileges United States strictly limits imports of to advance its economic growth at an sugar with rules even more onerous than accelerated pace. tariffs—absolute quotas on the amount So what is to be done to regain of sugar that can be imported. The momentum for public support of a result: consumers in the United States multilateral trading system? There are pay nearly double the market price for programs to assist displaced workers. sugar paid by other parts of the world, Every trade agreement that goes before where such restrictions do not apply. the US Congress includes funding for But do Americans complain about the so-called Trade Adjustment Assistance high cost of their child’s birthday cake (TAA)—retraining for workers who brought home from the local bakery? lose their jobs due to the fallout of a Of course not. On the other hand, one particular trade agreement. But these can be sure that the narrower sugar pro- programs are often operated by labor ducer interests are well represented by organizations representing the displaced lobbyists in the halls of Congress and workers. Retraining men and women that the handful of workers toiling in this for the same type of job they just lost is industry make their views known to their likely a nonstarter. Further, it may mean representatives in that same body. The moving workers to another location— bottom line is simple; while consumers also a nonstarter for the many whose

2 Jacob M. Schlesinger, “Amid Trump Attacks, Support Grows for Free Trade: WSJ/NBC News Poll Finds Democrats, Independents Increasingly Positive about Free Trade,” , February 26, 2017, https://www.wsj.com/articles/amid-trump-attacks-support-grows-for-free- trade-1488117600.

326 | REVITALIZING THE SPIRIT OF BRETTON WOODS roots and families are in one location. There will be gains and there will be TAA programs need a thorough overhaul losses. We may intuitively know that and a broader charter if they are going the gains will outweigh the losses, but to truly help displaced workers. that is little compensation to the ones who feel the losses hardest—the losers. Political and business leaders alike CREATING A NEW need to overhaul the trade message. MESSAGE There have to be concrete examples The core problem in “selling” trade as of jobs that are created. The message a policy is the bad messaging that has of how consumers benefit from lower been used for half a century or more. prices and more choices has to be Economists know the theoretical under- repeated over and over again, not just pinnings of trade and thus speak of its as an abstract concept but with specific macro benefits—improvements in qual- examples of the benefits that come every ity of life, in per capita income, and in day with every transaction. Fundamental GDP—but this theory has little meaning economic education must be returned or value to the individual whose job was to the classroom. Millennials must be just terminated. Local communities think recruited to engage in this debate. in terms of a new factory that will be As a first step, the advocates for opened and the jobs that will be created a robust multilateral trading system or, conversely, of factories closed and jobs must recognize that though they are lost. Businesses think of the increased not winning this battle, the stakes are market share, revenue, and profits they too high to leave the playing field. We might enjoy as a result of a new trade must engage on many fronts. The entire agreement. Labor unions focus on the multilateral structure of financial insti- dues-paying members that might be lost tutions, political institutions, and even when a business is moved elsewhere. our security arrangements depends on The case for trade has always been our ability to engage in international advanced as a win-win proposition. The commerce. Nothing less than our free- truth is, it almost never is a win-win. dom and our democracy are at stake.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 327 UPGRADING AND STRENGTHENING THE WORLD TRADE ORGANIZATION

CARLA A. HILLS Chair and Chief Executive Officer, Hills & Company International Consultants, and former United States Trade Representative

These are turbulent times economi- A HISTORY OF cally, politically, and technologically INTERNATIONAL that are affecting domestic, bilateral, and CONSENSUS global relationships. Brexit, the growth After World War II, to avoid a repetition of nationalist parties across Europe, the of the disastrous economic policies of decline of market reform in China, and the 1930s and to rebuild the shattered the 2016 presidential election in the postwar economies, the United States United States are all signs of a backlash and its allies engaged in a series of nego- against trade and globalization. tiations to establish rules to govern the The world cannot afford to turn postwar international economy. At the inward. History persuades that free trade Bretton Woods Conference in 1944, and open markets promote global peace representatives from 43 nations agreed to and prosperity. The policies of high create the International Monetary Fund tariffs, currency devaluation, and dis- to harmonize nations’ monetary policies criminatory trade arrangements adopted and the World Bank to provide loans by governments in the 1930s to counter for development and recovery from the the Great Depression ignited intense war. The intention was also to create an international friction without improving International Trade Organization to over- the global economy. see a multilateral agreement for reciprocal tariff reduction. A charter was drafted,

328 | REVITALIZING THE SPIRIT OF BRETTON WOODS and although submitted repeatedly to require nondiscriminatory and national the US Congress, it was never approved, treatment for foreign entrepreneurs. and as a result no other nation ratified it. These basic disciplines have generated In 1947, however, 23 like-minded substantial economic benefits through governments met in Geneva and agreed increased global trade and investment. to and signed the General Agreement on According to the World Bank, global Tariffs and Trade (GATT), along with a GDP, which was roughly US$31 trillion protocol committing to cut tariffs. Over in 1995, more than doubled to roughly the next 43 years, until the creation of US$76 trillion in 2016. GDP in the the World Trade Organization (WTO) in United States climbed from US$8 trillion 1995, GATT continued to attract addi- to US$17 trillion in the same period. tional member nations and to serve as the Developing as well as developed coun- organization to oversee rules governing tries benefited, and millions of people international commercial relations. As a were lifted out of abject poverty. result of seven successive rounds of trade negotiations, GATT members steadily expanded their agreements to reduce CHANGING ATTITUDES their tariffs. In spite of these documented benefits The eighth round, known as the flowing from the increase in inter- Uruguay Round, that began in 1986 national trade and investment, today, and involved 123 member nations, cre- protection is on the rise. According ated the WTO, which incorporated to the WTO’s 19th monitoring report the GATT rules. It also established a covering G20 trade measures for the number of new market-opening mea- period between May 16 and October 15, sures covering services, investment, 2018, the G20 governments applied 40 agriculture, and the protection of intel- new trade-restrictive measures, covering lectual property. Most important, the an estimated US$481 billion in trade, participants included in the WTO pro- six times larger than recorded in the visions a dispute settlement mechanism previous six-month reporting period as a more effective means to resolve and the largest since the first calculation, trade disputes and a trade policy review in 2012. The report expressed concern mechanism to strengthen trade disci- that uncertainty created by this prolif- pline by regularly reviewing members’ eration of trade-restrictive actions could trade policies and practices. jeopardize economic recovery.1 Today the WTO has 164 members Increasingly, members are expressing that have committed to abide by WTO concerns about the lack of effective rules rules that support open markets and to deal with the non-market-oriented

1 World Trade Organization, “Report on G20 Trade Measures: Mid-October 2017 to Mid-May 2018” (World Trade Organization, Geneva, Switzerland, July 2018), https://www.wto.org/english/news_e/ news18_e/g20_wto_report_july18_e.pdf.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 329 policies and restrictive practices being Appellate Body, which has been accused implemented by some members. They of overreach in its review of cases. point to a range of actions by govern- There is little debate that today the ments that include (1) granting industrial WTO, launched 24 years ago as a forum subsidies to state-owned enterprises for negotiating global trade rules and (SOEs) without notifying the WTO resolving trade differences, needs to as required, (2) exerting pressure on develop new rules to deal with these and foreign investors to transfer technology other issues that create friction among to domestic enterprises, (3) limiting members, lest we lose the substantial foreign investment in specified sectors, benefits that we derive from fair, open, and (4) failing to protect and engaging and predictable global trade. However, in the theft of foreign entrepreneurs’ skepticism abounds about the likelihood intellectual property. of new rules when the views among the In addition, a number of economic 164 members are diverse and the adop- activities that are important now were tion of new rules requires a consensus. not significant in the international market two decades ago. For example, SOEs are much more commercially active in the ROAD MAP TO global market today and too often are SOLUTIONS not guided by market principles. Also, The history of Bretton Woods could the 21st-century economy is linked far provide a useful road map. There, 23 like- more closely to technology than that minded governments made a difference of the 20th century. Digital activity has by creating GATT, which had grown to become a critical component of global 123 members by 1994, when the WTO trade. According to the most recent was created. Similarly, the Information estimates made by the United Nations Technology Agreement began in 1996 Conference on Trade and Development with 29 members and now has 82. Today (UNCTAD), “e-commerce includes a group of like-minded members could both business-to-business (B2B) and use those examples as the incentive to business-to-consumer (B2C), valued develop solutions to the concerns that respectively at around [US]$19.9 trillion threaten the WTO, making it more effec- and [US]$2.2 trillion each.”2 In addition, tive in addressing its mission and more concerns have been expressed about the respected by the full membership. adequacy of the WTO dispute settle- Perhaps a start is that EU Commissioner ment mechanism, particularly that of the for Trade Malmström; Japan’s Minister of Economy, Trade and Industry Seko;

2 “New Initiative to Help Developing Countries Grasp $22 trillion e-commerce Opportunity,” United Nations Conference on Trade and Development, last modified July 19, 2016, https://unctad.org/en/ pages/newsdetails.aspx?OriginalVersionID=1281.

330 | REVITALIZING THE SPIRIT OF BRETTON WOODS and US Trade Representative Lighthizer enhanced and improved over the short, met on the sidelines of the WTO min- medium, and long term.”5 In addition isterial conference in Buenos Aires in to Canada, Australia, Brazil, Chile, the December 2017 and three times in 2018 European Union, Japan, Kenya, Mexico, to discuss “non-market-oriented pol- New Zealand, Norway, Singapore, South icies and practices that lead to severe Korea, and Switzerland joined. These 13 over­capacity, create unfair competitive governments together represent nearly conditions for our workers and busi- half of global nominal GDP. nesses, hinder the development and use of These two groups could be even innovative technologies and undermine more effective if they worked together the proper functioning of international to develop a plan to upgrade the WTO trade.”3 They have agreed to take ini- rules to cover the 21st-century econ- tial joint action, among other things, “to omy and current market conditions. define the basis for the development of Some may not wish to participate and stronger rules on industrial subsidies and therefore drop out, but there may be to collaborate on maintaining existing other like-minded members willing disciplines, to tackle the issues of market to join. A collaborative effort to stop distortion or overcapacity” and “to enforce the violations of existing global trade existing rules by working jointly on cur- rules by governments representing a rent and new disputes in the WTO.”4 substantial share of the global economy If these three governments that rep- would be far more effective than the resent close to half the global economy questionable unilateral actions that have can come up with concrete proposals been employed to date. and appropriate rules, along with a rea- sonable strategy, there is a chance that they can attract others to join them. COLLABORATION TO And other groups are forming. ADDRESS CONCERNS In October 2018, the Canadian ABOUT CHINA government convened a small group Today the most serious concerns about of like-minded ministers committed non-market-oriented policies that to the multilateral trading system with undermine the WTO’s basic principles the stated objective “to identify con- of national treatment and nondiscrim- crete and tangible ways the operation ination are focused on China. The and function of the WTO could be

3 Office of the United States Trade Representative, “Joint Statement on Trilateral Meeting of the Trade Ministers of the United States, Japan, and the European Union,” last modified May 31, 2018, https:// ustr.gov/about-us/policy-offices/press-office/press-releases/2018/may/joint-statement-trilateral-meeting. 4 Ibid. 5 See “Strengthening and Modernizing the WTO: Discussion Paper,” JOB/GC/201 (September 24, 2018).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 331 commitments that China made in its Several respected experts in law6 protocol of accession to join the WTO have concluded that the best course in 2001 give both strength and cred- of action would be for members to ibility to a strong collaborative effort proceed now to bring an Article 23 to persuade it to comply with these “nullification and impairment” case to basic principles and to end restrictions the WTO against China, focusing on on foreign ownership of companies its market-restricting practices. In my in specified sectors, forced technol- view, before filing such a case at the ogy transfers, discriminatory licensing, WTO, the like-minded governments discriminatory government subsidies, should develop a plan setting forth the and theft of intellectual property, all of actions that China needs to take to which violate the basic market-oriented achieve WTO compliance and join in principles of the WTO. discussing with China how and over A negotiation led by like-minded what time frame corrective action can governments seeking changes in specific be taken. Since China’s economy is practices to ensure compliance with slowing in large measure as a result of WTO rules should seek to persuade its government’s funneling capital to China that the changes sought are based unprofitable state-run monopolies that on a deep concern for the future of the squeeze out the vibrant private sector, a rules-based global economy that has change in policy would not only reduce benefited all nations, and none more tensions over its lack of WTO compli- than China. To avoid debating whether ance but strengthen China’s economy. a particular WTO rule prohibits a spe- Holding such a negotiation could reduce cific economic policy, it should be made friction and create a greater potential clear that article 23 of GATT, from for reaching a positive outcome in an the beginning, has sought to protect efficient manner than going directly all WTO members from any action by to litigation at the WTO. And it does another member that would “nullify not foreclose litigation if the discussions and impair” the benefits flowing from come to naught. a fair and open trading system, whether We need a strategy developed by or not that action conflicts with specific like-minded governments to ensure that provisions of the 1994 GATT. we have strong rules to protect a free and fair 21st-century market economy. It

6 See, for example, the June 8, 2018, testimony before the US-China Economic and Security Review Commission of Jennifer Hillman, former member of the WTO Appellate Body and commissioner of the US International Trade Commission, and current professor at Georgetown University Law Center. Jennifer Hillman, “The Best Way to Address China’s Unfair Policies and Practices Is through a Big, Bold Multilateral Case at the WTO” (Statement as delivered by Ambassador Dennis Shea, WTO General Council, Geneva, Switzerland, May 8, 2018), https://www.uscc.gov/sites/default/files/ Hillman%20Testimony%20US%20China%20Comm%20w%20Appendix%20A.pdf.

332 | REVITALIZING THE SPIRIT OF BRETTON WOODS will take substantial effort. But it is time years ago and to stand up and defend for member governments to recall the the WTO that has contributed so much courage and persistence of those attend- to international growth and stability for ing the Bretton Woods Conference 75 more than a half century.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 333 Delegates Mikhail Stepanovich Stepanov (USSR), John Maynard Keynes (UK) and Vladimir Rybar (Yugoslavia) at the Bretton Woods Conference in 1944.

Source: Hulton Archive/Getty Images FORCES OF CHANGE

REVITALIZING THE SPIRIT OF BRETTON WOODS | 335 BANK-FUND Facing the Rising Challenges of Corruption

FRANK VOGL Co-founder, Transparency International and the Partnership for Transparency Fund, and Adjunct Professor, Department of Government at Georgetown University

WILLIAM R. RHODES President and Chief Executive Officer, William R. Rhodes Global Advisors, LLC; Advisory Council Member, Bretton Woods Committee; and former Chairman and Chief Executive Officer, Citibank, NA

Corruption—the abuse of entrusted world’s most vulnerable peoples. The power for private gain—was not on 75th anniversary of the founding con- the agenda at the birth of the Bretton ference in Bretton Woods needs to Woods institutions, nor at their 50th be recalled a generation from now as anniversary. Today, however, it is a the time when the World Bank and prime concern for all official multi­ International Monetary Fund (IMF) lateral development and economic committed to far more effective actions organizations. to confront corruption across all of their The scale and impact of corruption member countries. not only remain major challenges to Quantifying the costs of corruption the successful implementation of the is at best a matter of informed guess- missions of the Bretton Woods insti- work: the IMF estimates that it could tutions but represent increasing threats be between US$1.5 trillion and US$2 to security, the environment, and the trillion annually, or around 2 percent

336 | REVITALIZING THE SPIRIT OF BRETTON WOODS of global GDP.1 Approximately two- ACCEPTING THE thirds of the 180 nations surveyed for CORRUPTION PRIORITY the 2018 Transparency International It is useful to recall that the core rea- Corruption Perceptions Index (CPI)2 son for the meeting at the Brookings were seen as having high to very high Institution in January 1982, which levels of corruption. was to lead to the establishment of the Still, the statistics and general surveys Bretton Woods Committee, was an fail to reflect adequately the extent of the international development assistance damage done by corruption. Corruption, (IDA) funding crisis. The development to use the IMF’s jargon, is a major macro­ assistance needs of the poorest nations prudential concern. Put more bluntly, were formidable and, truth be told, government-promoted corruption in one of the reasons was the extensive scores of countries is distorting economic mismanagement and misuse of fiscal progress, misallocating budgets, rendering resources in these countries. While the public procurement inefficient, entrench- World Bank did not use the word corrup- ing poverty, threatening financial crises, tion at the time, securing efficient use of and adding to environmental destruction. financial resources was a key component The extraordinary economic dif- of the Bank’s then new sub-Saharan ficulties faced by such countries as African adjustment programs. Nigeria, Pakistan, Ukraine, Venezuela, It was at that conference that then and many others are largely the result World Bank President A.W. Clausen3 of high levels of kleptocracy—theft of called on leaders of the private sector to government financial resources by senior come together to actively support the public officials. In each of these cases, missions and goals of the Bretton Woods and many more, the World Bank and institutions. He not only stressed the the IMF have critical roles in acting core humanitarian challenges that IDA to reduce graft and strengthen public grants aimed to meet, but he argued transparency in all aspects of govern- that it was in the self-interest of the ment activity. more prosperous nations of the world, together with the Bank’s private-sector

1 See International Monetary Fund, “Corruption: Costs and Mitigating Strategies” (IMF Staff Discussion Note 16/05, International Monetary Fund, Washington, DC, May 2016); and Christine Lagarde, “Addressing Corruption with Clarity” (Address by IMF Managing Director Christine Lagarde, Brookings Institution, Washington, DC, September 18, 2017). 2 Data from Transparency International, Corruption Perceptions Index 2018, February 2019, https://www.transparency.org/cpi2018. The CPI is a poll of polls that calculates scores for the public perception of corruption in countries. A score of 100 indicates zero corruption; 122 out of 180 countries included in the report had a score of 49 or lower. 3 Comments made by A.W. Clausen at the Brookings Institution in early 1982 reflected his address to the World Bank’s board of governors in Washington, DC, on September 29, 1981.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 337 partners, that the poorer nations attain Director Michel Camdessus, the Fund sustained economic success. announced its commitment to anticor- In 1988, when Barber Conable was ruption goals, and this was swiftly seen the Bank’s president, an important World as an important part of fund condition- Bank report on poverty in Africa explic- ality in programs to countries embroiled itly noted the challenges that corruption in the 1997/98 Asian financial crisis. posed to economic development. It Under Wolfensohn’s leadership, major stated, for example, that conditions in diplomatic efforts in the latter part of a number of African states were charac- the 1990s elevated anticorruption pol- terized by “a high level of corruption, icies from oblivion to center stage on misuse of funds, side payments to political the agendas of all of the major multi­ allies, deportation of opponents, or a high lateral development banks, including the level of coercion.”4 regional institutions for Africa, Asia, and Interestingly, former World Bank Latin America, as well as an increasing President Robert S. McNamara traveled number of bilateral aid agencies. from Washington to Berlin in May 1993 to attend the launch conference of Transparency International, the first MANDATE FOR ACTION global anticorruption nongovernmental Within both the World Bank and the organization. He stressed publicly at that IMF, there has been a broad recogni- time that one of his greatest regrets was tion in recent years of shortcomings not having made fighting corruption a in institutional anticorruption prac- major Bank priority when he served as tices. For example, recognizing severe president. World Bank practical difficulties in Finally, in 1996, corruption entered investigating corruption in procure- the lexicon of the Bretton Woods ment contracting, the leadership of the institutions. In his first year as World Bank asked Paul A. Volcker to head a Bank president, James D. Wolfensohn review committee.6 Volcker had earlier concluded that the efficient uses of headed investigations into corruption development assistance grants and credits at the United Nations and drew on demanded recognition of corruption that experience to advocate tough new risks and actions to mitigate those risks.5 measures at the World Bank. His com- In 1997, under then IMF Managing mittee’s findings were to contribute,

4 World Bank Economic Development Institute, “The Political Economy of Sub-Saharan Africa” (World Bank, Washington, DC, August 1988). 5 James D. Wolfensohn, “People and Development” (Annual Meetings Address, World Bank, Washington, DC, October 1, 1996). 6 Paul A. Volcker, Gustavo Gaviria, John Githongo, Ben W. Heineman Jr., Walter Van Gerven, and John Vereker, “Independent Panel Review of the World Bank Group Department of Institutional Integrity” (World Bank, Washington, DC, September 2007).

338 | REVITALIZING THE SPIRIT OF BRETTON WOODS over time, to significant successes in gold-plated mandate, but will effective the Bank’s Integrity Vice Presidency action follow fine rhetoric? unit and to the setting of standards for The record of their performance investigations and corporate suspen- in recent years has been mixed. Both sions that have become the model for institutions need to find ways to the major regional development banks: ensure that their approaches are more the African Development Bank, Asian comprehensive and robust—in terms Development Bank, Asian Infrastructure of implementation, monitoring, and Investment Bank, European Bank for enforcement. Reconstruction and Development, and Inter-American Development Bank. Managing Director Christine Lagarde ILLICIT FINANCE launched a comprehensive review of the Illicit financial flows across national IMF’s anticorruption framework, which borders, including proceeds from tax concluded, in 2018, that the case is com- evasion, organized crime (notably nar- pelling for the IMF to deepen its work cotics), and government corruption, in this area considerably.7 This comes now amount to hundreds of billions of at a time when both the IMF and the dollars. The US Treasury estimates that World Bank are bound to adhere to the the United States alone probably receives UN’s Sustainable Development Goals an annual inflow of US$300 billion in (SDGs), which came into force in 2016 laundered cash.8 Excluding the pro- and include, in SDG 16, the explicit ceeds of tax evasion, Global Financial call for all governments to “substantially Integrity estimates the annual volume reduce corruption and bribery in all of illicit cross-border financial flows at their forms.” around US$1 trillion.9 These funds add Meetings of global leaders at their to poverty by robbing national treasuries annual G20 summit conferences in recent of crucial resources to support domestic years have repeatedly endorsed the impor- development, undermine sound regula- tance of multilateral institutions’ pursuing tion of the international financial system anticorruption strategies. Unquestionably, and weaken its institutions, and distort the Bretton Woods institutions have a investment markets.

7 International Monetary Fund, “Review of 1997 Guidance Note on Governance—A Proposed Framework for Enhanced Fund Engagement” (IMF Policy Paper, International Monetary Fund, Washington, DC, March 2018), https://www.imf.org/~/media/Files/Publications/PP/2018/ pp030918govpaper.ashx. 8 US Treasury, “National Strategy for Combating Terrorist and Other Illicit Financing” (US Treasury, Washington, DC, December 2018), https://home.treasury.gov/system/files/136/ nationalstrategyforcombatingterroristandotherillicitfinancing.pdf. 9 Global Financial Integrity, “Illicit Financial Flows to and from 148 Developing Countries: 2006–2015” (Global Financial Integrity, Washington, DC, January 2019).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 339 The IMF has played an import- example, with regard to Danske Bank, ant role in recent years in providing Deutsche Bank, and ING. Research by technical assistance to central banks the G30 shows deficits at many major to guard against money laundering.10 banks when it comes to ensuring that Given the scale of the problem, however, culture and conduct assign the highest the IMF should expand its work in this priority to integrity.12 The IMF needs area and enhance its cooperation with to join with leading central banks by other institutions, such as the Financial adding its voice to encourage leading Action Task Force of the Organisation banks to make greater commitments to for Economic Co-operation and anti–money laundering efforts and by Development (OECD). The challenge stressing the dangers to the international will be all the more complex in coming financial system if this does not happen. years as cryptocurrencies play a rising Importantly, IMF officials privately role in illicit finance. concede that they need to do more by Far more extensive cooperation explicitly raising issues of illicit finance between the world’s leading banks and with the governments of major Western the IMF on the stage of illicit finance is developed economies, whose capital mar- also warranted. While the banks have kets provide safe investment havens for so introduced increasingly sophisticated much of the illicit cash. Laws, and their compliance systems to guard against enforcement, to reveal the true beneficial suspicious transactions, the latest evi- ownership of vast numbers of holding dence, according to the US Treasury,11 companies registered in offshore havens suggests that substantial sums of money remain weak. Insufficient effective action continue to be laundered through the is seen in the United States, the UK, and banking system. The IMF might well numerous other countries to require take the lead in bringing together the real estate brokers to pursue meaningful central banks and the commercial banks know-your-customer due diligence on to forge better safeguards against all their clients. The IMF should use its forms of illicit finance. Article IV consultations as the mecha- A number of major global banks nism to raise such issues with its leading have settled money-laundering cases shareholder member countries. brought by US and European author- Curbing money laundering is—and ities, paying record-level fines. More this needs to be underscored—an issue such cases are now being pursued, for of international security. Illicit cash funds

10 “The IMF and the Fight Against Money Laundering and the Financing of Terrorism” (International Monetary Fund Factsheet, International Monetary Fund, Washington, DC, March 2018). 11 “The IMF and the Fight Against Money Laundering.” 12 The Group of Thirty, “Banking Conduct and Culture: A Permanent Mindset Change” (G30, Washington, DC, 2018); The Group of Thirty, “Banking Conduct and Culture: A Call for Sustained and Comprehensive Reform” (G30, Washington, DC, 2015).

340 | REVITALIZING THE SPIRIT OF BRETTON WOODS terrorism and the illegal export of weap- their incomes through extortion.13 In ons and weapons systems. Bribery and part, the answer relates to systems in dirty cash are the enabling mechanisms numerous countries that institutionalize for narcotics trade, ivory smuggling, police corruption. For example, reports vast product counterfeiting, and human from one country show that police units trafficking that today enslaves a record pay their senior officers high amounts of more than 26 million people. The on a regular basis for duty at airports, imperative for the IMF, in particular, where they can engage with wealthy to work with many other players to find people; somewhat lesser amounts to be solutions and counter transborder illicit on duty on major highways, where they financial flows, needs to be a central can “inspect” middle-income travelers priority in coming years. and truckers; and in comparison, low amounts for assignments to poorer loca- tions. And these senior officers, in turn, LAW ENFORCEMENT pay top criminal justice officials for these Laundered cash, of course, is the product positions. of crime, including governmental cor- These entrenched systems prevail ruption, and therefore the World Bank in part because public prosecutors and IMF will need to push far harder and and judges turn a blind eye—they are use their leverage to influence changes to appointed to do so and are part of the public policy and public accountability corrupt systems. Ultimately, the World in many of their member countries. For Bank, among others, faces not a tech- the Bank, the challenge starts with law nical but a political challenge when enforcement. It has worked construc- seeking to introduce integrity into law tively over the years to help governments enforcement in many countries. When improve their court systems, establish top officials and lowly police officers all anticorruption commissions, and take know that they will not be prosecuted other supportive measures. But surveys for corruption, then they indulge. in many of the world’s poorest countries When James Wolfensohn decided show that police extortion of small bribes that the World Bank must confront “the from the poorest citizens is seen as the cancer of corruption,” he challenged single greatest area of petty corruption. the Bank’s lawyers, who argued that Why is this? this was a political matter and thus in In part, the answer rests on the excep- contradiction to the Bank’s articles of tionally low level of pay to police officers, agreement. Wolfensohn prevailed, and which encourages them to supplement as we look ahead, the Bank’s leaders

13 Transparency International and Afrobarometer, “People and Corruption: Africa Survey” (Global Corruption Barometer 2015/16/17, Transparency International, Berlin 2015). The survey covered 28 countries in depth.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 341 need to assess how best to engage with have, indeed, opportunities to ensure national authorities on the complex that all creditors—multilateral, bilateral, political issues that are key to building and private-sector—place anticorruption systems of law enforcement that are activities at the core of reconstruction honest, win respect, and serve as mean- and development projects. Lessons ingful counters to both grand and petty from reconstruction and development corruption. programs in Afghanistan underscore that support for building institutions to ensure law enforcement is of paramount RECONSTRUCTION importance in reconstruction strategies. The International Bank for Recon­ Reports by the US Special Inspector struction and Development (to use the General for Afghanistan Reconstruction World Bank’s formal title) started its on both multilateral trust fund pro- work over 70 years ago by support- grams led by the World Bank as well ing post–World War II reconstruction. as the bilateral programs of the United This mission continues to be important, States—which have involved outlays of as underscored by conditions in, for over US$10 billion and US$125 billion, example, Afghanistan and Iraq, and the respectively—stress that inadequate safe- likely prospect in due course of massive guards in this area can result in foreign reconstruction needs, to take further aid inflows’ increasing, not reducing, examples, in South Sudan, Syria, and corruption.14 Yemen. These countries at war have seen the breakdown of law enforcement and the emergence of extraordinary NATURAL RESOURCES levels of corruption. The Bank and its Corruption at the highest levels of multilateral and bilateral aid partners government and in partnership with will be tested as they develop programs organized crime and multinational cor- to secure the institutional capacity nec- porations is doing enormous damage essary to reestablish justice and effective in many resource-rich countries, from anticorruption enforcement. Angola to Malaysia. The humanitarian In each of these country situations, consequences are severe, as is evident, not only do the Bretton Woods institu- for example, in the rising numbers of tions have direct roles to play as lenders, refugees from resource-rich countries— but they are central to convening inter- Venezuela is an outstanding and tragic national long-term undertakings. They case. The country’s once enormous

14 See quarterly reports of the US Special Inspector General for Afghanistan Reconstruction, particularly “Afghanistan Reconstruction Trust Fund: The World Bank Needs to Improve How It Monitors Implementation, Shares Information, and Determines the Impact of Donor Contributions” (SIGAR 18-42 Audit Report Afghanistan Reconstruction Trust Fund, Special Inspector General for Afghanistan Reconstruction, Washington, DC, April 2018).

342 | REVITALIZING THE SPIRIT OF BRETTON WOODS oil-related income has failed to lift living systems, and clinics are not being built standards; quite the contrary, the failures because the revenues from extractive of government have created an extra­ activities that should be used for these ordinary humanitarian crisis. Leadership purposes are being plundered by top in addressing such crises and their under- government officials and their cronies, lying causes needs to become a higher and invested in the world’s leading capital priority in the World Bank. markets instead. Research by the Natural Resources The failure to counter corruption in Governance Institute15 shows that about these countries contributes to environ­ 80 percent of the resource-rich countries mental destruction, insecurity, and that it surveyed were weak, poor, or destitution, which leads to a rising tide failing in their governance of extractive of migration as global refugee numbers industries. Programs that powerfully reach record levels. The destabilization promote anticorruption actions provide of these economies, to a considerable clear paths out of abject poverty for degree due to corruption, has led to most of the 1.8 billion people who live the rise of terrorist organizations, such in these countries—nations that have, as Boko Haram and al-Shabaab, and in many cases, been borrowers from contributed to the massive violence in, the World Bank over several decades. for example, the Democratic Republic A study in 2013 by the African of the Congo and South Sudan.17 Progress Panel,16 then chaired by former And with respect to the environment, UN Secretary-General , pro- consider illicit logging and its massive vided compelling details on the degree to destruction of many rain forests, as well which massive poverty in some 20 natural as the concomitant damage to indigenous resources–rich sub-Saharan African coun- peoples through organized crime syndi- tries is the major cause of extraordinary cates that bribe government officials. This income inequality, with hundreds of mil- activity may well account today for as lions of people trapped in humanitarian much as 30 percent of total global sales conditions that are among the world’s of wood products, with annual revenues worst. Public housing, schools, sanitary

15 Natural Resources Governance Institute, “Resource Governance Index 2017” (Natural Resources Governance Institute, New York, 2017). 16 Africa Progress Panel, “Equity in Extractives” (Africa Progress Panel, Geneva, Switzerland, 2013). 17 For example, see “Jihad’s Next Battleground: The Fight Against Islamic State Is Moving to Africa,” The Economist, July 14, 2018; research by Sarah Chayes at the Carnegie Endowment for International Peace; and Tom Burgis, The Looting Machine: Warlords, Oligarchs, Corporations, Smugglers, and the Theft of Africa’s Wealth (New York: Public Affairs, 2015).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 343 equal to those of the international nar- to monitor and enforce anticorruption­ cotics trade.18 approaches in all aspects of their infra- In sum, the plunder of royalties, structure lending. Infrastructure accounts license fees, and profits from the for the largest share of approximately extraction of oil, gas, and minerals US$9.5 trillion of worldwide annual in many countries directly results in public contracting. According to the extraordinary avoidable poverty, and Open Contracting Partnership, “57 the World Bank is better equipped than percent of foreign bribery cases pros- any other institution to launch a major ecuted under the OECD Anti-bribery multiyear campaign to address what is Convention involved bribes to obtain now an extraordinary crisis. The Bank public contracts. According to a 2013 has extensive data on the prevailing Eurobarometer survey, more than 30 conditions and the threats. Its leaders percent of companies participating in EU are likely to be judged in coming years public procurement say corruption pre- by how effectively they address these vented them from winning a contract.”19 issues. Without a far more effective set The World Bank and other multi­ of tools and a much sharper focus, the lateral and bilateral lenders have accepted Bank will fail to meet its own goal, and opacity in some governments when it that of the SDGs, to see the eradication comes to public contracting and sub- of absolute poverty by 2030. contracting. In some countries, military establishments have wielded excep- tional influence, controlling large parts INFRASTRUCTURE of national budgets and blocking the DEVELOPMENT public transparency of many projects on AND FINANCE the grounds of national security. Neither Such a failure to meet goals is also the Bank nor the IMF has publicly and the inevitable conclusion if the World explicitly challenged military establish- Bank and other multilateral develop- ments in its member countries over ment banks, including the new Asian their extensive engagement in public Infrastructure and Investment Bank, fail contracting.

18 According to Professor Ray Fisman and Miriam A. Golden, “Interpol estimates that illegal log- ging—logging in violation of laws or regulations in the country of origin—contributes nearly a third of the wood on the global market, and somewhat between 50 percent and 90 percent of the volume of wood leaving the world’s main producer countries in the Amazon basin, central Africa and Southeast Asia. The value of the illegal timber exports is comparable to the production value of the global drug trade.” Fisman and Golden, Corruption: What Everyone Needs to Know (Oxford, UK: Oxford University Press, 2016). See also Interpol, “Uncovering the Risks of Corruption in the Forestry Sector” (International Criminal Police Organization, , France, 2016). 19 Open Contracting Partnership, “Why Open Contracting,” accessed May 2018, https://www.open- contracting.org/why-open-contracting/. The Open Contracting Partnership is an advocacy and con-� sulting enterprise.

344 | REVITALIZING THE SPIRIT OF BRETTON WOODS Many of the largest cases brought Recent internal research by the IMF against multinational corporations under on corruption and fiscal policy highlights the OECD Anti-bribery Convention and this area, noting that top government the US Foreign Corrupt Practices Act officials’ allocation of funds to SOEs may have involved kickbacks to foreign gov- at times prove to be effective mechanisms ernment officials in return for large-scale for the officials’ own enrichment, and also infrastructure contracts. For example, that SOEs play an important role in pro- joint US and Brazilian investigations viding employment for corrupt associates of Odebrecht, the largest construction of top politicians and officials. Finally, as company in Latin America, concluded the Petrobras scandal, for example, has that the firm paid bribes to government revealed, SOEs are frequently used as officials in possibly as many as a dozen prime sources of political party financing. countries in the region. IMF research into fiscal affairs Many of the largest infrastructure highlights corruption in both revenue projects involve significant financing collection (we have seen all too clearly in from banks, and here, too, there is many countries, following one debt crisis scope not only for opaque trans­actions after another, that governments have but also for the banks and project con- too often failed to collect tax revenues tractors to evade environmental norms efficiently, with bribes to tax collectors and standards. The World Bank has being part of the problem) and the dis- diverse partnership channels with bursement of tax revenues. Decisions by private finance, from its cofinancing top officials to allocate resources in one operations to the expanding portfolio area rather than another may be due to of investments under the International kickbacks and graft in general, just as Finance Corporation. The Bank needs decisions to allocate public contracts to to provide bolder leadership in its one vendor rather than another may have diverse ventures with private finance similar causes and lead to overpaying for to emphasize transparency and ensure inefficient services. sound monitoring and enforcement of anticorruption standards. Adding yet another level of com- FUTURE plexity in public contracting is the fact COLLABORATION that some of the largest corruption Thus, many of the particular aspects scandals, from Brazil to South Africa, of corruption that emerge as areas of have involved major state-owned central importance to the World Bank enterprises (SOEs) that are large-scale and the IMF come together to force infrastructure developers. Neither the the conclusion that the coming years World Bank nor the IMF has assigned will test these institutions. As Managing noteworthy priority to monitoring for Director Lagarde recognized, anticorrup- corruption in SOEs. tion approaches need to be mainstreamed

REVITALIZING THE SPIRIT OF BRETTON WOODS | 345 into the work of the IMF. The World essential law enforcement reforms in Bank needs to do the same—it cannot place. During its work in Ukraine, the view good governance as just one of Fund has understood that overcoming many areas of interest: it is integral to political opposition demanded that it virtually all of the Bank’s activities. work in close partnership with a range The Bank and the Fund will need of governmental and nongovernmental to forge effective mechanisms for joint organizations in a continuing effort. anticorruption structural adjustment The Fund is learning lessons from this programs. Partial reforms simply will experience that need to inform much of not be adequate. To address one area of its future work in many countries and anticorruption work and ignore others in cooperation with the World Bank. would be counterproductive. Moreover, The IMF’s Christine Lagarde and as the institutions move more explicitly the World Bank’s new president, David to the heart of national governance Malpass, will be challenged in coming issues in the interests of the overwhelm- years to mobilize the skills and resources ing majority of the citizens of their of their respective institutions to formida- member countries, they need to engage bly strengthen anticorruption programs. with citizens more directly. They have no choice; corruption is a In recent times, the IMF has sought rising threat to issues that are at the core to do just that in Ukraine, where it of the mission of the Bretton Woods recognized that it needed to work with twins: the soundness of the global finan- many stakeholders outside government cial system and the development of the to convince the government to put human condition.

346 | REVITALIZING THE SPIRIT OF BRETTON WOODS A CALL FOR EXCEPTIONAL BUSINESS LEADERSHIP

GAIL KELLY Senior Global Advisor, UBS; Member, Group of Thirty; and former Chief Executive Officer, Westpac Banking Corporation

To be an exceptional, acknowledged, Today’s world feels contextually dif- and trusted business leader in today’s ferent. It is one of profound change. world is extremely challenging. Much All around us, we see and experience more so, it seems to me, than was the the effects of hyperconnectivity, speed, case in the years preglobalization, uncertainty, the weakening of global pre–the onset of the fourth industrial institutions, anger toward the “elites,” revolution and the global financial cri- intolerance, polarization, and a dam- sis of 2008/09. Those were the years aging breakdown of trust. Big business when “the business of business is busi- is explicitly part of this landscape and, ness” was widely accepted as truth. indeed, has a lot to answer for—finan- Maximize profits for shareholders, and cial institutions in particular. How is the efficiency of the free market system it, people may ask, that banks and their will do the rest. To affect the outputs leaders were bailed out at the time of in any given situation, senior manag- the 2009 financial crisis while ordinary ers set themselves up to control the citizens were not? Men and women in inputs. Strength, clarity of direction, many countries around the world lost discipline, and follow-through were their businesses, their livelihoods, their the requirements. Hierarchy and struc- homes, and their sense of self-worth. ture mattered, reinforcing power and Millions of people have borne witness influence. All in all, this was a simpler, to a failure of culture and a failure of clearer leadership model, and when well leadership on an epic scale. executed, it seemed to work. For the short term, at least.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 347 WANTED: EXCEPTIONAL Exceptional business leaders under- BUSINESS LEADERS stand the need to clearly define and then articulate purpose (the “why”). At every Today, a decade on from the 2009 crisis, turn, it is their role to communicate it, organizational culture understandably bringing it to life for different stake- occupies center stage. Many studies have holder groups. Even more crucially, emerged and papers been written dis- they understand the imperative of lining cussing what went wrong, what needs up every element of the organization to change, and how to go about it. To behind its stated purpose. Alignment, address culture, first you need to address alignment, alignment. It is often said leadership. And in the context of today’s that culture is best understood by what troubled world, there comes a cry for happens when no one is looking. When exceptional business leadership to help no one is looking, is the organization’s heal and bind, to assist communities and purpose being delivered? Are the pol- individuals to adapt and change. The cry icies, practices, values, and behaviors is loud and the need is obvious. in sync? As leaders, do we measure, Exceptional business leadership track, and reward what we say we value? starts with purpose—not just what the Do we tell stories and use examples to organization seeks to do, but why it reinforce and make clear, in everyday matters. Fundamentally, why does the terms, what we stand for? Do we check organization exist? Quite clearly, the and verify, not hiding behind trends and business of business can no longer be averages but looking for the outliers, so narrowly defined as “just business.” assessing treatment of the most vulner- Businesses exist to serve society; indeed able, those with the smallest voices? Do they are integrally connected to their we guard against complacency, watching communities. Financial institutions are closely for any signs of arrogance? excellent examples. At the most fun- All of this takes enormous energy damental level, banks are here to help and determination. It requires courage customers by seeking to understand their and holding onto a long-term view. needs and putting their interests first; Exceptional business leaders know this. they are here to help employees by pro- And they know it is especially daunting viding rewarding and meaningful jobs, because from a personal perspective, coupled with opportunities for growth nothing less than absolute authenticity and development; they play a crucial and transparency will do. It is how you role in supporting the well-being of behave, day in and day out, that matters. communities through influencing public Exceptional leaders lead by example; policy debate and actively engaging with they set the tone. government. In times of disaster, they deliver on-the-ground practical support.

348 | REVITALIZING THE SPIRIT OF BRETTON WOODS THE GENEROUS- perform fearlessly, where they can grow SPIRITED LEADER and develop. This style of leadership is not quick to judge. It involves deep Let me now turn to what is certainly the listening and seeks to walk in the shoes central element on which exceptional of others. Generous-spirited leaders are leadership depends—the leadership of visible and authentic. Because they care, others. As discussed at the outset of this they are kind and compassionate. They essay, leading others has never been are also self-aware, understanding the easy, but in today’s fast-paced, hyper- impact they have on others. Such leaders connected, media-saturated world, the are inclusive in their approach, striv- challenge is heightened. Driven by new ing for diversity in all its forms. Their technologies, both the nature of work essential humility means that they are and the way it gets done are under­ continually challenging themselves, going profound changes. Required skills seeking out new ways to think about and capabilities are being redefined. things and new lessons to learn. Workers are being challenged to be At this point, two myths are worth more innovative and more creative, exploring. Myth number one is that and as traditional boundaries blur and such leaders are “soft.” Myth number give way, collaboration, agility, and two is that this style of leadership is learning as you go become essential. something you are born with, that it is In this environment, leading from the either inherently in you or it isn’t. corner office, utilizing the traditional Myth number one—that generous-­ command-­and-control style, believ- spirited leaders are soft. Nothing could ing that it is possible to control what be further from the truth. This is happens and how it happens—this the toughest, most courageous style model is dead. To fully utilize talent of leadership there is. Its ingredients and consistently align people around include clarity of purpose, setting high purpose, such that discretionary effort expectations, and holding people to is brought to bear, requires a new style account while consistently and regularly of leadership, one that is more selfless providing honest feedback. The gener- and compassionate. One that is built on ous-spirited leader does not resile from trust. My term for this style of leadership tough decisions. He or she will tackle is generosity of spirit. them timeously, treating those affected In simple terms, the generous-­ with respect. spirited leader fundamentally believes An exceptional leader and role model in the power of each person to make a from the political sphere can best bring difference and has a genuine desire for this concept to life—Nelson Mandela. people to flourish and be the best they After 27 years of imprisonment, and can be. This leader sets out to create having suffered all his life from the an environment in which people can

REVITALIZING THE SPIRIT OF BRETTON WOODS | 349 indignities, discrimination, and hatred orientation, or any other distinguishing embodied in apartheid, Mandela’s first characteristic. But from this essential words upon his release from jail in starting point, one can learn and grow. February 1990 were of peace, democ- The critical enabling element is that of racy, and freedom for all. His voice was self-awareness, a preparedness to stand one of hope, his message the rebuilding back and observe one’s own behaviors of a nation, based on reconciliation and actions, to assess their impact on and reconstruction. There were many situations, positive and negative, and to around him, understandably both angry learn from this assessment. Interestingly, and bitter, who argued for a harsh in becoming more self-aware, one approach, one involving retribution becomes more aware of others, too, and immediate redistribution. Mandela and of the significance of context and stood his ground. He was unambiguous environment. Leaders skilled in aware- in his expectation of others, clear in his ness tend also to be practiced in listening vision, and consistent in his messages. and in looking for cues, both verbal and At the same time, he was renowned nonverbal. The best courtesy and sign for his personal warmth, his care and of respect a leader can pay to others respect for individuals, his taking time is to be genuinely “in the moment” to acknowledge and thank. He made it when engaging with them. Doing so his business to understand the perspec- requires time and focused attention, tives and points of view of others, even and it involves seeing people, fully seeing of his enemies. He embraced recon- them. This approach encompasses a ciliation at the most personal of levels. humility and centeredness that builds And he delivered a new constitution, trust. Exceptional leaders observe them- a new government, a new vision for selves and learn from their experiences. South Africa, and a remarkable legacy with regard to truth and reconciliation.1 This is generous-spirited leadership at BEYOND THE its best. Tough and fair, tough and kind. BOUNDARIES OF Myth number two—that this style TRADITIONAL BUSINESS of leadership is something you are born At the outset of this essay, I stated that with. On the contrary, it is a leader- leadership is hard; indeed, in today’s ship style that develops and matures challenging times it is becoming even with practice, and over time. It cer- harder. This is certainly true with respect tainly starts with a basic respect for to the issue I now discuss—the role of others, regardless of race, gender, sexual today’s business leader in leading and

1 In 1996, Nelson Mandela established the Truth and Reconciliation Commission under the chairman- ship of Bishop Desmond Tutu. The emphasis of the commission was to bring out the truth of apartheid’s dark years and seek to provide some level of cleansing and closure for both victims and perpetrators.

350 | REVITALIZING THE SPIRIT OF BRETTON WOODS championing change beyond tradi- are tough to deal with, and it is easier tional business boundaries. “The future to retreat and keep one’s head down. of the world has become my business” Increasingly, exceptional business lead- is how exceptional business leaders are ers are required to be both courageous beginning to think about it. They have and resilient. Once on this path, it is a thoughtful understanding of the major important to keep going. societal forces facing the world, and they are able, conceptually, to link these forces with the businesses they run. They CONCLUSION reframe success for their enterprises to In 2019, Bretton Woods reaches its 75th make it clear that being long-term, sus- anniversary. Its focus has consistently been tainable, and value-creating institutions on a strong and prosperous global econ- for society is what matters most. They omy to benefit all the world. Reflecting understand the inextricable link between on its 75 years of history, there is indeed a investment and productivity, and that lot to celebrate. But growing and strident productivity dividends need to be spread nationalism, coupled with ardent protec- and shared. They have made the shift tionism, are making the challenge much from narrowly defending their corpora- harder. The speed and hyperconnectivity tions’ interests to actively contributing to of our digital era add to these obstacles. public debate. In this way, they are com- The growing disparity between the haves fortable in the worlds of governments, of and have-nots is of increasing concern, nongovernmental organizations, and of as is the tone-deafness of many of the civic society generally. They have moved so-called elites. If we are to preserve the beyond rhetoric and avoid being glib or Bretton Woods spirit—and preserve it superficial. They look for opportunities we must—big business has a vital role to to collaborate and partner with others. play. I argue that a new style of leader­ Innovation, design thinking, skills in ship is required. The role of business is problem solving, and business pragma- much more than business. Be clear on tism are key elements they bring to the purpose and align behind it, ensuring a table in addressing global issues such as culture that is ethical at its core. Build climate change, food and water security, an environment of high trust and high future jobs, gender equality, and access accountability. Be generous-spirited and to education. value diversity. And take on the difficult Business leaders who take on these role of championing change beyond responsibilities know that they will traditional business boundaries, bringing encounter criticism and attack, some- business skills and resources to bear. Stand times deeply personal. Such is our world up and be counted. Exceptional business of growing intolerance and polariza- leaders—we need you. tion, with the power of social media reinforcing existing biases. These forces

REVITALIZING THE SPIRIT OF BRETTON WOODS | 351 THE NEW GLOBAL AGENDA Scale, Urgency, and the Future of the Multilateral Development Bank System

NICHOLAS STERN Chair, Grantham Research Institute on Climate Change and the Environment; I.G. Patel Professor of Economics and Government, London School of Economics; and former Chief Economist, European Bank for Reconstruction and Development and World Bank Group

AMAR BHATTACHARYA Senior Fellow, Global Economy and Development Program, Brookings Institution; former Director, Group of Twenty-Four; and former Head of the International Policy and Partnership Group, World Bank Group

The seven and a half decades since the Bretton Woods institutions, we have launch of the Bretton Woods institutions seen extraordinary achievement in the have seen development progress on a improvement of life expectancy, educa- scale, pace, and breadth unprecedented tion, and income.1 We have seen rapid in human history. Such progress is a tes- and large decreases in global poverty timony to the spirit of internationalism, as well as in global inequality in health with the UN and the Bretton Woods and education. These fundamental institutions at its core, that was built in advances have been interwoven with the aftermath of two world wars and a set of profound changes in the struc- a Great Depression. In the era of the ture of the world economy and society,

1 Nicholas Stern, “The Best of Centuries or the Worst of Centuries: Leadership, Governance and Cohesion in an Interdependent World” (Fulbright Legacy Lecture, Grantham Research Institute, London School of Economics, London, UK, June 4, 2018).

352 | REVITALIZING THE SPIRIT OF BRETTON WOODS including a fundamental shift of the demographics realm, world life expec- balance of economic activity toward the tancy has risen, from around 40 years in emerging markets and developing coun- 1950 to around 70 today. Infant mortality tries; increasing interdependence across (per 1,000 live births) has fallen from regions and nations through means more than 100 in 1960 to around 30 including trade, investment, finance, and today. In the education domain, in 1950 the movement of people; fundamental around 45 percent of the world’s pop- technological change; and rapid pop- ulation was illiterate; today it is close to ulation growth along with increasing 15 percent. The gap between females and life expectancy. Any discussion of the males has narrowed, with female literacy future of the multilateral development now around 83 percent. Most of these bank (MDB) system must be built on a trends are due to the progress achieved in recognition of these changes, the role of the developing world as a result of public internationalism in their creation, the action and investments as well as better unique strengths of the MDBs, and the policies supported by strong development profound challenges that lie ahead, in cooperation in which the World Bank and large measure arising from the pressures subsequently the regional development created by past success.2 banks have played an important role. Of course, there has been great variation across regions and countries, and there DEVELOPMENT have been setbacks.3 While Africa has PROGRESS WITH seen real progress in many dimensions of GROWING PRESSURES well-being, growth in per capita income ON THE GLOBAL and other development indicators has COMMONS improved more slowly. These trends in human develop- The progress achieved in poverty reduc- ment have been accompanied by tion and human development indicators strong growth, although convergence over the past 75 years has been nothing in income per capita is a more recent short of astounding. The share of the phenomenon. In the first quarter of a world’s population living on less than century after the Second World War, US$2/day has declined from around world income per capita grew by around 75 percent in 1950 to an estimated 3 percent per annum, driven largely by 10 percent in 2015. In the health and rich countries and reconstruction after

2 Nicholas Stern, “Sustainability and Internationalism: Driving Development in the 21st Century” (Policy Insight, Grantham Research Institute, London School of Economics, London, UK, 2019). 3 In particular, conflict around the world continues to pose serious challenges.Armed conflict between countries has decreased, but there has been a sustained rise in internal conflicts. See Marie Allanson, Erik Melander, and Lotta Themmnér, “Organized Violence, 1989–2016,” Journal of Peace Research 54, no. 4 (2017): 574–87.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 353 the war. For much of the 1970s and The combination of economic and 1980s, growth sputtered as a result of the population growth has put enormous oil and debt crises. From the early 1990s pressures on the global commons and to the 2007 financial crisis, per capita ecosystems. We have seen severe damage income growth picked up to 2 percent to the environment across a range of per annum, this time driven by the dimensions—the atmosphere, biodiver- populous emerging-market countries, sity, forests and landscapes, oceans and especially China. The world economy freshwater resources. The strong reliance has finally started to recover from the on the burning of fossil fuels has been financial crisis, with growth still driven particularly damaging. Annual emissions largely by emerging markets. Per capita of carbon dioxide from the energy sector income growth is likely to remain in the alone increased from 11 gigatons (Gt) 2 percent range for a while, alongside in 1960 to 35 Gt in 2016. As a result, declining population growth. Overall, the concentrations of carbon dioxide world income per capita has grown by in the atmosphere have increased from a factor of 4 since 1950 as population around 315 parts per million (ppm) in has roughly trebled, so that total output 1960 to over 400 ppm today, a level not has gone up by a factor of around 12. seen for 3 million or more years.5 These Inequality between countries has emissions and resulting concentrations fallen as a result of the more rapid have caused average global surface growth of the large populous emerg- temperatures to increase by 1°C above ing markets; however, there has been preindustrial levels, taking us to the an increase in inequality within many edge of the experience of the benign countries, particularly in terms of the Holocene period of the last 10,000 years, shares of income and wealth going to during which human civilization has the top 1 percent.4 In addition, techno­ grown and thrived, introducing such logical and structural change together fundamentals as grain crops, settled with globalization have led to disloca- agriculture, and towns. tions in sectors and geographic regions The rise of emissions has led to grow- in many rich countries that have often ing air pollution and degradation of air been badly managed, leaving many quality. Air pollution is a major cause marginalized. today of illnesses and death,6 and 97

4 Facundo Alvaredo, Lucas Chancel, Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, “The World Inequality Report” (Paris, Harvard University Press, 2018). 5 Gavin L. Foster, Dana L. Royer, and Daniel J. Lunt, “Future Climate Forcing Potentially without Precedent in the Last 420 Million Years,” Nature Communications 8 (2017): 14845. 6 Latest estimates are around 9 million per year (Jos Lelieveld, Klaus Klingmüller, Andrea Pozzer, Ulrich Pöschl, Mohammed Fnais, Andreas Daiber, and Thomas Münzel, “Cardiovascular Disease Burden from Ambient Air Pollution in Europe Reassessed Using Novel Hazard Ratio Functions,” European Heart Journal ehz135, February 2019).

354 | REVITALIZING THE SPIRIT OF BRETTON WOODS percent of cities in low- and middle-­ greenhouse gas emissions and threats to income countries do not meet World the climate and weather systems of the Health Organization guidelines on air world. Around 75 percent of land is now quality. At the same time that we are assessed to be degraded, and biodiver- emitting greenhouse gases and pollut- sity, which is central to the functioning ing the air, we are degrading the natural of ecosystems, has been hit particularly ecosystems that create the environmental hard. The World Wildlife Fund estimates conditions for development. And these that 58,000 species are lost every year; pressures are being made worse by cli- vertebrate populations have declined by mate change. Freshwater resources are 60 percent since the 1970s and insects polluted and under stress in many parts are also under severe stress.9 of the developing world. Oceans absorb and store around a quarter of the annual greenhouse emissions, but this absorp- THE NEW GLOBAL tion is leading to increased acidity and AGENDA: SCALE, lower oxygen concentrations.7 Combined URGENCY, AND with overexploitation of fisheries and OPPORTUNITY FOR A increasing levels of plastics and other NEW GROWTH PATH pollution, the ecosystems of the oceans The progress achieved on development are under severe stress.8 Landscapes and over the past 75 years provides a good forests, which absorb about 25 percent platform for further progress, but our of annual greenhouse emissions, are current paths of growth and develop- also under intense and sustained pres- ment are clearly not sustainable.10 The sure from agriculture, harvesting, and discussions that led us to the milestone urbanization. Forest cover has declined agreements of 2015 recognized the dramatically over the past century, with need for greater ambition and radical the rate of tropical tree cover loss reaching change. The new global agenda was a high in 2016, amplifying the increase in created and agreed upon by more than

7 Bärbel Hönisch, Andy Ridgwell, Daniela N. Schmidt, Ellen Thomas, Samantha J. Gibbs, Appy Sluijs, Richard Zeebe, Lee Kump, Rowan C. Martindale, Sarah E. Greene, Wolfgang Kiessling, Justin Ries, James C. Zachos, Dana L. Royer, Stephen Barker, Thomas M. Marchitto Jr., Ryan Moyer, Carles Pelejero, Patrizia Ziveri, Gavin L. Foster, and Branwen Williams, “The Geological Record of Ocean Acidification,” Science 335, no. 6072 (2012): 1058–1063. 8 A.J. Jamieson, L.S.R. Brooks, W.D.K. Reid, S.B. Piertney, B.E. Narayanaswamy, and T.D. Linley, “Microplastics and Synthetic Particles Ingested by Deep-Sea Amphipods in Six of the Deepest Marine Ecosystems on Earth,” Royal Society Open Science 6, no. 2 (2019): 180667. 9 Monique Grooten and R.E.A. Almond, eds., “Living Planet Report 2018: Aiming Higher” (Gland, Switzerland: World Wildlife Fund, 2018), 7, https://www.wwf.org.uk/sites/default/ files/2018-10/wwfintl_livingplanet_full.pdf. 10 Sustainability means that future generations have opportunities at least as good as the current one, assuming they behave similarly to those who went before.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 355 190 countries, in contrast to Bretton eliminating extreme poverty and laying Woods, which was pre-­decolonization the foundation for sustainable future and included just 44 countries around prosperity worldwide go hand in hand the table, with one dominant power. with effectively tackling climate change. The new global agenda includes at As the pioneering 2014 New Climate its core the Sustainable Development Economy report, “Better Growth, Better Goals (SDGs), agreed to at the Climate,” had underscored,11 there is no UN in September 2015; the Addis trade-off between these objectives: the Ababa Action Agenda of the Third only long-term growth path that is sus- International Conference on Financing tainable is a low-carbon, climate-resilient for Development, agreed to in July 2015; one. The new global agenda has also and the UN Framework Convention on highlighted the central role of sustainable Climate Change agreement, reached infrastructure.12 Raising the quantity at the 21st Conference of the Parties and quality of sustainable infrastructure (COP21) in Paris in December 2015. is crucial for sustainable and inclusive The SDGs are more ambitious, compre- growth, reduction in poverty and attain- hensive, universal, and forward-looking ment of the SDGs, and meeting the than the Millennium Development ambitions of the Paris climate agreement Goals that had guided poverty reduction to limit global warming to less than 2°C efforts and development cooperation and build resilience in the face of climate since 2000. They recognize the cen- change. Two-thirds of those investments tral importance of sustainability. They will take place in emerging and develop- define our shared understanding of ing economies, and all the infrastructure the key dimensions of development. we build will need to be low carbon And in constructing the Paris climate and climate resilient. We must be clear agreement at COP21, the international that stabilization of temperature requires community recognized the enormity stabilization of concentrations, which of the possible dangers and the neces- in turn requires net zero emissions. The sity for urgent action well before the earlier we go “net zero,” the lower the deepest impacts of the potential crisis temperature at which we stabilize. For are upon us. the Paris target of “well below” 2°C, that The new global agenda was and means within 50 years. is based on the understanding that

11 New Climate Economy, “Better Growth, Better Climate” (New Climate Economy, Washington, DC, 2014). 12 Amar Bhattacharya, Joshua P. Meltzer, Jeremy Oppenheim, Zia Qureshi, and Nicholas Stern, “Delivering on Sustainable Infrastructure for Better Development and Better Climate” (Global Economy and Development at Brookings, Brookings Institution, Washington, DC, 2016); New Climate Economy, “The Sustainable Infrastructure Imperative: Financing for Better Growth and Development” (New Climate Economy, Washington, DC, 2016).

356 | REVITALIZING THE SPIRIT OF BRETTON WOODS The scale and urgency of delivering reaping the full health benefits of cleaner on the development goals while ensur- air and a safer climate, including contain- ing sustainability cannot be overstated. ing pandemic diseases. The benefits of Over the next 15 years, the stock of investing in sustainable infrastructure are infrastructure will need to more than immense and include cities where we can double. The world economy will likely move, breathe, and be productive; resilient double over the next 20 years, and the power and water systems; housing that urban population will nearly double can withstand increasingly frequent and over the next 30 years or so. At the same severe climate extremes; and ecosystems time, the world will need to cut carbon that are productive, robust, and resilient. emissions by 35 percent by 2030 to have The discourse has consequently shifted a reasonable chance of limiting global from the costs of action to ways to exploit warming to no more than 2°C. With emerging opportunities in this new econ- the scale of investment that will have omy based on a changing understanding to be made, we cannot afford to lock of the processes of growth. in polluting technologies and inefficient capital. The window for making the right choices is uncomfortably narrow, THE ROLE AND FUTURE not only because of a shrinking carbon OF THE MDB SYSTEM budget but because remedial measures MDBs and other development finance will become progressively costlier. institutions have a central role to play in At the same time, we have in our supporting the new global agenda. Their hands an immense opportunity to embark mandate, instruments, and shareholding on a path of strong, sustainable, and inclu- structure enable them to play a unique sive growth that could both drive and be and crucial role that other financial driven by the transition to a zero-carbon, structures cannot. They can bolster climate-resilient economy.13 Advances government capacity to accelerate policy in technology, especially in the energy reforms and institutional development; sector but also in sustainable mobility, they can support scaling up of projects city and building design, and agriculture, and programs through the power of have been much faster than anticipated. example and facilitation of platforms; And all of this on the back of policies and critically, they can catalyze private that have been less than strong and often investment and finance through reduc- inconsistent. Economic opportunities of ing, managing, and sharing risk. These the new growth path also stem from pre- three multipliers give such institutions serving essential natural capital and from their special comparative strengths in

13 New Climate Economy, “Unlocking the Inclusive Growth Story of the 21st Century: Accelerating Climate Action in Urgent Times” (New Climate Economy, Washington, DC, 2018), https:// newclimateeconomy.report/2018/.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 357 scaling up and enhancing the quality of innovation and going to scale. MDBs investments, especially in human devel- must move on the frontiers and move opment and sustainable infrastructure. as the frontiers move. In order for them to play a role com- The report of the G20 Eminent mensurate with the scale and urgency of Persons Group on Global Financial development challenges, these institu- Governance (EPG) made the case that the tions will need to transform themselves, scope and effectiveness of MDB activities learning from the lessons of past experi- must evolve with the changing world ence. They must demonstrate clarity and and the adoption of the global agenda.14 consistency around a sense of purpose; Further, the MDBs will need to work constructive country interactions around more effectively together as a system. policy; support for good governance; Strategic action as a group must be based recognition of the importance and com- on shared objectives and key operating plementarity of investment in all forms principles, which themselves follow from of capital—human, physical and natural, the strengths and mandates of the MDBs. and social; a high quality of skills and The starting point must be the ability of analysis; support for good long-term MDBs to work effectively as a system on platforms for action at the country level; the ground to support the development utilization of a broad range of financial strategies of countries and the delivery instruments; bigger “multipliers” across of global public goods. The answer is the board and stronger partnerships, to work with the other MDBs on the particularly with the private sector; basis of platforms created by the coun- and greater coherence as a system. And tries, rather than the present fragmentary they must avoid the adoption of narrow, approach and piecemeal collaboration. rigid, or fundamentalist approaches, all Country platforms imply shared objec- too visible in the 1990s. tives; joint assessment and support for These lessons and strengths imply policy and institutional reforms; common that the MDBs should work on the fron- structures for project selection and prepa- tiers of policy and investments, where ration; and joint financing structures, other banks find it more difficult to including those for mitigating risk and work. They should build partnerships crowding in private capital. Country around policy and institutions, including platforms need to be backed by effec- long-term platforms around infrastruc- tive cooperation and platforms at the ture, health, and education. They should regional and global levels, including better use their strengths to support both

14 G20 Eminent Persons Group on Global Financial Governance, Making the Global Financial System Work for All (n.p.: G20 EPG, 2018). Also see Amar Bhattacharya, Homi Kharas, Mark Plant, and Annalisa Prizzon, “The New Global Agenda and the Future of the Multilateral Development Bank System” (Brookings Institution, Washington, DC, 2018).

358 | REVITALIZING THE SPIRIT OF BRETTON WOODS utilization of the comparative strengths and the threats to the global commons. of individual MDBs. There are four priorities for governance The global agenda requires action reform: First, there is a need for strong in all countries. The allocation of effort but strategic involvement of institutional and resources between countries in the boards. Strategic boards with high-level MDB system is not a zero-sum game. participation should meet less often, The future of Africa and its climate and bringing into question the need for the environment depends in large measure heavy costs of residency. Second, a move on the nature of infrastructure invest- to merit-based leadership selection is ment in the middle-income countries fundamental for the effectiveness and (MICs) in the next two decades. The legitimacy of the system. Third, share- good returns that MDBs can get on holding structures must evolve to reflect financing in MICs can be used in poorer changing economic realities and foster countries. Some of the lessons learned strong multilateralism. Finally, as the EPG from work in the MICs carry over into report suggested, there is a need to put in poorer countries. Good investments place a mechanism for governance and in MICs would allow room for taking accountability of the overall system, with more risk in poorer countries. And good a role for the G20 and the governance connections between MICs and poorer structures of the international financial countries can help drive development institutions. for both. The immense challenges of sustain- Shareholder alignment and improved ability that the world now faces require governance is essential for the effective international action, with the MDBs at functioning of the system and individual the core. In the last 75 years we have institutions. Shareholders need to have a seen how effective that combination shared understanding of the value prop- can be. The challenges have changed osition of the MDBs across all income fundamentally, largely as a result of past groups and in tackling global challenges. successes, and the MDBs can make a They must better utilize the unique contribution at the necessary scale and financial strengths of the MDB system urgency only if they too change funda- but also plan for a major expansion of mentally. We have described how they their financial capacity, given the urgency can. We look to political leadership to and scale of the development agenda decide whether they will.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 359 A NEW BRETTON WOODS VISION FOR A GLOBAL GREEN NEW DEAL

ANDREW SHENG Distinguished Fellow, Asia Global Institute, and former Chair, Hong Kong Securities and Futures Commission

In 1934, US President Franklin Climate change, disruptive technology, Roosevelt launched a visionary New global migration, deleterious finan- Deal to lift the United States economy cialization, and geopolitical rivalry are out of the Great Depression and revive 21st-century additions to the 1930s it from damage caused by the Dust problems of massive unemployment, Bowl, huge unemploy­ment, and idle social inequalities, state failure, and excess capacity.1 Ten years later, America populist sentiments poised at open and extended his vision through the Bretton violent conflict with each other. Woods Conference to revive a Europe The Bretton Woods institutions and developing world devastated by war. (BWIs), comprising an International The conference created not only a new Monetary Fund to help finance balance-­ postwar international monetary and of-payments deficits under a fixed financial order but also a framework for exchange regime and a World Bank world governance through the United to help reconstruct Europe and later Nations and a multilateral trade and provide soft aid and long-term loans investment order. to the developing countries, have sur- Seventy-five years later, the world vived to the present day. Through the is facing another existential challenge. long lens of history, the Bretton Woods

1 I am grateful to Douglass Carmichael for very stimulating insights, comments, and suggestions. All opinions, errors, and omissions are personal to the author.

360 | REVITALIZING THE SPIRIT OF BRETTON WOODS Conference marked the passing of the low-income countries in adjustment, reins of global power from Great Britain giving broadly sound policy advice, and to the United States.2 The Bretton help member countries understand and Woods system initially functioned adjust to their growing role in the global well because the United States funded financial order and adjustments.4 the postwar dollar shortage through generous aid and investment outflows, with American companies beginning to POST-GFC IMPLICATIONS globalize trade and investments, leading The GFC and its aftermath marked a to widespread use of the dollar. But after profound change in the global economic the United States was forced to delink and financial order, because the crisis the dollar from gold in 1971, a new era affected the United States and Europe of floating exchange rates created the most, slowing their growth by a third, second phase of Bretton Woods, which while the rest of the world powered has lasted to the present day. ahead. The immediate response was José Ocampo called the structure quantitative easing (QE) by the global under the latter period a nonsystem central banks, aided by the famous stim- because although the world enjoyed ulus package of 4 trillion renminbi that fairly rapid growth, especially in the morphed into a massive credit boost emerging markets, that growth was in China. punctuated by periodic debt crises, The BWIs were given only a sec- notably the Latin American debt crisis ondary role during the handling of the in the 1980s, the Asian financial crisis GFC due to their inadequate capital and in 1997/98, and the US subprime lend- resources relative to the size of the rescue ing crisis of 2007/08 and European required. Instead, reserve-­currency cen- debt crisis of 2010–2012, the latter two tral banks took center stage. Central collectively called the global financial bank swaps by the US Federal Reserve, crisis (GFC).3 the European Central Bank, the Bank Nevertheless, despite all the flaws of England, the Bank of Japan, and of the nonsystem, the BWIs have, on the People’s Bank of China had more balance, been positive for globalization potency than the BWIs to deal with because together they provide scarce the financial crisis. Furthermore, global global public goods. In essence, they help recession was avoided by massive QE,

2 Benn Steil, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order (Princeton, NJ: Princeton University Press, 2013). 3 José Antonio Ocampo, “Reforming the Global Monetary Non-system” (UNU-WIDER Working Paper 2015/146, UN University World Institute for Development Economics, Helsinki, Finland, 2015). 4 Edwin M. Truman, “International Monetary Fund Reform: An Overview of the Issues” (Presentation at Peterson Institute for International Economics conference on IMF reform, Washington, DC, September 23, 2005).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 361 creating historically low interest rates, and the unemployment risk associated asset bubbles, and many other unin- with lower growth and the digital rev- tended effects, such as social inequalities olution is largely ignored.8 and political backlashes.5 Still, the BWIs Of these, climate change is the fore- diligently handled the aftereffects of most existential threat, with geopolitical the crises in terms of support lending, tensions and war as second, worsened financial surveillance (through missions by rising population counts, migration, of the World Bank’s Financial Sector and aging, with very few policy options Assessment Program), policy advice, and because of a massive debt overhang. All analytical support to the G20.6 these issues compound each other in an Two former Bank for International existential “race of our lives” threat.9 Settlements colleagues lamented the By the end of the 21st century, world failures of the G7 model of the post- population will peak at around 11 bil- GFC international era as follows: “The lion, with massive aging and declining global financial system remains frag- populations in the rich countries, cou- ile. The world economy struggles to pled with large youth unemployment in recover. Climate change accelerates. Africa and emerging markets, leading Digitization and globalization depress to huge migration pressures. Global wages. Income equality is on the rise. emissions will have to be cut by over Geopolitical turbulences are spread- 40 percent in order to have any chance ing. Lies are presented as truths. Truth of meeting carbon neutrality by 2050 remains unspoken. And people are and thereby hitting the Paris target of angry.”7 The authors identified four keeping warming to less than 2°C.10 “ticking time bombs”: the growing debt Failing that, there will be more food and and demography risk is grossly mis- water shortages, pandemics, failed states, priced, the growing war risk is unpriced, migration, war, and conflicts. In short, the climate change risk is underpriced, the world will have to collectively invest

5 Andrew Sheng, “Central Banks, National Balance Sheets and Global Balance,” in The Changing Fortunes of Central Banking, edited by Philipp Hartmann, Haizhou Huang, and Dirk Schoenmaker (Cambridge, UK: Cambridge University Press, 2018), 341–58. 6 Andrew Sheng, “A Global System Transformed by Systemic Crises” (10th Anniversary Financial Crisis Essay, Reinventing Bretton Woods Committee, New York, NY, 2017). 7 Hervé Hannoun and Peter Dittus, “Revolution Required: Ticking Time Bombs of the G7 Model” (Unpublished paper, Bank for International Settlements, Basel, Switzerland, 2017), 1, https:// www.ssrn.com/abstract=3060168. 8 Hannoun and Dittus, “Revolution Required,” 83. 9 Jeremy Grantham, “Race of Our Lives” (Speech to Morningstar Investment Conference, Chicago, IL, June 11–13, 2018), https://www.morningstar.com/videos/870606/watch-jeremy-granthams- race-of-our-lives-speech.html. 10 Intergovernmental Panel on Climate Change (IPCC), “Global Warming of 1.5°C: Summary for Policymakers” (United Nations, Geneva, Switzerland, 2018), https://www.ipcc.ch/site/assets/ uploads/sites/2/2018/07/SR15_SPM_version_stand_alone_LR.pdf.

362 | REVITALIZING THE SPIRIT OF BRETTON WOODS hugely in clean energy and infrastruc- low interest rates, the US federal debt ture to avoid the worst effects of climate will rise to an estimated 152 percent change and address social inequalities of GDP by 2048.12 In addition, the and the present escalation of conflict, United States may have US$10 trillion leading to nuclear war. in unfunded Social Security liabilities, The world urgently needs a Global whereas the unfunded pension liabili- Green New Deal (GGND). For better ties in 20 Organisation for Economic or worse, the BWIs are best placed to Co-operation and Development coun- lead the efforts to design and coordinate tries may be as large as 190 percent the implementation of a GGND. The of GDP. 13 In short, the fiscal space to broad parameters of such a deal may deal with climate change appears to involve the following. be limited. Roughly US$2.4 trillion, or 2.5 per- Any redesign of the Bretton Woods cent of world GDP, would have to be framework going forward must there- invested annually in clean energy through fore contend with a complex, messy 2035, and in addition coal-fired power future covering multiple alternative would have to be cut to nothing by scenarios that include, at best, mud- 2050, to avoid catastrophic damage from dling through to global war, climate climate change.11 These numbers exclude disasters, and state failures. In other the costs of social adjustments for people words, all crises have political origins to adapt to the new infrastructure, train- and will need political solutions. Facing ing of people displaced by technology the current one demands a coherent, and climate disasters, creation of new unified vision with coordinated resource jobs in high-unemployment areas, and management that encourages local ini- so on. Africa and the Middle East would tiatives to deal with problem resolution be most affected in the near future. at the grassroots level. The bad news for climate change Getting national Green New Deals financing is that between 2007 and is tough enough. Is achieving a GGND 2016, advanced-country debt has mission impossible? already risen 39 percentage points, We know that if global public goods to 274 percent of GDP, facing slow- are not provided to incentivize behav- ing growth and productivity. The ioral change, temperatures will rise, and US Congressional Budget Office food and water shortages from loss of has already warned that even under topsoil, flooding, salination, and so on optimistic estimates of exceptionally will increase global insecurity, leading to

11 IPCC, “Global Warming of 1.5°C.” 12 US Congressional Budget Office, “The 2018 Long-Term Budget Outlook” (CBO, Washington, DC, June 2018), www.cbo.gov/publication/53919. 13 Hannoun and Dittus, “Revolution Required.”

REVITALIZING THE SPIRIT OF BRETTON WOODS | 363 war and failed states. Even if sufficient these models excluded the revolutionary resources are found to make a difference concepts and tools of modern physics in keeping the temperature rise below that originated with Einstein’s relativ- 2°C, there will be technology-induced ity theories and quantum mechanics, disruption in jobs, higher costs of green which have been successfully adopted living, and massive costs for health care in biology, neuroscience, information and for education of the rising young theory, cryptography, international in Africa and emerging markets, along relations, politics, and computing. A with escalating aging costs for the rich quantum paradigm of finance and the economies. These challenges will demand economy is slowly emerging, and its behavioral changes in individuals, civil nonlinear, complex nature may help society, corporations, and governments the design of a future global economy that put the ethics and value of collec- and financial architecture.14 tive human and natural survival above The good news is that in fighting the individual interests. GFC, central bankers have discovered that Present policy makers can no longer QE can generate resources that can be treat these threats as “bumps in road” utilized to lower interest rates and stop but must approach them as existential the real economy from deteriorating challenges that demand new paradigms due to contagion. Indeed, the top five and modi operandi. reserve-currency central banks more than doubled their balance sheets, from US$6 trillion in 2008 to US$20 tril- A NEW PARADIGM lion in 2019, with hardly any impact on ON THE HORIZON inflation.15 This US$14 trillion injection To put it simply, we can no longer use of liquidity lowered interest rates and the reductionist neoclassical economic created asset bubbles as central banks paradigm, because the invisible hand bought financial assets ranging from sub- of the market cannot deal with climate prime mortgages and exchange-traded change, nor the inequities of war and funds in equity indexes to corporate and disruptive technology. Rational homo sovereign bonds. economicus has morphed into angry homo Unfortunately, the GFC was a “wasted politicus. crisis” because these resources should The neoclassical blindness arose have been used to finance long-term because its framework was founded on projects that would have dealt with the classical mathematics and physics of climate change, energy conservation, Descartes and Newton. By and large, green urbanization, forest and marine reef

14 David Orrell, Quantum Economics: The New Science of Money (London: Iconbooks, 2018). 15 Edward Yardeni and Mali Quintana, “Central Bank Balance Sheets” (Yardeni Research Inc., New York, NY, 2019), https://www.yardeni.com/pub/peacockfedecbassets.pdf.

364 | REVITALIZING THE SPIRIT OF BRETTON WOODS conservation, and the like. In a clear case human inequality, natural imbalance, of market failure, even with long-term and unsustainable growth. interest rates at near-zero levels, it was The quantum nature of the knowl- difficult to finance such projects. edge economy is that those who control Although central banks have talked information have power through infor- about green finance, they have shied mation generation, misinformation, or away from directly funding green proj- disinformation.16 Financial assets and ects on the pretext that to do so would virtual liabilities have quantum char- compromise the banks’ independence. acteristics of entanglement with each But because governments have also been other that are not yet fully understood. shy about increasing their debt levels, But those who are allowed to create critically important infrastructure proj- cybercurrencies or financial derivatives ects have remained unfunded, meaning have been able to exploit information that any central bank resources that asymmetries to enjoy inflated profits were generated were captured for short- while adding fragility to the system as term speculation rather than long-term a whole. investment purposes. This was not just All of these developments suggest that a market failure but a failure of policy using a new “quantum” imagination, imagination. the Bretton Woods framework can be QE and the digitization of the econ- reengineered to enable national cen- omy have revealed that for every asset, tral banks to fund global public goods there are virtual liabilities that central through investing in Bretton Woods– banks and cyber experts can create at created “global green bonds” and other near-zero marginal cost. Indeed, monetary funding instruments that can be designed policy entails central banks’ manipulat- to ensure accountability for delivery of ing their balance sheets (mostly creating green output. In other words, instead of virtual liabilities that are accepted as creating a global central bank, it might money) to influence the real economy. be possible to create a transparent fintech What central bankers have ignored is platform that would enable national gov- that their QE was gamed to enrich those ernments, corporations, and civil bodies smart enough to borrow and generate to bid on funding green projects, with asset inflation at the expense of the proper due diligence on funds utilization, ignorant 90 percent of the population. accountability, and ethical considerations. Hence, the ethical basis of QE requires The GGND therefore would be a new form of governance that makes a global initiative to use global excess sure such resources are allocated for capacity to tackle existential climate dealing with the existential threats of change threats. The old monetary system

16 Orrell, Quantum Economics.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 365 was incomplete because it comprised bank liquidity for long-term global partial national policies that could not public goods. cope with systemwide, global issues. As long as there is global excess capacity, such creation of “green QE” will not ARE THE BWIS SUITED TO lead to inflation. National governments UNDERTAKE THIS TASK? and central banks can also place limits on What remains to answer is whether the how much they wish to invest in such BWIs are suited to handle such a formi- global green bonds, which can be bought dable task. One plausible answer is that openly in the market by private funds. the incumbent institutions already have As we have learned from experience, a global footprint with a governance inflation in food prices has the most structure (however flawed) that represents impact on consumer price indexes. For member interests. Even though it is not example, in 2007, rice prices rose sharply easy for the leading powers to agree to when rice production was cut due to deal with what Mancur Olson called a drought in Australia, a major rice pro- “collective action trap,”17 there is little ducer. In other words, precisely because doubt, even for the most ardent climate the geopolitical realities will not allow a denier, that the evidence points to cli- global central bank or fiscal authority, we mate warming as a clear and present could still use lessons learned from fin- danger. After all, the last 10 years were tech to create a “virtual” global monetary 10 of the hottest 11 years in history and policy whereby global excess resources contained the 3 hottest years ever.18 are allocated to deal with climate change, Pessimists will say that, politically, it without sparking inflation. may be impossible to get global agree- What is lacking is the political will ment under the current contentious to collectively empower the BWIs to geopolitical conditions. On the other undertake such an important task for hand, Elinor Olstrom demonstrated the global public good, not unlike what how common resources, such as forests, happened with the Marshall Plan, but fisheries, energy, and farmland, can be this time systemically for global climate managed successfully by users rather change challenges. In short, the BWIs than governments or private companies.19 can intermediate short-term central Swedish schoolgirl Greta Thunberg

17 Mancur Olson, Power and Prosperity (New York, NY: Basic Books, 2000). 18 Grantham, “Race of Our Lives.” 19 Elinor Olstrom, Governing the Commons: The Evolution of Institutions for Collective Action (Cambridge, UK: Cambridge University Press, 1990).

366 | REVITALIZING THE SPIRIT OF BRETTON WOODS vividly shows that the young are already politics of global management of cli- demanding action on climate change.20 mate change. Not only will the design As the British Academy economists of a GGND require imagination, but admitted to Queen Elizabeth in 2009, its delivery will necessitate action with the experts failed to see the global crisis energy, force, passion, and urgency. coming because of “a lack of collective Failing these tasks, we will have imagination.”21 Political economists must broken BWIs in a broken world. find imaginative ways to engage the

20 “Greta Thunberg’s Climate Crusade,” The Week, May 4, 2019, https://theweek.com/articles/839011/ greta-thunbergs-climate-crusade. 21 British Academy, “British Academy to Her Majesty The Queen, July 22, 2009” (Letter from Imperial College London), http://wwwf.imperial.ac.uk/~bin06/M3A22/queen-lse.pdf (accessed May 7, 2019).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 367 BEYOND DEVELOPMENT Rethinking Aid in an Era of Fragile States

DAVID MILIBAND President and Chief Executive Officer, International Rescue Committee, and former Foreign Secretary of the United Kingdom

When we say “Bretton Woods,” we The right place to start is the 1941 are talking about a set of agreements, Atlantic Charter, signed by Winston and then institutions, established with Churchill and Franklin Roosevelt in the aim of promoting effective eco- Newfoundland before America joined nomic governance of an interdependent the Second World War, which focused world. But we also mean more than not on winning the war but on shaping that. Bretton Woods is part of a wider the peace. Former German Foreign system, set up after the Second World Minister Joschka Fischer called it the War to make the phrase “never again” “birth certificate of the West.” Bretton mean something. Never again the failed Woods was in various ways the child of institution building after the First World the Atlantic Charter. War; never again the exclusion of the Three commitments underpinned vanquished from postwar reconstruc- the Atlantic Charter’s animating idea tion; never again the failure to protect that global cooperation had to be the the rights of people, not just the sover- product of the defeat of fascism: first, the eignty of states. commitment to rights for individuals; The spirit of Bretton Woods is about second, international responsibility for more than an economic legacy. It rep- common problems, including the shar- resents important aspects of a world ing of sovereignty; third, institutional view, born in the depths of appalling creativity and responsibility to facilitate war, fashioned in the early days of frag- interstate cooperation. These notions ile peace, of homo sapiens, not just homo that underpin the postwar order have economicus. been challenged externally throughout

368 | REVITALIZING THE SPIRIT OF BRETTON WOODS their history. They have sometimes been distinguish vision from illusion, what in tension. They have been honored I call the difference between knowing in the breach, not just the observance. your own mind and defining your own But today there is a new problem: they reality. are under siege in the very countries Many changes in the last 75 years are that first promulgated the charter. The discussed in this volume. The focus of referendum decision that Britain should this essay is basic to the effectiveness of withdraw from the EU was a direct the international order, and its message rebuff to the lessons learned after 1945. is fundamentally changed from that Meanwhile, the Trump Administration of the immediate postwar era. It con- provides a counterpoint every week to cerns conflict and, more particularly, the idea of a global community to which its consequences. the charter aspired. In 1945, the world was all too used to the problem of interstate conflict. Today, there are tensions between Saudi Arabia INTERDEPENDENCE and Iran, between India and Pakistan, AND INTERNATIONAL between the United States and China. COOPERATION There is interstate competition. But The irony is that the world is so much interstate war is, for the moment, far less more interdependent today than in 1945 of a problem than intrastate warfare. It is and needs international cooperation so intrastate warfare that poses the greatest much more. Domestic policy today is threat to global security. It is intrastate so much more dependent on foreign warfare that is generating massive human policy. Public policy needs so much misery, not least in the displacement of more global cooperation, not less. The record numbers of people from their legacy of Bretton Woods—its ideals and homes as a result of conflict, persecu- its insights—is more relevant than ever. tion, or disaster (68.5 million people It speaks to the commitment to rigorous at the time of writing, made up of 40 idealism in international affairs; to the million internally displaced, 25 million alignment of economics and politics in refugees who have crossed borders, and successful public policy; to the essential 3.5 million asylum seekers, also having role of international action in serving left their own home countries).1 national interest, contrary to the siren More than 40 percent of the calls of nationalism and nativism; and extremely poor now live in conflict-­ to the requirement for statesmanship to affected or fragile states. This number is

1 UNHCR, “Figures at a Glance” (UNHCR, Geneva, Switzerland, June 19, 2018), https:// www.unhcr.org/figures-at-a-glance.html.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 369 projected to rise to two-thirds by 2030.2 in the UN Security Council in cases Climate change will only exacerbate of mass atrocity—but not enough to these trends, with rising temperatures stanch the bloodshed. and more extreme weather projected Pending radical changes in the global to displace 140 million people by mid-­ commitment to peacemaking, more century, mostly in already fragile and incremental efforts guided by the ani- low-income communities.3 The new mating principles of Bretton Woods are nexus of conflict and fragility on the one needed. In the treatment of the conse- hand and extreme poverty and political quences of war, there is urgent need for tension on the other exposes a bug, not reform. I focus here on four examples. a feature, of the system for treating these problems: the idea that “humanitarian” help is short-term and emergency in THE REFUGEE CRISIS nature, while “development” work to First, the refugee crisis requires that tackle poverty is structural and long- the global public good being deliv- term in nature, is broken by the new ered by refugee-hosting states such as geography of poverty. Bangladesh, Colombia, and Jordan be Ultimately, the only “solution” to properly recognized. A study by the this problem is to tackle the crisis of Center for Global Development of the peacemaking at its source—to invest future of the multilateral system con- international diplomatic, economic, cluded that the provision of global public and military resources to prevent crisis goods was the central development chal- if possible and put out fires where nec- lenge of today: essary. But so far there is little sign that Growing interconnectedness this type of investment is happening. through international trade, Since the end of the Cold War the aver- migration, and travel has age number of ongoing civil wars is increased the number of criti- 10 times greater than in the century cal common challenges faced by prior, and the length of civil wars in the global community. Climate the second half of the 20th century was change, cross-border epidem- three times greater than in the first half. ics, security risks, and financial The crisis of diplomacy has promoted crises pose a mounting threat some radical thinking—for example, to stability and living standards French proposals to suspend the veto everywhere. While they affect all

2 World Bank Group Fragility Forum, “Fragility, Conflict & Violence” (World Bank Group, Washington, DC, April 2, 2019), https://www.worldbank.org/en/topic/fragilityconflictviolence/overview. 3 Kanta Kumari Rigaud et al., “Groundswell – Preparing for Internal Climate Migration” (World Bank Group, Washington, DC, March 19, 2018), https://openknowledge.worldbank.org/handle/ 10986/29461.

370 | REVITALIZING THE SPIRIT OF BRETTON WOODS of us, those living in the poorest country 2.4 percent of its GDP in 2014 nations—with little or no per- due to increased government expendi- sonal savings, no social safety tures to support the expansion of public nets or government emergency services—a cost that is compounded by assistance programs to fall back legal restrictions on refugees’ access to on—are the most vulnerable. the labor market, preventing them from The provision of global public becoming self-sufficient.6 goods is a prerequisite for sus- These developing nations hosting tained future progress both in 84 percent of the world’s refugees are rich and poor countries and is providing a global public good, and vital for reduction of poverty they should be supported by the inter- and inequality across and within national community accordingly. This countries.4 situation was not anticipated at the founding of Bretton Woods, when The refugee crisis squarely fits into only European refugees had status this definition. in international law (courtesy of the Contrary to the claims of too many 1951 Refugee Convention, which politicians, the vast majority of refugees was extended globally only in 1967). are not in high-income Western coun- Refugee host countries need a new tries. Instead, the top 10 refugee-hosting deal, in which greater macroeconomic states account for just 2.5 percent of support is offered for integrating refu- global income. Despite a GDP per capita gees into economic and social life. One of just US$1,500, Bangladesh hosts option is to establish a financial facil- more than 900,000 displaced Rohingya. ity for third countries as an incentive Uganda, with the world’s 102nd-largest for them to take refugees. The World economy, hosts 1.4 million refugees—11 Bank’s IDA18 regional sub-window for times the number hosted by the UK, refugees and host communities, which the world’s 5th-largest economy.5 This opens up US$2 billion in grants and generosity does not come free for host loans to low-income refugee-­hosting countries. USAID (the United States countries, and its financing facility Agency for International Development) for middle-­income refugee-hosting estimated that the large influx of Syrian countries, which had received pledges refugees hosted by Jordan cost the totaling US$512 million by the end

4 Nancy Birdsall and Anna Diofasi, “Global Public Goods for Development: How Much and What For” (Center for Global Development, Washington, DC, 2015), 2, https://www.cgdev.org/sites/ default/files/CGD-Note-Birdsall-Diofasi-Global-Public-Goods-How-Much.pdf. 5 UNHCR, “Global Trends: Forced Displacement in 2017” (UNHCR, Geneva, Switzerland, June 25, 2018), 3, https://www.unhcr.org/5b27be547.pdf. 6 Razan Nasser and Steven Symansky, “The Fiscal Impact of the Syrian Refugee Crisis on Jordan” (Prepared by DAI for US Agency for International Development, Washington, DC, January 2014).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 371 of 2017, are both important steps. But REDEFINING more can be done, including work DEVELOPMENT AND in conjunction with regional finan- HUMANITARIAN AID cial institutions such as the African Second, the global community needs to Development Bank, Asian Development rethink the divide between development Bank, and others that have so far been and humanitarian aid, shifting the focus minimally engaged. of both from helping people survive to Another idea would be to create a helping them thrive. Unlike the World self-sustaining financial facility that blends War II era when Bretton Woods was public and private finance to shoulder first established, displacement today is the up-front costs of resettlement and a generational phenomenon, with the incentivize countries to open additional average displacement lasting 10 years. slots for refugees. Once refugees become The key statistic is that 60 percent of economic net contributors, this facility refugees are out of their own countries would be replenished through a part for over 20 years, and 80 percent for of the taxes they generate. Ultimately, over 10 years.7 Of the 330,000 Somalis creating a win-win situation for refugees living in the Dadaab camp in Kenya, and the countries hosting them requires one-third were born there.8 that the international community step up In this new reality, early childhood with innovative and longer-term financ- education and workforce training ing options that are fit for today’s trends become core businesses of the human- of displacement, while host countries itarian response, rather than peripherals shift their policies to enable refugees to left to governments and development integrate into local communities and actors to address. However, these sec- contribute to local economies. The fear tors remain woefully underfunded; for that such policies will encourage them example, just 2 percent of humanitarian to stay undoubtedly weighs on the mind aid goes to education.9 We can and must of host governments, but ironically, eco- do better to invest in areas that can help nomic self-sufficiency and skill building interrupt the cycle of violence that has may actually be the impetus for people eventually to return home.

7 Nicholas Crawford et al., “Protracted Displacement: Uncertain Paths to Self-Reliance in Exile” (Prepared by the Humanitarian Policy Group at the Overseas Development Institute, London, United Kingdom, 2015), https://www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinion-files/ 9851.pdf. 8 Alex Court, “‘Growing hopelessness’ grips ‘forgotten’ Somali refugees, warns UNHCR” (UNHCR, January 9, 2017), The UN Refugee Agency. https://www.unhcr.org/en-us/news/latest/2017/1/ 58738b174/growing-hopelessness-grips-forgotten-somali-refugees-warns-unhcr.html (accessed May 7, 2019). 9 UNESCO, “Education for All Monitoring Report. Humanitarian Aid for Education: Why It Matters and Why More Is Needed” (Policy Paper 21, UNESCO, Paris, France, 2015), https:// en.unesco.org/gem-report/humanitarian-aid-education-why-it-matters-and-why-more-needed.

372 | REVITALIZING THE SPIRIT OF BRETTON WOODS shattered so many countries and forced for reducing poverty, increasing learn- so many to flee their homes. ing, eliminating hunger, or improving By fracturing our aid responses into employment opportunities unless we public and private funding, human- meet the most vulnerable populations itarian and development sectors, where they are increasingly concen- governmental and nongovernmental trated: in fragile and conflict-affected solutions, we risk forgetting the lessons states. There are now more people living that drove the Bretton Woods partic- in extreme poverty in Nigeria than ipants to construct a united approach in India, and with three-quarters of 75 years ago. The protracted nature of a billion people living in the world’s displacement today necessitates bringing 15 most fragile states, such states are a diverse set of actors to the table at the increasingly where poverty—one of the start of a crisis to plan jointly for imme- biggest challenges underpinning all of diate and long-term solutions. No longer the SDGs—is becoming concentrated.10 can we wait to bring in development Yet the SDGs fail to put an adequate actors, financing, and tools to support focus on the most vulnerable people. displacement populations, and no longer Just 13 of 169 SDG targets mention can economic development be viewed as vulnerable people or conflict-affected separate from the humanitarian response populations, and not a single one in displacement contexts. Humanitarian explicitly refers to the displaced—a and development solutions need to be community of 68 million people, larger complementary and work in tandem in than either the UK or France. order to lift up the lives of the world’s The fractured nature of the humani- most vulnerable people. The key is not tarian system requires common methods institutional change but shared account- of accountability and shared goals to ability for agreed-on targets. This idea bring cohesion to our approach. To links to a critical third point. create these methods and goals, the SDGs need to be augmented with specific tar- gets—“collective outcomes” that establish DISPLACEMENT AND accountability for the humanitarian and EXTREME POVERTY development sectors covering health, Third, we need to recognize the threat education, protection, and income for posed by the displacement crisis to populations affected by conflict in frag- the core global goal of eliminating ile states. These targets must go beyond extreme poverty by 2030 through the input or output metrics, such as the Sustainable Development Goals (SDGs). number of tons of food delivered, and The SDGs will not achieve their targets instead should target the elimination of

10 World Poverty Clock, “The Percentage of Nigerians Living in Extreme Poverty Could Increase by 2030” (World Data Lab, 2018), accessed May 21, 2019, https://worldpoverty.io/blog/index.php?r=12

REVITALIZING THE SPIRIT OF BRETTON WOODS | 373 extreme poverty. For example, SDG 8, become closely linked—just 600 cities Decent Work and Economic Growth, generate 60 percent of the world’s GDP.12 could incorporate refugees by setting targets for activity by displaced people in local labor markets—that is, for obtain- THE CASH EQUATION ing safe and decent work. Other SDGs, We need to embrace this shift as we such as Quality Education, Zero Hunger, think about how to help populations Gender Equality, and Sustainable Cities displaced by conflict. The new frontier and Communities, can similarly be built in tackling their poverty is to make “why on to incorporate and address the unique not cash?”—that is, cash or its electronic needs of displaced communities, such as equivalent—the first question in humani- psychosocial support to address trauma, tarian contexts. With rising humanitarian nutrition standards, and access to schools needs outpacing public aid, we need in both refugee camps and urban settings. better aid that does more with less, and Finally, the drive against global pov- cash is a proven part of that equation. erty needs to recognize the biggest Just as the world has urbanized, so too shifts since Bretton Woods—the spread have refugees. Sixty percent of displaced of the market economy and the spread people worldwide live in urban areas,13 of urbanization. Since 1960, GDP per not camps, and cash offers them a way to capita has increased more than 23-fold, access the opportunities provided by local from US$450 to US$10,714. Relatedly, economies and make their own choices trade has become a more important part about what they need most. Cash doesn’t of the global economy, growing from 24 just support refugees, it supports the com- percent of world GDP in 1960 to 58 munities they live in, too. In Lebanon, the percent today.11 In that time period, the International Rescue Committee found percentage of the total world population that every US$1 spent by a Syrian refu- living in urban areas has also increased, gee generated US$2.13 of GDP for the from 33 percent to 53 percent, or from Lebanese economy,14 an equation that’s 1 billion people to 4 billion people. critical to encouraging these low- and Economic growth and urbanization have middle-income countries to keep their

11 World Bank DataBank, “Trade (% of GDP),” accessed May 21, 2019, https://data.worldbank.org/ indicator/NE.TRD.GNFS.ZS. 12 World Bank DataBank, “Urban population (% of total),” accessed May 21, 2019, https://data.worldbank. org/indicator/SP.URB.TOTL.IN.ZS?view=chart. 13 UNHCR, “Urban Refugees,” UNHCR: The UN Refugee Agency, https://www.unhcr.org/ en-us/urban-refugees.html (accessed May 7, 2019). 14 International Rescue Committee, “Economic Impacts of Syrian Refugees: Existing Research Review and Key Takeaways” (IRC Policy Brief No. 1, International Rescue Committee, New York, NY, January 2016), https://www.rescue.org/sites/default/files/document/465/ ircpolicybriefeconomicimpactsofsyrianrefugees.pdf.

374 | REVITALIZING THE SPIRIT OF BRETTON WOODS doors open to people fleeing conflict, The changes in the global context persecution, and environmental disaster. have not been matched by appropriate Seventy-five years ago, leaders from changes to our international institutions, 44 Allied nations came together to build but we can change that. By reinvest- a better international financial order ing in the spirit and values that drove when the previous one had failed them. Bretton Woods, we can meet the chal- They had tasted the bitter fruits of inter­ lenge of today’s shared problems. The national division, and they vowed to learn lesson we should learn is the impor- the painful lessons of the protectionism, tance of breaking down walls to solve isolationism, and zero-sum approach common problems, not building new to international affairs that precipitated walls in pursuit of the myth that we can World War II. The danger for our gen- keep problems out. eration is the opposite: that complacency is the forerunner of crisis.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 375 IN SEARCH OF A GLOBAL APPROACH TO THE GLOBAL MIGRATION CRISIS

DAMBISA MOYO Global Economist and Board Member, 3M Company and Chevron Corporation

Global mass migration has been at To meet the challenge of disorderly the heart of intense public debate and mass migration, the nations of the world international dialogue in recent years. need a more unified migration strat- In the wake of migration and refugee egy, and there is much inspiration to be crises around the world—including the found in the Bretton Woods institutions, ongoing European migration crisis, which have been the gold standard for which alone registered the movement international economic cooperation for of over 1 million people in a matter of the past 75 years. Unfortunately, today, months—the politics and social impact the organizations that safeguard our of migration have attracted substantial economic world order have neither the attention. Yet the international com- mandate nor the ability to influence, let munity and, in particular, leaders and alone manage, global migration. Going policymakers are not sufficiently focused forward, they must adapt accordingly. on the considerable impact that global Historically, population dynamics, mass migration will have on the global migration, and refugee policy have been economy in the coming years. Indeed, the purview of individual nation-states. without stronger global cooperation, But global migration is, by definition, mass migration has the potential to a global problem. The world therefore become one of the greatest headwinds needs an approach to mass migration against economic growth and global grounded in the same spirit of inter­ peace and prosperity in the 21st century. national economic cooperation that has

376 | REVITALIZING THE SPIRIT OF BRETTON WOODS been enshrined in the Bretton Woods internally displaced people around the institutions. world who have fled violence, political To understand the scope of the global persecution, natural disasters, and other migration challenge, it is important to dangers.2 examine the matrix of forces that drive The unprecedented speed and migration. Global leaders also need a volume of modern economic migra- better understanding of the various tion and refugee movements are the economic effects—both positive and result of a confluence of several fac- negative—that mass migration might tors that will continue to accelerate have on the global economy. With such an population movements in the coming accounting as a starting point, the nations century, including climate change, pov- of the world can then begin to develop erty and economic destitution, political a framework for renewed international instability, and violent conflict. Worse cooperation in the face of this looming still, these same forces are strongest in crisis—a framework that recognizes the the very countries and regions whose complex set of competing national imper- populations are growing the fastest. By atives that fuels this debate. the end of the century, more than 11 billion people will live on this planet.3 Most of that growth will come from THE FORCES BEHIND regions whose native-born populations THE CRISIS have the greatest incentive to migrate. There are nearly 260 million inter- Take Africa, for instance, a continent national migrants around the globe.1 that will be home to 40 percent of the Migration today has reached levels world’s population by the end of the not seen since the end of the Second century.4 According to the UN’s 2017 World War, in terms of both economic International Migration Report, the migrants—people who left their home rate of migration from Africa is already countries voluntarily, seeking new growing faster than that from any other opportunities abroad—and the nearly continent, likely owing to the war, 70 million refugees, asylum seekers, and famine, disease, weak governance, and

1 United Nations Department of Economic and Social Affairs (UNDESA), “International Migration Report” (United Nations, New York, NY, 2017), http://www.un.org/en/development/desa/ population/migration/publications/migrationreport/docs/MigrationReport2017_Highlights.pdf. 2 “Refugee Statistics,” USA for UNHCR, accessed May 7, 2019, https://www.unrefugees.org/ refugee-facts/statistics/. 3 “World Population Prospects: The 2017 Revision,” UNDESA, June 21, 2017, https://www.un.org/ development/desa/publications/world-population-prospects-the-2017-revision.html. 4 Geoffrey York, “Population Boom: 40% of All Humans Will Be African by End of Century,” The Globe and Mail (, Ontario, Canada), posted August 12, 2014, updated May 12, 2018, https://www.theglobeandmail.com/news/world/africa-to-experience-population-boom/ article19998373/.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 377 terrorism that are still widespread across any other country.10 And although its the continent.5 In 2017, Transparency poverty rates are falling, India is still International ranked sub-Saharan Africa home to more people living in extreme as the single most corrupt region in the poverty than almost anywhere else.11 world.6 That same year, a leading World The Middle East is home to the Bank official called Africa the planet’s five countries with the fastest-­growing most disease-prone continent.7 This long populations in the world: Qatar, list of factors is already fueling an exodus Oman, Lebanon, Kuwait, and Jordan.12 of Africans to other parts of the world. Unfortunately, it is also home to political Meanwhile, in the next six years, instability, uneven economic growth, India will overtake China as the world’s and terrorism—all of which have con- most populous nation.8 Every month, tributed to some of the largest refugee around a million Indians join the crises of the 21st century. By the end of working-­age population, and often they 2016, more than 12 million Syrians— struggle to find jobs.9 Poverty, of course, more than half of the entire Syrian is one of the strongest motivating fac- population—had been displaced from tors for economic migration: the UN’s their home.13 And according to the UN 2017 International Migration Report Refugee Agency, of the over 1 million also estimated that more international refugees who crossed the Mediterranean migrants hail from India than from

5 UNDESA, “International Migration Report.” 6 “Corruption Perceptions Index 2017,” Transparency International, February 21, 2018, https:// www.transparency.org/news/feature/corruption_perceptions_index_2017. 7 Nwafor Polycarp, “Africa Is the Most Disease Prone Continent—World Bank,” Vanguard (blog), October 9, 2017, https://www.vanguardngr.com/2017/10/africa-disease-prone-continent- world-bank/. 8 S. Rukmini, “Five Surprising Trends in India’s Population Growth in The Coming Decades,” Huffington Post, posted June 24, 2017, updated June 26, 2017, https://www.huffingtonpost.in/ 2017/06/24/five-surprising-trends-in--population-growth-in-the-comin_a_22676736/. 9 “Not Hiring Now,” Indian Express, February 11, 2014, https://indianexpress.com/article/opinion/ editorials/not-hiring-now/?sf1828582=1. 10 UNDESA, “International Migration Report.” 11 Homi Kharas, Kristofer Hamel, and Martin Hofer, “The Start of a New Poverty Narrative,” Brookings (blog), June 19, 2018, https://www.brookings.edu/blog/future-development/2018/06/19/the-start- of-a-new-poverty-narrative/. The only country with more people living in extreme poverty is Nigeria, which overtook India in early 2018. 12 Callum Brodie, “The World’s Fastest-Growing Populations Are in the Middle East and Africa. Here’s Why,” World Economic Forum, May 3, 2018, https://www.weforum.org/agenda/2018/05/ why-the-world-s-fastest-growing-populations-are-in-the-middle-east-and-africa/. 13 “Refugee Statistics,” USA for UNHCR.

378 | REVITALIZING THE SPIRIT OF BRETTON WOODS Sea in 2015, more than three-quarters THE ECONOMICS OF were from Syria, Afghanistan, and Iraq.14 MASS MIGRATION Looking to the future, climate Developing a framework for inter- change promises to catalyze further national economic cooperation on migration in the coming century. migration must begin with an honest Already, climate disasters displace accounting of the economic benefits and an average of 26 million people each costs of mass migration for the global year, according to the UN Food and economy. On the downside, evidence Agriculture Organization.15 As does indicates that many of today’s migrants population growth, climate change dis- are finding it more difficult to survive proportionately affects the same regions and thrive in their new home coun- whose people are most prone to migra- tries than did previous generations of tion. A 2016 study by the Max Planck migrants. Institute for Chemistry and the Cyprus The “age of mass migration,” during Institute found that climate change the 19th and early 20th centuries, offers could soon render large swaths of the a valuable starting point for assessing Middle East and North Africa uninhab- the economic impact of migration. itable—spurring a new wave of mass During that period, more than 50 mil- migration in a region that already has lion migrants left Europe, and around the highest rate of population growth 30 million settled in the United States.17 in the world.16 The economic benefits of that influx Together, this complex array of cat- can still be seen today, a century later. alysts threatens to produce destabilizing Research conducted by economists global mass migration on a scale the from Harvard, Yale, and the London world has never before confronted. School of Economics found that US counties that took in a high percentage

14 UNHCR (Office of the United Nations High Commissioner for Refugees), Operational Data Portal, accessed May 7, 2019, https://data2.unhcr.org/en/situations/mediterranean?page=1&view =grid&Type%255B%255D=3&Search=%2523monthly%2523. 15 “Climate Change Is a Key Driver of Migration and Food Insecurity,” United Nations Framework Convention on Climate Change, October 16, 2017, https://unfccc.int/news/climate-change- is-a-key-driver-of-migration-and-food-insecurity. 16 “Climate-Exodus Expected in the Middle East and North Africa,” The Cyprus Institute, accessed May 7, 2019, https://www.cyi.ac.cy/index.php/in-focus/climate-exodus-expected-in-the-middle-east-and- north-africa.html; Farzaneh Roudi-Fahimi, “Population Trends and Challenges in the Middle East and North Africa” (Population Reference Bureau, Washington, DC, October 2001), https://www.prb.org/ populationtrendsandchallengesinthemiddleeastandnorthafrica/. 17 Dudley Baines, “European Emigration, 1815–1930: Looking at the Emigration Decision Again,” The Economic History Review 47, vol. 3 (1994): 525–44, https://onlinelibrary.wiley.com/doi/ pdf/10.1111/j.1468-0289.1994.tb01389.x; Ran Abramitzky and Leah Boustan, “Immigration in American Economic History,” Journal of Economic Literature 55, no. 4 (2017): 1311–45, https:// www.ncbi.nlm.nih.gov/pmc/articles/PMC5794227/.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 379 of immigrants during this era experi- developed the destination country is, the ence “higher incomes, less poverty, less less economic impact we are likely to see unemployment, more urbanization, and from migration.”21 Today, the industrial higher educational attainment” in the revolution is long over, and the need for 21st century.18 low-skilled labor has declined. As a result, Indeed, many of the migrants who modern immigrants face much steeper came to the United States during the economic challenges than did those age of mass migration provided vital during the industrial revolution, with low-skilled labor for the industrial American immigrants relying more heav- revolution, facilitating rapid economic ily on government assistance programs growth. In 1880, for instance, immi- and tax credits than their native-born grants accounted for well over half of peers.22 Today, immigrants in America the manufacturing workforce, even are significantly more likely to live in though they comprised only a tenth poverty, even though they are also more of the population.19 These immigrants likely to be employed, than their earlier themselves also prospered: in 2014, a counterparts, according to a 2015 study Stanford University study found that, by the National Academies of Sciences, contrary to popular belief, European Engineering, and Medicine.23 Life for immigrants to the United States during modern migrants is even more difficult the late 19th and early 20th centuries in the European Union, where a 2015 held jobs and had earnings similar to Organisation for Economic Co-operation those of native-born Americans.20 and Development (OECD) report found But as a 2017 study published in the that foreign nationals experience substan- Harvard Business Review put it, “the more tially higher rates of poverty, and even the

18 Dan Kopf, “Places in the US That Took In More Immigrants in the 19th Century Still Benefit Economically from It,” Quartz, June 3, 2017, https://qz.com/989099/the-places-in-america-that- took-in-more-immigrants-in-the-19th-century-are-richer-today-because-of-it/. 19 Sandra Sequeira, Nathan Nunn, and Nancy Qian, “Migrants and the Making of America: The Short- and Long-Run Effects of Immigration during the Age of Mass Migration,” ifo DICE Report 15, no. 3 (2017): 30–34, https://www.cesifo-group.de/DocDL/dice-report-2017-3-sequeira- nunn-qian-october.pdf. 20 Clifton B. Parker, “European Immigrants to America in Early 20th Century Assimilated Successfully, Stanford Economist Says,” Stanford News Service, August 7, 2014, https://news.stanford.edu/pr/2014/ pr-immigration-myth-debunked-080714.html. 21 Vincenzo Bove and Leandro Elia, “Why Mass Migration Is Good for Long-Term Economic Growth,” Harvard Business Review, April 18, 2017, https://hbr.org/2017/04/why-mass-migration-is-good-for- long-term-economic-growth. 22 Steven A. Camarota and Karen Zeigler, “Immigrants in the United States: A Profile of the Foreign- Born Using 2014 and 2015 Census Bureau Data,” Center for Immigration Studies, October 3, 2016, https://cis.org/Report/Immigrants-United-States#30percent. 23 Alvin Powell, “Measuring Assimilation,” The Harvard Gazette, September 21, 2015, https://news.harvard. edu/gazette/story/2015/09/measuring-assimilation/.

380 | REVITALIZING THE SPIRIT OF BRETTON WOODS best-educated immigrants are more likely according to research conducted by to be unemployed than European natives.24 Moody’s Analytics.26 In the United It is likely that such statistics contribute Kingdom, the International Monetary to commonly cited concerns that immi- Fund found that a 1 percent increase grants are placing an increasing burden on in the share of migrants in the adult state welfare programs and social safety population yielded a 2 percent increase nets in developed host nations. in productivity and GDP per capita.27 Despite the hardships immigrants But these benefits can come at a nota- face in highly developed Western ble cost to the economies of migrants’ nations, most prospective international countries of origin. At the turn of the migrants are still determined to move millennium, the OECD calculated that there. A 2012 Gallup poll found that, more than half of the college-educated among the estimated 640 million adults natives in impoverished countries such who want to leave their home countries, as Trinidad and Tobago, Haiti, Guyana, the most popular destinations are the and many more of the poorest nations United States, the United Kingdom, in Africa, Asia, and Latin America left Canada, and France.25 their home countries to migrate to Many economists agree that today’s more prosperous ones.28 This “brain migration has at least a modest posi- drain” has made it nearly impossible tive impact on the economies of highly for impoverished countries around the developed countries. In the United world to maintain sustained economic States, for instance, every 1 percent growth—a situation that perpetuates increase in the immigrant population cycles of poverty as well as catalyzing results in a 1.15 percent boost to GDP, mass migration itself.

24 Organisation for Economic Co-operation and Development, “Indicators of Immigrant Integration 2015: Settling In” (OECD Publishing, Paris, 2015), https://read.oecd-ilibrary.org/social-issues- migration-health/indicators-of-immigrant-integration-2015-settling-in_9789264234024-en#page1. 25 Jon Clifton, “150 Million Adults Worldwide Would Migrate to the U.S.,” Gallup, April 20, 2012, https://news.gallup.com/poll/153992/150-million-adults-worldwide-migrate.aspx. 26 Lena Groeger, “The Immigration Effect,” ProPublica, July 19, 2017, https://projects.propublica.org/ graphics/gdp. 27 Jonathan Portes, “The Economic Impacts of Immigration to the UK,” Vox, April 6, 2018, https:// voxeu.org/article/economic-impacts-immigration-uk. 28 Jean-Christophe Dumont and Georges Lemaitre, “Counting Immigrants and Expatriates in OECD Countries: A New Perspective” (Social, Employment and Migration Working Papers 25, OECD Directorate for Employment, Labour and Social Affairs, Paris, France, 2004), 14, http:// www.oecd.org/els/mig/35043046.pdf.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 381 COMPETING NATIONAL While it is true that there are interna- PRIORITIES AND tional agencies that monitor and manage THE NEED FOR global population movements, these agencies are often limited in their scope INTERNATIONAL and authority. The United Nations, for COOPERATION instance, contains a complex web of In the coming decades, a massive influx divisions and departments dedicated of migrants could very well spur a new to examining population dynam- era of economic growth and prosperity, ics and advocating for migrants and as it did during the original age of mass refugees, including the UN Refugee migration. But without international Agency, the UN Population Fund, cooperation around this unprecedented and the International Organization challenge, this new age of mass (partic- for Migration. Unfortunately, while ularly disorderly) migration could also the work of these divisions is critically prove disastrous and threaten to upend important, they simply lack the influ- the global economy. ence, mandate, and broad perspective Collectively, the International necessary to fully address the global Mon­­etary Fund, the World Trade migration crisis. Organization, and the World Bank As long as migration policy is the manage the worldwide flow of cap- purview of national governments—all ital, the global trade of goods and with their own competing agendas and services, and the international devel- national political imperatives—there opment agenda. Yet they have little to will inevitably be barriers to inter­ no authority over the most important national cooperation around migration. economic resource of all: human capital. Developed nations, of course, want to Perhaps now is the moment to contem- attract the best and brightest migrants, plate the creation of a World Migration while developing countries rely on Organization, an international coop- low-cost, low-skilled workers to attract erative body with a mandate to help foreign investment and drive economic member states manage the flow of labor growth, all the while struggling to attract across borders. As with similar Bretton and keep their most talented citizens. Woods organizations, membership Meanwhile, national politicians them- would be voluntary; admittance would selves are beholden to political incentives. be extended by invitation of existing Their thinking is inherently focused on members; benefits and responsibilities short-term priorities, rather than the would be widely distributed in keeping long-term, global consequences of the with shared and stated goals; and the policies they enact. As a result, political enforcement of agreements would be concerns—and the ethnic, religious, and codified in the organization’s charter, to cultural anxieties that drive them—often ensure the organization’s effectiveness.

382 | REVITALIZING THE SPIRIT OF BRETTON WOODS play a much larger role than objective can mitigate the risks of chaotic and economic analysis in shaping national destabilizing mass migration while also migration policies. reaping the benefits migration can bring. Against this backdrop, international But by rejecting this cooperation, these organizations like the Bretton Woods same nations risk even greater chaos, institutions provide a valuable model including escalating fear and ethnic for what international cooperation on hostility, reactionary politics, and rising migration might look like in the 21st protectionism, particularly in the highly century. Existing international accords, developed Western countries that attract such as the Paris Agreement on climate the greatest numbers of migrants. change, have already proven that interna- The world needs a unified migration tional cooperation is possible even when strategy—one that examines the surpluses the countries involved have different and deficits of human capital around the priorities, capabilities, and agendas—just globe and channels migrants to where as they do when it comes to migration. they are needed the most. The Bretton By embracing greater international Woods spirit is a proven place to start cooperation, the nations of the world to think of such an audacious approach.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 383 CYCLICAL CRISES IN THE 21ST CENTURY

ISRAEL KLABIN President, Brazilian Foundation for Sustainable Development, and former Mayor of Rio de Janeiro

The concept of state and sovereignty development projects has never been has evolved since the Renaissance and as effective and efficient as the one that crystal­lized in a many-nuanced way. took place after the war period of 1939– Over the course of the 20th century, 1945 and resulted in the creation of a cyclical crises occurred as the mecha- global project through what took shape nisms for implementing power varied in Bretton Woods, New Hampshire. from parliamentary monarchy to dic- tatorial systems such as Communism, Fascism, and Nazism. With the evo- HISTORICAL CYCLES lution of more modern concepts of AND 20TH-CENTURY democracy, the absolutism of orthodox CRISES liberalism gave way to a new liberalism, The historical cycle of peace and con- which viewed many state interventions flicts that many historiographers have as important mechanisms for directing addressed theoretically was described public policies. Politics—that is, the art more distinctly in Arnold Toynbee’s of governing—determined the mech- theory of cycles,1 which asserted that anisms for implementing power, both from the Renaissance to the 20th cen- as a strategy of carrying out national tury, every century had an initial period visions and as a catalyst for systems of of peace followed by a localized war, global competition. after which there was an interwar period The conceptual and pragmatic evo- followed by a world war, finally fol- lution of ideas about preserving freedom lowed by a long period of peace. We saw in the midst of economic and social proof of this theory of cyclical crises in

1 Arnold J. Toynbee, A Study of History, 12 vols. (Oxford, UK: Oxford University Press, 1934–61).

384 | REVITALIZING THE SPIRIT OF BRETTON WOODS the 20th century when the First World noneconomic factors such as those that War of 1914–1918 interrupted an ini- govern climate change and mass migra- tial period of peace, followed by the tions, either for economic or political interwar period, which originated the reasons or due to environmental disas- Second World War, in which more than ters. The main question is whether this 60 million people were killed. transition from the centralized model of From the ruins of that war arose Bretton Woods to the one that will suc- the great victor, the United States, ceed it will be regulated and developed whose military and economic power in the 21st century without destructive was utilized wisely at Bretton Woods, armed conflicts. producing, over successive obstacles, a long period of peace during which the basic principles of the rule of economic TWO NEW CHALLENGES “liberalism” were consolidated. The Confrontation scenarios today are of result was the establishment of the US two types, presenting two different dollar as a reference currency and of US challenges. The first challenge is an even- military power as a form of persuasion. tual military confrontation regionalized This period’s European reconstruction as what divided into and globalization of more or less success- three possible regional wars:2 ful socioeconomic development projects 1. The nuclear challenge posed by were perhaps the most wide-reaching North Korea and effective in our history, at least over the last 2,000 years. 2. Ideological and religious conflicts in Today, however, a global project based the Middle East on the unique power of the United 3. Iranian expansionism States has a tendency to be replaced by a multiplication of centers of power. The This international scenario could existence of other convertible currencies, have underlying impacts that erode either regional or national, indicates the the system of balances supported by way toward a new, multicentered world the global power of the United States. in which the military confrontation At their core, however, these impacts of the past will be supplanted by the would also carry challenges for the lesser work of global organizations or even powers that intend to be part of the of new multilateral systems. A multi­ global power in one way or another. centered world implies the need for The second challenge is found in the ever more urgent forms of control over impact of new technologies on the

2 Henry A. Kissinger, “Opening Statement by Henry A. Kissinger before the Senate Armed Services Committee” (Speech, Washington, DC, January 25, 2018), U.S. Senate, https://www.armed-services. senate.gov/imo/media/doc/Kissinger_01-25-18.pdf.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 385 economic and social balance of both to codify the policies pertinent to the developed and developing countries. strategies and tactics of a future scenario This impact is already surpassing territo- of socioeconomic and environmental rial issues and threatening the economic development. We need a strategy in order preestablished by the system of which all major powers create mech- global balances. anisms of effective impact, not only on In the 20th century, the techno­ the military equilibrium among them logical advances needed for the progress but also on their ability to intervene in of nuclear warfare ceased to be exclu- regional imbalances as necessary to sta- sively American and started to be bilize military conflicts and avoid greater developed also by other global powers, catastrophes. such as Russia, and by developing coun- Again according to Henry Kissinger, tries, such as India, Israel, North Korea, for this system to work efficiently, there Pakistan, and many others. The chal- are two prerequisites:3 lenge of controlling a weapon that is 1. The “balance of power” must be potentially lethal at a global scale has maintained, and to do so requires started to be part of the macropolicies an understanding of the elements of all military and economic powers, that constitute the system of power. not those of the United States alone. In this era of rapid change, such an Thus, given the high level of irration­ understanding requires advanced ality of solutions that come from military, communications systems as well as ideological, or religious sources, short- a common recognition of the great term solutions are increasingly urgent. global threat of mutually destructive There is a pressing need for a standardized confrontation. system of economic and sustainability models that acknowledge the impor- 2. There must be an overall political tance of multipolar balance and global strategy. Although essential, the sim- co-responsibility for the creation and dis- ple power balance between military tribution of the collective wealth of the forces does not constitute by itself planet—that is, we need a new Bretton a political strategy. Obviously, the Woods system for new convertible cur- most advanced military technologies, rency baskets, as well as new models of which combine cyber and space- global financial centers whose mission is based technologies as well as artificial to structure a sustainable economy. intelligence (AI), would certainly To design these models in the 21st turn any confrontation between century, we need to create new tools major powers into a final catastrophe.

3 Ibid.

386 | REVITALIZING THE SPIRIT OF BRETTON WOODS THE IMPORTANCE • IPCC (Intergovernmental Panel on OF ENVIRONMENTAL Climate Change): A scientific panel POLICIES that, since 1988, had produced assess- ment reports every six to seven years Cutting-edge thinkers and researchers on the state of climate change have reckoned that at the turn of the 20th century we passed from the Holocene • And many others to a new era, the Anthropocene. That We see, therefore, that the new models means that for many millennia, humans of political and economic governance made use of natural resources and became require, for their implementation, a dependent on them. As we entered the combination of means and ends as a Anthropocene, nature became dependent safeguard of their own power. These new on humans, who are now responsible for models should be based on fundamental the supply-and-demand balance of all principles of economic globalization natural assets. in order to produce balanced relations In response to this shift in respon- within the global market. The future sibility, policy makers have created vision of a project that could give rise various mechanisms to control and to beneficial and impactful effects with implement environmental policies, a universal view requires that all related especially the following: actors develop mechanisms to boost • UNFCCC (United Nations Frame­ the sustainable development of under- work Convention on Climate developed countries. The goal is for Change): An international environ- these countries to reach development mental treaty that entered into force indexes closer to those of countries with in March 1994 adequate standards of social inclusion and consumption. However, the most • UNCBD (United Nations Con­ important thing is that the 17 Sustainable vention on Biological Diversity): A Development Goals be universalized. convention that agrees on goals and procedures to protect and use biodi- versity in a sustainable way NEW MECHANISMS • DSDG (United Nations Division for TO ADDRESS OLD Sustainable Development Goals): A PROBLEMS UN division that seeks to provide lead- It is clear to us that the successful mech- ership and catalyze action to promote anisms developed at Bretton Woods and coordinate the implementa- in 1948, such as the IMF, the World tion of internationally agreed-upon Bank, and later the United Nations, as development goals, including the 17 well as almost all sectoral agencies that Sustainable Development Goals. have provided important mechanisms

REVITALIZING THE SPIRIT OF BRETTON WOODS | 387 for the great political and economic We need to rethink the impacts of new success of the last 70 years, now need technologies, as well as the necessary to be expanded to include multiple new transformations in economic systems mechanisms. for the adoption of various management It is evident that the worldview and models, and their possible consequences the psychosocial and economic realities for welfare and socioeconomic inclusion of the various countries that are part of across the globe. our universe are still impacted by the Systems of communication and data variety of ethnicities, by religious and accumulation available today due to cultural factors, and by their own his- technological advances have changed tories. The tribes that have developed the way humans access knowledge and during the history of human civilization information. These systems have intro- will always embrace different view- duced different ways to use the same points regarding other countries and information to create global technolo- other tribes, as well as their many ideol­ gies suitable for the future. Thankfully, ogies, and will always pursue visions human intelligence and the ability to of their own centrality, certain to be ask questions are complemented, not in conflict with the current realities of replaced, by these new technologies. other countries and other tribes. AI has made anachronistic the human Today, the United States still bears capacity per se to develop new strategies, the greatest share of responsibility for so we must learn how to use AI in com- the elaboration of global policies. It bination with the explanatory capacity seems to us that the greatest asset left of language and human rational­ity. by Bretton Woods, the central role of We must be careful not to allow new the United States, will be lost, in the technologies to move humans away economic field and in the one necessary from the philosophy and knowledge for solving pressing global issues, such acquired over the last 4,000 years that as global warming, sustainability of the is still essential for building a new form ecosystems necessary to support human of humanism. life, and many other fundamental issues Even the greatest liberal philosophers of collective interest. of the 19th and 20th centuries advocated A new strategy is needed for the evo- government intervention as a necessary lution of liberal political systems, in view remedy to prevent political and social of the technological advances that will unrest in moments of crisis that could change the unfolding of history. Since the potentially lead to social and economic 15th century, humankind has witnessed collapse. The problem we now face is a rapid and efficient progress that has how to intervene without changing the radically transformed the ways in which way we exercise freedom as advocated we learn different kinds of knowledge. by the liberal principles of democracy.

388 | REVITALIZING THE SPIRIT OF BRETTON WOODS We must remain optimistic in this hamper the policies needed for the global political scenario, since all of the continued development of these same anticyclical remedies are embedded in societies. Schumacher’s theory resulted the very origin of the crisis that affects in the creation of the concept of “sus- humanity. This crisis will surely lead tainable development.” us from unilateral supremacy toward All roads toward implementing the a compromise that will regulate the concepts of sustainable development decentralization of power. Its essential involve the use of these same resources— purpose will be the continuation of as well as new technological, political, sustainable development and a necessary economic, and social mechanisms—to and urgent solution to avoid military co-create models of power use aimed clashes or something even more terri- at continuing the fundamental effects fying: the short-term consequences of a of development created by the Bretton gradual intensification of climate change Woods Agreement. However, these pro- and its destructive powers against the cesses should no longer be carried out civilization created by humankind over in a system based on a central power but the last 20 centuries. by a plurality of powers working toward the same purpose. Ultimately, the system that should be created to make way for FROM ENVIRONMENTAL harmonious and shared growth needs a LIMITS TO SUSTAINABLE “social contract” to determine the limits DEVELOPMENT and factors opposed to growth and to When, in the 18th century, Thomas the sustainability of life on our planet. Malthus, perhaps the most important of We should, however, be cautious the early economists, predicted the lim- along this road, because our progress on its of growth as a result of finite natural it could be challenged precisely by the resources, he created the theory known globalization of advanced technology, as “environmental limits.”4 In the 20th through the side effect of decreased century, economist Schumacher5 drew job availability and consequent social attention to the fact that the very speed exclusion as a broader concept. This and extent of development would bring eventuality will necessitate a new model about a destructive phenomenon for of education. the planet through the depletion of Among the greatest threats faced by natural resources. This event would humankind in the near future, apart have environ­mental impacts that would from the spread of nuclear power, is

4 Thomas Robert Malthus, An Essay on the Principle of Population as It Affects the Future Improvement of Society, with Remarks on the Speculations of Mr. Godwin, M. Condorcet, and Other Writers (London: J. Johnson, 1798). 5 E.F. Schumacher, Small Is Beautiful (London: Abacus, 1973).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 389 climate change caused by current tech- toward the Paris Agreement’s goals of nologies and by the current economic sociological balance have not yet been and production model. There is as yet designed. Many proposals will be dis- no solution for cussed at the 25th Conference of Parties of the UNFCCC, scheduled to take place 1. controlling the emissions of gases in Rio de Janeiro in December 2019. that cause climate change; Among the various measures that have 2. creating a new political model—that been advocated, some are more poten- is, social democracy as we under- tially effective, such as carbon pricing and

stand it today; or others that could alone help control CO2 emissions by creating a new target value. 3. updating the economic and social Perhaps the very threat that is per- system established in the last century. ceived and structured not only by the These three interrelated points must urgency of dealing with climate change, be urgently discussed and concretely but also by the clear need to reform addressed, especially when we consider the models of liberal democracy, could that the process of acceleration of history bring about a new Bretton Woods that requires quick solutions as well as tech- would gather support from many dif- nological advances to achieve collective ferent centers of future power, not only and comprehensive results. The required the United States. This type of coopera- discussions and actions are surely tasks tion could bring into the world a new that should be allocated to the Bretton cycle of growth and inclusion with no Woods system. need for wars or difficult negotiations In the case of global warming and through institutions such as the World its consequences, the Paris Agreement Trade Organization, which could be fatal constitutes an organized institutional for humankind as a whole. In that case, it collaboration and cooperation among is a must for the Bretton Woods system all nations. It carries in its body even the to codify and structure international necessary seeds for change in the eco- agreements on how the new “monnaie nomic structure and for solutions to the de compte” should be built to comply problems of development and inclusion. with the needs of future modernity, inter- However, the mechanisms for working national trade, and fluidity of the market.

390 | REVITALIZING THE SPIRIT OF BRETTON WOODS TECHNOLOGY, THE FUTURE OF WORK, AND PROSPECTS FOR DEVELOPING ECONOMIES

SUSAN LUND Partner, McKinsey & Company and McKinsey Global Institute

JAMES MANYIKA Senior Partner, McKinsey & Company, and Chairman and Director, McKinsey Global Institute

The summer of 1944 is rightly cele- with an automatic sequence-controlled brated as the time when the Bretton calculator, dubbed the Harvard Mark Woods conference established new rules 1. A precursor of today’s computers, it for the postwar international monetary was the first machine that could execute system. One month after that confer- long computations automatically. It ence, 150 miles to the south, another weighed five tons and was encased in a celebrated event took place: IBM offi- steel frame 51 feet long and 8 feet high.1 cially presented Harvard University

1 “IBM’s ASCC Introduction (a.k.a. The Harvard Mark 1),” IBM archives, accessed May 2019, www.ibm.com/ibm/history/exhibits/markI/markI_intro.html.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 391 Today, 75 years later, the smallest livelihoods and the workplace, boosting smartphone on the market is infinitely productivity and creating new jobs and more powerful than the Harvard Mark prosperity. In the United States alone, 1. Yet the advances in computing that we estimate that the personal computer these early machines represented sparked created 15.7 million net jobs between many of the same concerns and fears 1970 and 2015. While some jobs, such back then that automation and artificial as typist were eliminated, the creation of intelligence do today. People worried new jobs, ranging from software devel- that these new contraptions would take oper to customer service rep and app away their work and change their lives developer, easily offset those lost. The for the worse. net gain amounted to about 10 percent Already back in 1930, John Maynard of the US civilian labor force in 2015.3 Keynes worried about “technological For the global economy, too, tech- unemployment,” and the late 1940s nology has transformed the way that and 1950s saw an outpouring of con- countries and companies connect across cerns about job-killing machines, from borders, giving birth to a new era of Martin Heidegger’s techno-pessimistic­ globalization that has brought develop- treatise “The Question Concerning ing economies into a worldwide system Technology” in 1954 to the 1957 movie of trade and financial flows. At a time Desk Set, starring Spencer Tracy as an when globalization is under attack from engineer hired to install a computer for all sides, it is worth remembering that it Katharine Hepburn, who plays a TV has boosted global growth and brought network researcher. The computer ends widespread prosperity; since 1990, more up firing her, the entire research staff, than 1.1 billion people in emerging econ- and the network president.2 omies have been lifted out of extreme Such fears were overblown then and— poverty.4 The Bretton Woods institutions we would argue—remain so today. Not have played a critical role, providing a only is there no mass unemployment, but rules-based, multilateral framework that the global labor force has expanded to has enhanced (albeit imperfectly) macro- about 3 billion people, about 500 million economic and financial market stability. more than the total world population Yet even if technology has not proved back in 1944. Technology has transformed to be the existential threat that gloomy

2 John Maynard Keynes, “Economic Possibilities for Our Grandchildren,” in Essays in Persuasion (London: Macmillan, 1933), 358–74; Martin Heidegger, “Die Frage nach der Technik,” in Vorträge und Aufsätze 1936–1953, vol. 7 (Frankfurt am Main: Vittorio Klostermann, 2000), 5–36; Desk Set (20th Century Fox, 1957). 3 James Manyika, Susan Lund, Michael Chui, Jacques Bughin, Jonathan Woetzel, Parul Batra, Ryan Ko, and Saurabh Sanghvi, “Jobs Lost, Jobs Gained: Workforce Transitions in a Time of Automation” (McKinsey Global Institute, New York, NY, December 2017). 4 World Bank, World Development Indicators database, accessed May 2019, https://datacatalog. worldbank.org/dataset/world-development-indicators.

392 | REVITALIZING THE SPIRIT OF BRETTON WOODS philosophers and popular culture would AUTOMATION IS have us believe, the economic and social CHANGING WORK transformations it has brought to date— AND SKILLS and the very substantial transformations Our research at the McKinsey Global it will continue to bring in the future— Institute over the past three years has nonetheless pose significant challenges, focused on rapid advances in automation even as they create new opportunities. technologies and their potential impact As automation and artificial intelligence on work.5 We use the term automation to are increasingly adopted, the workplace refer to a range of technologies, including and the global economy will change. advanced robotics, autonomous vehicles, Opportunities for developing coun- and artificial intelligence. We developed tries are shifting as machines transform a range of scenarios for the speed of manufacturing processes and erode their adoption of these technologies and found historic competitive advantage of large that in most scenarios, new labor demand pools of low-wage labor. and job creation will likely be strong This paper examines the changes that enough to more than compensate for automation and artificial intelligence are the jobs displaced by automation through bringing to occupations and skills across 2030. This is true even in the advanced the global economy; looks at how they economies at the forefront of adoption. are transforming trade flows and upend- Nonetheless, almost all jobs will change ing much conventional wisdom and past to some extent; we estimate that in about practice in the business world around 60 percent of all occupations, as much as global value chains; and concludes with 30 percent of work activity is potentially a discussion of the implications of these automatable. Work most susceptible to shifts for all countries, but particularly automation includes jobs that require low-income countries in need of new performing routine physical activity in development paths. The next chapter of a predictable setting, collecting and pro- global integration and the challenge of cessing data, and conducting routine making future growth more inclusive customer transactions. are issues of central importance to the Automation will thus play out dif- global economy and, as such, ones that ferently by sector, depending on the the Bretton Woods institutions could types of work activities most prevalent. address as part of their evolution in a As figure 1 shows, sectors including changing world. manufacturing, accommodation and food service, transportation, and retail are considerably more susceptible to

5 See Manyika et al., “Jobs Lost, Jobs Gained”; and Jacques Bughin, Eric Hazan, Susan Lund, Peter Dahlström, Anna Wiesinger, and Amresh Subramaniam, “Skill Shift: Automation and the Future of the Workforce” (McKinsey Global Institute, New York, NY, May 2018).

REVITALIZING THE SPIRIT OF BRETTON WOODS | 393 FIGURE 1. THE AUTOMATION POTENTIAL OF WORK ACTIVITIES VARIES BY SECTOR Impact of automation by industry in the United States. Full-time equivalent weighted percentage of technologically automatable activities by industry. Automation potential is defined by the work activities that can be automated by adapting currently demonstrated technology.

SOURCE: MGI Global Automation Impact Model, McKinsey Global Institute analysis.

automation than other sectors, such as switch occupational categories in the health care or teaching, in which human next 10–15 years. interaction is much harder to replace The skill implications of these shifts with machines. for the workforce are significant. We can As rapidly evolving machines play already see one of the key challenges, an ever-larger role in the workplace, we that of worker retraining, advancing to can also expect substantial workforce the top of the corporate agenda and transitions. In our most accelerated sce- receiving renewed public policy attention nario for automation adoption, as many in some countries. Some firms, including as 375 million workers worldwide, or AT&T, Walmart, Tata, Infosys, and Tech about 14 percent of the global work- Mahindra, are putting in place large-scale force, may need to switch occupational workforce retraining initiatives. AT&T categories between now and 2030. Even is using external education providers if the pace of adoption is slower, as in such as Udacity, for example, whereas at our midpoint scenario, that could mean Germany’s SAP, the focus is on in-house about 75 million workers who need to efforts to create “learning journeys” for

394 | REVITALIZING THE SPIRIT OF BRETTON WOODS FIGURE 2. THE SKILLS NEEDED IN THE WORKFORCE WILL SHIFT TOWARD MORE TECHNOLOGICAL AND SOCIOEMOTIONAL SKILLS Includes United States, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, the Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom. Figures may not sum due to rounding.

SOURCE: McKinsey Global Institute analysis.

thousands of employees, including soft- These skill shifts will also have repercus- ware engineers who need to acquire sions for education, with a high school “softer” skills as their roles change to education no longer sufficient for many serving customers directly. types of jobs in the future, especially in Indeed, our recent work on the skills advanced economies. that will be needed by the workforce in While we see automation adoption the future shows that demand will rise as a worldwide phenomenon, we also sharply not just for technological skills of expect the pace and extent of that adop- all kinds but also for social and emotional tion to vary among countries. Lower skills, including leader­ship and ability to relative wage levels in developing coun- manage others. Basic cognitive skills will tries could mean slower adoption there, no longer suffice for many jobs, while since the business case for investing in the need for higher cognitive skills such automation technologies will be less as creativity and complex information compelling. Nonetheless, saving costs processing will increase. Demand for through labor substitution is only one physical and manual skills will decline. factor among several that companies However, in many countries, the latter will consider. Automation technologies will remain the largest category of skills are also powerful tools for improving in terms of hours worked (figure 2). the quality and increasing the speed of

REVITALIZING THE SPIRIT OF BRETTON WOODS | 395 production, reducing waste, and innovat- borders has fallen sharply. This decline ing more generally. Already, for example, in trade intensity has nothing to do with we can see China emerging as a leading the recent trade wars, however. In fact, it investor in artificial intelligence capabil- reflects healthy economic development in ities, along with the United States, well China and other emerging markets. More ahead of Europe in terms of research of what gets made in these countries is and development (R&D) spending. We now consumed locally instead of being can also see textiles and apparel com- sent to advanced economies. Moreover, panies experimenting with robotics in these markets are developing their own production, which not only speeds the domestic supply chains and rely less on process and reduces waste but also uses imported intermediate goods. vastly less labor. The geography of global demand is shifting radically away from the aging advanced economies. The developing TECHNOLOGY IS world accounted for less than 20 per- RESHAPING INDUSTRY cent of global consumption in 1995, VALUE CHAINS AND but now that share has grown to nearly ERODING LABOR-COST 40 percent and will top 50 percent by ARBITRAGE 2030. The new global consumers these numbers represent are creating major Even as it roils the workplace, technol- opportunities for the domestic com- ogy has been transforming globalization. panies in these countries—and also for While the public debate today is focused exporters around the world. Companies on rising trade disputes and protectionist in advanced economies sold more than measures, over the past decade, global- US$4 trillion worth of goods to the ization has undergone little-noticed developing world in 2017. Digital but profound structural shifts that are e-commerce marketplaces with global changing the calculus of where goods reach are opening the door for more are produced and which countries stand small and medium-sized manufacturers to gain.6 to capture a slice of this growth. Over the last 10 years, both output While trade in goods has flattened, and trade volumes have continued to services and cross-border data flows have rise, but the share of goods traded across become the real connective tissue of the

6 Susan Lund, James Manyika, Jonathan Woetzel, Jacques Bughin, Mekala Krishnan, Jeongmin Seong, and Mac Muir, “Globalization in Transition: The Future of Trade and Value Chains” (McKinsey Global Institute, New York, NY, January 2019).

396 | REVITALIZING THE SPIRIT OF BRETTON WOODS global economy.7 Some types of services migrate to the developing world. Today, trade—information technology ser- the labor arbitrage game appears to be vices, business services, and intellectual coming to an end. Only 18 percent of property royalties—are growing two or today’s goods trade now involves exports three times faster than trade in goods. from low-wage countries to high-wage From design to marketing, services also countries. That’s a far smaller share than account for 30 percent of the value of most people assume—and one that’s exported goods. Collectively, advanced declining in many industries. In textiles economies run a trade surplus in services and apparel, the share of trade flow from of US$480 billion, twice as high as a low-wage to high-wage countries has decade ago. These economies are well declined from 55 percent in 2005 to 43 positioned to capture future growth in percent in 2017. areas such as entertainment streaming, Automation and artificial intelli- cloud computing, remote health care, gence technologies will continue to and education. make labor costs a less important factor All industry value chains, including when companies decide where to invest those that produce manufactured goods, in new plants. Factors such as infrastruc- now rely more heavily on R&D as well ture, workforce skills, and especially as innovation. Spending on intangible speed to market—attributes that devel- assets, such as brands, software, and oping countries lack—are weighing operational processes, has more than more heavily in the equation. doubled relative to revenue over the All of these circumstances could past decade. This development bodes produce a shift away from production in well for Europe, the United States, and low-wage countries, enabling advanced other advanced economies with highly economies to recapture a bigger share skilled workforces and strong intellec- of the world’s production—albeit in tual property protections. a more digitized form.8 This type of The last era of globalization, in the manufacturing will not put millions 1990s and the subsequent decade, saw to work on assembly lines, but it does the offshoring of production, causing support more highly skilled and there- factories to be shuttered in advanced fore better-paying jobs. economies and manufacturing to

7 James Manyika, Susan Lund, Jacques Bughin, Jonathan Woetzel, Kalin Stamenov, and Dhruv Dhingra, “Digital Globalization: The New Era of Global Flows” (McKinsey Global Institute, New York, NY, April 2016); Rana Foroohar, “California Leads the Way on Data Regulation,” Financial Times, February 24, 2019, https://www.ft.com/content/3406505e-36b9-11e9-bd3a-8b2a211d90d5. 8 Rana Foroohar, “Made in the USA: Inside One Company’s All-American Supply Chain,” Financial Times, February 20, 2019, https://www.ft.com/content/c0e2c544-349c-11e9-bd3a-8b2a211d90d5.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 397 TOWARD A NEW and modern, technology-enabled facto- DEVELOPMENT PATH ries that can compete globally. Other opportunities may also arise Labor-intensive manufacturing for in the next era of globalization. Speed export has been the only proven path to market and proximity to major con- for low-income countries to climb the sumer markets is becoming increasingly economic ladder rapidly. First in Japan, important in a range of consumer goods, then in South Korea and Taiwan, and from fashion to household goods to most recently in China, export-led electronics, as companies respond to manufacturing generated high rates of changing consumer tastes. Countries economic growth and lifted hundreds and regions that are near the major of millions of people out of poverty. But consumer markets—such as Mexico and as countries become richer, the share of Central America to the United States, employment in manufacturing eventually and North Africa, Eastern Europe, and peaks and starts to decline, at which point Turkey to the European Union—may service sectors such as finance, retail, stand to gain from these trends. transportation, and business services take A third path may be through service over as leading job creators. This peak exports. Developing countries, including is occurring earlier and earlier in the Costa Rica, India, and the Philippines, development process, a phenomenon that specialize in traded business-process that Dani Rodrik has dubbed “premature operations and information technology deindustrialization.”9 services will likely have new opportu- So against the backdrop of auto­ nities as trade in services continues to mation’s changing work and trade, rise. Indeed, one finding of our research what will become of the prospects for is that the cross-border services trade low-income countries? In the short is growing more than 60 percent faster term, export-led, labor-intensive man- than trade in goods and is generating ufacturing may still have room to grow more economic value than traditional in some low-wage countries (figure trade statistics capture.10 However, an 3). Bangladesh, India, and Vietnam are important caveat is that these types of achieving solid growth in labor-­intensive traded services face important challenges, manufacturing exports, at a time when since artificial intelligence and virtual China’s wages are rising, and it is focus- agents can respond to only the most basic ing on higher value-added value chains. customer queries. For this path to remain Countries pursuing this classic man- successful, these countries will need to ufacturing path will need to invest in develop a more skilled workforce and transportation and logistics infrastructure move into higher-value offerings, such as

9 Dani Rodrik, “Premature Deindustrialization,” Journal of Economic Growth 21, no. 1 (2016): 1–33. 10 Lund et al., “Globalization in Transition.”

398 | REVITALIZING THE SPIRIT OF BRETTON WOODS FIGURE 3. SOME DEVELOPING ECONOMIES ARE STILL INCREASING THEIR EXPORTS OF LABOR-INTENSIVE GOODS COMPOUND ANNUAL GROSS EXPORTS OF LABORINTENSIVE GOODS GROWTH RATE Index: 100 = 2007 2007–17 400

350 375 +15.1

300 242 250 +7.9 228 214 +7.2 200 182 201 192 +6.7 150 161 100

50

0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Vietnam India China Bangladesh

SOURCE: McKinsey Global Institute analysis.

software and Web development, graphic trading blocs in Latin America and Africa design, and customer sales. could be deepened to create regional Closer regional integration may also trade opportunities. hold potential. Intraregional trade is rising Finally, technology may enable some globally, driven by the growth of value developing economies to leapfrog ahead chains within Asia and within the 28 EU in some areas, bypassing the technologies countries. But intraregional trade remains of the last era altogether. The digitization low in Africa and Latin America. In these of the economy creates an imperative for regions, further regional economic inte- developing economies to build digital gration can create markets with scale infrastructure, and mobile apps, cloud and open up new trade opportunities. computing, and digital finance are prov- Within the East Africa Community, for ing to be powerful enablers. Already we instance, manufactured goods make up can see that countries such as China and a larger share of internal trade than of Kenya have taken a global lead in digital trade with the rest of the world. Existing financial services accessed by mobile

REVITALIZING THE SPIRIT OF BRETTON WOODS | 399 phone.11 India has enrolled more than IMPLICATIONS FOR 1.2 billion people in its Aadhaar dig- THE BRETTON WOODS ital ID program, which has boosted a INSTITUTIONS range of other digital services including The Bretton Woods institutions have online banking; government benefits played a central role in maintaining are paid directly into online accounts an open and competitive world eco- linked to Aadhaar.12 Digitization is nomic order and promoting economic enabling new credit scoring models for prosperity and peace for over 70 years. small and medium-sized enterprises in Hundreds of millions of people have some emerging economies, and digital been lifted out of poverty during this platforms such as Alibaba, Amazon, and period. The Bretton Woods institutions eBay are spawning a new generation of have evolved their roles over the years “micro-­multinationals”—tiny companies to reflect new challenges, and this 75th that can achieve global reach. anniversary provides an opportunity The specific challenges and oppor- to reflect further on how they can help tunities differ for individual countries. address the most pressing challenges of Yet a few priorities apply across the the 21st century.13 board. No matter where countries spe- While technology is reshaping trade, cialize today, strengthening their service investment, and development paths, sectors and capabilities is an important new global challenges have emerged opportunity for the future. Investment that go beyond the ability of single in R&D will be critical to competing nations to address. Climate change, in an increasingly knowledge-intensive epidemics, and migration call out for global economy. Upgrading skills for all new global leadership and coordinated and finally realizing the oft-stated goal of responses. As might be expected after lifelong learning will be essential if we are 75 years, many more institutions have to reap the full benefits that new technol- entered the multilateral system, includ- ogies promise. Above all, notwithstanding ing regional development banks and the gloomy notes struck by Katharine other bilateral and plurilateral institu- Hepburn and Martin Heidegger, the tions; more could potentially be done future can be bright—but it will take to promote cooperation and coordi- work and foresight to prepare the way. nation among them to maximize their

11 James Manyika, Susan Lund, Marc Singer, Olivia White, and Chris Berry, “Digital Finance for All: Powering Inclusive Growth in Emerging Economies” (McKinsey Global Institute, New York, NY, September 2016). 12 Noshir Kaka, Anu Madgavkar, Alok Kshirsagar, Rajat Gupta, James Manyika, Kushe Bahl, and Shishir Gupta, “Digital India: Technology to Transform a Connected Nation” (McKinsey Global Institute, New York, NY, February 2019). 13 See G20 Eminent Persons Group on Global Financial Governance, Making the Global Financial System Work for All (n.p.: G20 EPG, 2018).

400 | REVITALIZING THE SPIRIT OF BRETTON WOODS impact. At a time of growing income infrastructure, a key enabler for future inequality and lack of economic mobil- growth and development. In the digital ity, and as new technologies accelerate era, building human capital is more workforce transitions, the institutions important than ever, through education, could play a leading role in providing vocational training, and health care, as support and advice to governments well as tapping the human capital of seeking to make future growth more women. Digital skills will be an essen- inclusive. It is important that nations tial requirement for the workforce of both harness the productivity potential the future. of automation and artificial intelligence At a time when the global economy and, at the same time, mitigate social itself is rebalancing yet becoming ever and economic dislocations. more interconnected, with continu- Alongside these new roles and goals, ing growth and influence of emerging the institutions might consider updat- economies on the global economy, the ing their initial and ongoing mandates Bretton Woods institutions remain of to reflect the changing context. For critical importance in ensuring a rules- example, financial and advisory ser- based, open, and competitive world vices for low-income countries could be economic order that will serve us all expanded to include the need for digital for the next 75 years.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 401 A photographer snaps a photo of delegates assembled in front of the Mt. Washington Hotel in Bretton Woods, NH.

Source: Bettmann/Getty Images FUTURE OF THE BRETTON WOODS COMMITTEE

REVITALIZING THE SPIRIT OF BRETTON WOODS | 403 REFLECTIONS ON THE FUTURE OF THE BRETTON WOODS COMMITTEE

RANDY RODGERS Executive Director, Bretton Woods Committee

Across the essays in this compendium forward-looking perspectives on the and the wider array of feedback collected system, IFIs, and key issue areas—their through the Bretton Woods@75 engage- perspectives remain their own, but many ment channels, some notable themes that authors shared common views and pro- consistently rose to the fore are worthy posed solutions to these questions in of reflection. And the readership may their respective pieces. feel left with a natural set of next ques- Rather, the hope is that the con- tions to consider; namely, where to go clusion of the Bretton Woods@75 from here? What is the next chapter for initiative, is, in effect, a new beginning: the global, rules-based system and for a rekindling of the visionary think- the Bretton Woods institutions? For the ing and spirit of multilateralism that Bretton Woods Committee? changed the world beginning in 1944, This chapter does not pretend to aim whose legacy has continued to reward at such lofty heights as to definitively and reshape the world in irrefutably answer these questions. It was never positive ways since; and an inspirational intended that the Bretton Woods@75 assortment of ideas that emboldens initiative would produce a road map policymakers, lifts their sights toward for the international financial insti- the horizon, and invigorates their tutions (IFIs), or even for the Bretton thinking to accentuate and accelerate Woods Committee itself. Compendium reform efforts. As for the Bretton Woods authors were asked to share their Committee, it is a fresh endorsement

404 | REVITALIZING THE SPIRIT OF BRETTON WOODS from its members and enthusiasts and an Criticism, while plentiful, is construc- opportunity to reflect, rejuvenate, and tive. Importantly, contributors contend reposition the organization to meet its that the fault lines existing today across mission for the next generation. the open, rules-based economic system More than any other sentiment, have arisen in large part as a byproduct Bretton Woods@75 contributors offer of the great successes the system has a universal and indispensable message: afforded to nations and civilization on protect and strengthen the Bretton Woods the whole. mission and accelerate the evolution of the In light of shifting economic land- global financial architecture for a rapidly scapes and the forces of change the world changing world. is witnessing, various contributors urge Authors share a wide array of for- evolution of global governance to better ward-looking ideas about the future of reflect the growing economic clout of the global, rules-based system, within key countries across Asia, Africa and the context of a commonly referenced Latin America, and their rising stakes backdrop: an increasingly multipolar and responsibilities within the system. world in which populist politics and the And, as the world becomes more inter- forces of protectionism and nationalism connected (e.g. global supply chains, are on the rise across key countries and communication technology prolifera- regions. Against this backdrop, they pos- tion) yet also more decentralized (e.g. tulate that multilateralism may be in the issue complexity, stakeholder prolifer- midst of an existential crisis. The spirit ation), decision making around future of cooperation as established in Bretton global governance may also need to be Woods appears to have faded, and the more decentralized—driven through risks of system fragmentation are real. networks, partnerships and task forces Can this spirit be renewed? The suitable for the challenge, and perhaps view among contributors is that great less reliant on institutionalized gover- effort should be made, and that this is nance mechanisms. largely a matter of will—will among Specific to institutional reform, con- global public leaders and policymakers tributors posit that all IFIs should focus to choose collaboration over unilateral on how best to serve their respective action, and to achieve outcomes that memberships and promote the ideals support both sovereign interests and that have driven dramatic increases in common objectives within the inter- living standards and economic growth national community. over the decades. They recognize that In one form or another, contrib- policymakers seek resilience in the face utors champion the various successes of global economic fluctuations, as well of the Bretton Woods system and the as help in making their economies more historical ability of its stewards to flexible and their labor forces more able adapt to an evolving global economy. to advance their own development.

REVITALIZING THE SPIRIT OF BRETTON WOODS | 405 Authors also urge the institutions now and for the future. It needs them to serve as knowledge sources for their to be effectual partners to their mem- members; they need to do more to keep bers, as well as system stewards for the up with innovation and emerging global global public good. If we wish to evolve trends and challenges. IFIs will need to and strengthen the open, rules-based look beyond their walls to gather ideas, international system to tackle tomor- experiment, evaluate risk, and collab- row’s challenges within an increasingly orate with a richer and more diverse multipolar world, global leaders should landscape of financiers, donors, thought rekindle the spirit of Bretton Woods partners, planners, and implementers and demonstrate the will and foresight than ever before. to act in greater coordination and Contributors also point out that harmonization. the private sector has a key role to play This universal sentiment by con- in long-term development finance. As tributors in support of protecting and several recount, the sums needed for strengthening the Bretton Woods mis- physical and institutional infrastructure sion, as well as accelerating the evolution are far larger than can be provided by of the global financial architecture, aid donors or international development lends renewed credence to the mission institutions. IFIs have started using more and mandate of the Bretton Woods innovative financing tools to encourage Committee. What is a reasonable role private-sector involvement—but more and path forward for the Committee, out-of-the-box thinking (e.g., resource or taking into account organizational risk pooling and diversification) is needed strengths and limitations and the exter- to unlock opportunities for development. nal forces at work? The theme of governance in one form Essentially, all aspects of the Bretton or another also permeates the essays. Be it Woods@75 initiative, from essays and through combating corruption, strength- events to surveys and dialogues, were ening legal frameworks and enforcement designed to help catalyze organizational capabilities, improving fiscal performance, renewal and to offer ample opportunity or broadening inclusion—increased trans- for Committee members and followers parency is essential for driving standards, to share feedback on the role and future efficiencies and accountability. Good growth path for the Committee. The pos- governance outcomes need to be visibly itive responses from Bretton Woods@75 promulgated at the highest levels of IFI contributors offer an encouraging sign operations and prioritized throughout that Committee renewal and growth are, country programs. in fact, desirable. For those with limited Across the diverse spectrum of essays, knowledge of the Committee’s mission, the conclusions are clear: the world role, and activities, the following para- needs the Bretton Woods institutions graphs provide the requisite context.

406 | REVITALIZING THE SPIRIT OF BRETTON WOODS The Bretton Woods Committee was periodically draws together a Legislative created in 1983 at the suggestion of Task Force of US-based members inter- two former US Treasury officials— ested in educating members of the US Secretary Henry Fowler and Deputy Congress or their staff on key IFI issues, Secretary Charls Walker, a Democrat at times bringing current or former IFI and a Republican—who saw the need representatives or policy makers into for an organized effort to ensure that the discussion. leading citizens speak about the impor- Throughout its existence, the Com­ tance of the IFIs. Headquartered in mittee has deliberately maintained a Washington, DC, and working closely small, informal leadership structure and for decades with successive US admin- a lean-resourced organizational secretar- istrations, the Committee provides ideas iat. Leadership has consisted of two or and advice to leaders of the Bretton three co-chairs with experience working Woods institutions, while also fulfilling closely with or within the IFIs and the an important advocacy role by remind- U.S. government. In the past decade, ing elected leaders that global economic an Advisory Council was conceived to prosperity and lasting national security broaden and diversify input into the are closely tied to continued progress on Committee’s direction. Three-year stra- multilateral issues. tegic plans help steer and prioritize these Defining itself as the nonpartisan efforts and other core programmatic, network of prominent global citizens that operational, and membership activities. works to demonstrate the value of inter­ Committee members are leaders at national economic cooperation and to foster the top of the business, finance, aca- strong, effective Bretton Woods institutions as demic, and nonprofit sectors, including forces for global well-being, the Committee many industry CEOs as well as former strives to attain this mission by estab- presidents, cabinet-level officials, policy lishing itself as a constructive partner makers, and lawmakers who share the and advisor to the IFIs, and as an honest belief that international economic broker of public- and private-sector cooperation is essential and best served interests across the reform dialogue. through strong and effective IFIs. The Committee carries out this role Membership count has fluctuated over by hosting gatherings (large confer- the decades between approximately 500 ences, seminars and panels, roundtables, and 700 members (it currently stands at virtual conferences, and other public 675). In the Committee’s first decades and private events). It offers accessible of existence, its member makeup was member engagement channels (e.g., nearly entirely American, but through social media, a website, newsletter arti- dedicated efforts to diversify the cles) to promote constructive debate member base over the past decade, the and idea sharing. The Committee also organizational makeup has gradually

REVITALIZING THE SPIRIT OF BRETTON WOODS | 407 become more global (approximately On the legislative front, the Committee 65 percent American and 35 percent has played an active role in educating the international to date). U.S. Congress over a multitude of IFI The backbone of the Bretton Woods reform debates, including multilateral Committee always has been and always development bank (MDB) replenish- will be its membership. Throughout its ments (think International Development history, members’ experience, ideas, influ- Association and International Finance ence, and—most importantly—collective Corporation), governance (think IMF voice have positioned the Committee as quota reform), and other significant a uniquely valuable, credible, and non- institutional debates, such as resolu- partisan thought partner to government tions proposing US withdrawal from and multilateral policy makers charged the WTO. with a mandate to oversee or reform Looking forward—and perhaps more the IFIs. Almost every World Bank pres- broadly across the plurality of institutions ident and International Monetary Fund that now convey the Bretton Woods (IMF) managing director has sought the values, such as the regional MDBs— Committee’s counsel upon taking the there is good reason to believe this role helm of their respective institution. for the Committee will continue to be As the World Bank Group, the IMF, needed. It is a safe assumption that in and to a lesser extent, the institutionally an increasingly multipolar world, the younger World Trade Organization Committee’s mission should be more (WTO) have, time and again, weath- widely known, and its voice should be ered public debates over institutional more widely heard in the debates and relevance and sought to reshape their dialogues occurring today and tomorrow priorities and tool kits to address the around the globe. needs of their constituents, IFI leaders But “should be” and “will be” are and US administrations have leaned on by no means synonymous, and past the Committee to be advisor, honest achievements offer no assurance of broker, advocate, and constructive critic future success. So, for the Committee, rolled into one. this moment is an inflection point— For example, the Committee has one of great challenge but unlimited offered counsel during IFI policy delib- opportunity—to begin repurposing, erations on debt sustainability and IMF resourcing and renewing itself in a crisis lending, crisis prevention tool kits, manner that will enable it to achieve private-sector lending facilities, and major its mission for tomorrow’s world. This initiatives—from poverty alleviation for will entail embarking on a growth path heavily-indebted poor countries (aka the that adequately balances membership HIPC initiative) to today’s more broadly needs with its organizational mandate focused Sustainable Development Goals. and resources.

408 | REVITALIZING THE SPIRIT OF BRETTON WOODS A broad reassessment of the Com­ should reflect this broader agenda. mittee’s mission, scope, and future The Committee’s fundamental con- role(s) appears justifiable, given the cerns around international monetary significant changes occurring across system components, financial stabil- the external landscape and the ongoing ity, growth, poverty reduction, and diversification of the membership. The fighting protectionism and commer- culmination of the Bretton Woods@75 cial discrimination remain in place, initiative offers an optimal opportu- but other topics requiring collaborative nity through which leadership and a and multi-faceted problem solving may subset of membership could begin to invite comparable focus, from the envi- drive this effort. Such a move could ronment and migration to technology occur in a due diligence phase through and equality. 2020 while other areas of renewal and If any expansion of institutional cov- investment (operational, programming, erage or issue area is warranted, such a membership/leadership) are simultane- move merits wider introspection not only ously reevaluated. of the Committee’s mission and role, but For example, to what degree should of the Committee’s operating model. the Bretton Woods Committee expand One of the Committee’s strengths its voice and “coverage” to new regional is its exceptional convening power. development institutions (e.g., the Asian A worthwhile question to consider is Infrastructure Investment Bank, the whether this power is underutilized, New Development Bank), governance and if so, what is possible or desirable? forums (e.g., the G20), supervisory The existing forums provided by the boards and bodies (e.g., the Financial Committee, many of which occur in Stability Board, the Basel Committee regular conjunction with the semi- on Banking Supervision), or other annual and annual IMF/World Bank networks? Today’s increasingly decen- Group meetings, already bring together tralized economic landscape has multiple movers and shakers across the global centers of gravitational pull. It would economic community to discuss topi- be worth considering which institutions cal issues. Is the Committee uniquely should be core and which should be positioned to do more than convene, peripheral to the Committee’s scope advise, advocate and critique? Could the within the future multilateral ecosystem. Committee further leverage the exper- From an issue area standpoint, the tise of its members and its nonpartisan agendas for multilateral organizations credibility to navigate cross-institution are far richer and more complex than or cross-actor conversations, and help ever before, which prompts the question facilitate paths of collective action that of to what degree Committee partner­ could bring greater cohesion and coor- ships, programming, and advocacy dination to the system as a whole?

REVITALIZING THE SPIRIT OF BRETTON WOODS | 409 The answer is a qualified yes. This role Let’s keep the spirit of Bretton beyond “convener”—as “integrator”—is Woods alive as we rethink the well beyond the Committee’s immediate specific requirements of the new mandate and capacity without charge world.… from across the multilateral community. But it certainly could be possible. Mission impossible? A fitting ending for this Bretton Woods@75 Compendium—and the … Maybe a grand new conference to global dialogue that the Committee has reach conclusions and enforce reform convened—is a restatement of where is beyond any present possibility. this publication begins—with a call to But surely a study and debate of action from Bretton Woods Committee new approaches is much in order. Chair Emeritus, Paul Volcker: That is where the Bretton Woods Committee can help lead the way in new thinking for the 21st century.

410 | REVITALIZING THE SPIRIT OF BRETTON WOODS

The Bretton Woods Committee is the nonpartisan network of prominent global citizens that works to demonstrate the value of international economic cooperation and to foster strong, effective Bretton Woods institutions as forces for global well-being.

The Committee was created in 1983 at the suggestion of two former Treasury officials—Secretary Henry Fowler and Deputy Secretary Charls Walker, a Democrat and a Republican—who saw the need for an organized effort to ensure that leading citizens spoke about the importance of the international financial institutions (IFIs).

Committee members are leaders at the top of the business, finance, academic, and non-profit sectors, including many industry CEOs, as well as former presidents, cabinet-level officials, and lawmakers, who share the belief that international economic cooperation is essential and best served through strong and effective IFIs. Through the Committee, they champion global efforts to spur economic growth, alleviate poverty, and improve financial stability.

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