Bretton Woods should heed the cries for fair play or go, how China can help reshape the global financial system

 Is Bretton Woods fit for the 21st century?

America is financed by the rest of the world because of the hegemomic of the US dollar.

The world's largest economy has moved from a giver of global public goods to a taker of global resources.

Probably the best way to increase global funding is to raise the capital of the global multilateral development banks like the World Bank, Asia Development Bank, etc.

In July 1944, delegates from 44 countries gathered in a UN-sponsored conference in Bretton Woods, New Hampshire to decide on a post-World War II monetary and financial order. 

In the closing speech of the gathering, then US Treasury secretary Henry Morgenthau concluded that the conference had succeeded in addressing the twin “economic evils – the competitive currency devaluation and destructive impediments to trade” that led to the war.

To prevent competitive devaluation, the Bretton Woods conference established the fixed but adjustable exchange rate system, which was based on the US dollar linked to gold and capital controls, securing funding from a newly created World Bank and the International Monetary Fund (IMF). 

The global free trade mechanism was negotiated first through the General Agreement on Tariffs and Trade, which decades later became the World Trade Organization.

The Bretton Woods negotiations were led by the US chief delegate Harry Dexter White and the eminent British economist John Maynard Keynes. Keynes argued unsuccessfully for the creation of an new international currency called the bancor, whereas the United States preferred to use its own currency.

In 1944, the US had the largest share of world GDP and was a major creditor to economies suffering from the destruction of war. It is no surprise that the Bretton Woods order was largely US-led and designed.

This Bretton Woods structure lasted until 1971, when rising US fiscal and trade deficits led US President Richard Nixon to delink the US dollar from gold at the fixed price of US$35 to one ounce of gold. 

After flexible exchange rates became the global norm, the US continued to be financed by the rest of the world because of the hegemonic position of the US dollar. It was protected by the might of the US military and its status as the strongest economy, including being the consumer of last resort.

Eighty years later, the US share of world GDP has been pared down to 26 per cent by current exchange rates but the US dollar remains as mighty as ever.

People walk past an image of US dollar bills outside a currency exchange bureau in downtown Nairobi, Kenya, on February 16. Photo: Reuters

Unfortunately, having the US dollar act as the global reserve currency is both a blessing and curse. The US is able to fund its fiscal and trade deficits easily because the rest of the world prefers to hold the US dollar.

But running protracted deficits means that the US net liability to the rest of the world is now US$21 trillion, or about 20 per cent of world GDP, with a gross sovereign debt of US$35 trillion, or roughly one third of world GDP. Fiscal debt cost is rising as interest expenses will rise from 3.4 per cent of GDP in financial year 2025 to 4.1 per cent by 2034.

The irony is that the world’s largest debtor absorbs more of the world’s natural and financial capital that encourages global consumption to drive growth. Since increased levels of consumption ultimately generates more carbon emissions, the current model is neither ecologically nor financially sustainable.

To address these global imbalances, the United Nations has suggested that a “just transition” requires US$2.4 trillion annually to fund clean energy and climate resilience. Where is this money going to come from?

What is climate finance, and why is it crucial to the global energy transition?

This is both a flow and a stock problem. The annual shortfall, or flow, can either be funded from an increase in taxation or a cut in spending. The stock issue is whether there is enough wealth to be taxed or used to fund the needed climate action.

There is growing momentum behind an initiative proposed by French economist Gabriel Zucman, in which a minimum wealth tax of 2 per cent would raise US$200-US$250 billion per year globally from 3,000 billionaires who currently pay little to no tax. Current evidence suggests ultra-high-net worth individuals have an observed pre-tax rate of return to wealth of 7.5 per cent on average per year during the last four decades, while the current effective tax rate is equivalent to roughly 0.3 per cent of their wealth.

Alternatively, the Austrian Institute for Economic Research thinks that a global financial transactions tax of 0.1 per cent could yield between US$238 billion and US$419 billion per year. Needless to say, the rich who control the electoral process in countries across the world will not allow such tax increases.

There are two big-ticket items in global fiscal spending which could be cut. The largest is subsidies on fossil fuels, which were US$7 trillion or 7.1 per cent of global GDP in 2022. On top of that, global military expenditure was US$2.4 trillion in 2023.

Perhaps the best way to increase global funding is to raise the capital of the global multilateral development banks such as the World Bank and Asian Development Bank. If the countries which control the special drawing rights of the IMF can apply their US$650 billion in 2021 to increase the bank’s capital by eight times the leverage, these multilateral development banks can increase their lending by about US$5 trillion.

However, doing so would require these countries to agree that this is a priority, which could be unlikely given the current global atmosphere leaning towards protectionism and isolationism.

In short, the 21st century requires multilateral cooperation in dealing with mutual existential challenges involving climate warming, social imbalances and serious polarisation. If the Bretton Woods framework does not serve the Global South because the established powers are unwilling to reform it, do not be surprised if a new set of institutions rise to replace it.

Andrew Sheng

Andrew Sheng is a former central banker and financial regulator, currently distinguished fellow at the Asia Global Institute, University of Hong Kong. He writes widely on Asian perspectives on

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French economist Marc Uzan on how China can help ...

Open questions | French economist Marc Uzan on how China can help reshape the global financial system

With the US-led financial consensus at a crossroads, economist Marc Uzan says China has role to play in systemic reform

French economist Marc Uzan is executive director and founder of the Reinventing Bretton Woods Committee, a non-profit organisation established in 1994 to address issues related to the world’s financial architecture. He has been working closely with central banks and finance ministries around the world, as well as international organisations such as the International Monetary Fund and the Group of 20, to bring stakeholders together to attempt to fix the system.

In this latest interview in the Open Questions series, Uzan reflects on the decades of change since the paradigmatic Bretton Woods conference in 1944, and the role China and other emerging economies will play in the global financial system during an era of heightened unilateralism and confrontation. This interview first appeared in SCMP Plus. For other interviews in the Open Questions series, click here.

As suggested by the name of your organisation, the Reinventing Bretton Woods Committee, why did you think that the Bretton Woods system should be restructured back in 1994? Can it be?

This question brought a multitude of thoughts about the objectives of the 44 nations whose representatives gathered at Bretton Woods, New Hampshire, in the summer of 1944 to establish a new economic order.

The world has changed considerably since then. Instead of a system of fixed exchange rates among major currencies, we now have a mixed system with major floating currency areas but fixed rates among smaller countries. At that time, we had capital controls, and now we are a global financial market. And from a small group of 44 countries that became the founding members of the International Monetary Fund (IMF) and Worl 

U.S. debt just hit $35 trillion. Is it putting the global economy at 

risk ...

This nation’s gross cumulative debt has hit $35 trillion — a number so large, the International Monetary Fund warns that it’s putting the entire global economy at risk. 

https://www.marketplace.org/2024/08/13/u-s-debt-just-hit-35-trillion-is-it-putting-the-global-economy-at-risk/

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How to decolonise minds and why it’s crucial

 

No one has total sovereignty when a few platforms can use AI to obtain full data of how individuals and even nations are thinking or behaving. — Reuters

Decolonisation means different things for different peoples, depending on their own colonial or near-colonial history.

To be treated as equals to the West, the Global South must decolonise its minds.

What does the Decline of the West mean? After Ukraine and Gaza, the line between the West and the Rest (what is today called the Global South) has been drawn clearer and clearer.

In Ukraine, the West expected the Rest to support its principled stance in fighting for national sovereignty, freedom to choose and against aggression from neighbours. they were surprised that the Rest did not fall in line, with many abstaining from taking sides.

In abandoning diplomacy and balance in favour of weaponising everything, the collective West (America, Europe, Japan and Australasia) is increasingly isolating itself from the Rest, divided into the East (strangely grouped as Russia, China, Iran and North Korea) and the Global South, comprising countries that refuse to be aligned either to the East or the West.

Today’s modernity is clearly associated with the West, which has set the scientific, educational and cultural standards since the 15th century, when Portuguese and Spanish explorers opened up the Americas, Africa and Asian maritime trade routes.

Colonisation became a land and power grab by Europeans against the Rest, with the use of superior military firepower, energy and industrial and financial technology. this power grab continued to the 20th century, with Belgium taking Congo as late as 1908, the Philippines by the United States in 1906, while the Italians tried to colonise parts of Ethiopia in the 1930s.

When the United States took over the global hegemon mantle from the British empire after the end of the Second World War, many former colonies bought the neoliberal ideology that free trade and markets, democracy, rule of law and equality would be a universal creed for all nations and cultures.

That naïve belief ended when inequality within the West itself widened, even as the gap with the Rest narrowed.

Neoliberal idealism shattered as the West’s middle class began to turn towards protectionism, industrial policy and in the case of Israel, military occupation and subjugation of Palestinian rights.

The Palestinian-american father of post-colonial studies, Edward Said said, “Part of the main plan of imperialism is that we will give you your history, we will write it for you, we will re-order the past.

“What’s more truly frightening is the defacement, the mutilation and ultimately, the eradication of history in order to create an order that is favourable to the United States.”

Mental colonisation, which is the ultimate aim of imperialism, is reached when the colonised, slave or vassal believe that the imperial power is superior to his or her own culture. Mental slavery is more frightening than physical slavery.

But as rock-star Homo Sapiens historian Yuval Noah Harari said, artificial intelligence (AI) is all about mental colonisation, when the private or state-run platform knows more about you than you yourself and influences your likes, dislikes, and future.

Decolonisation means different things for different peoples, depending on their own colonial or near-colonial history.

For indigenous people like the Maoris in New Zealand, it means remembering the cruel past of taking their lands and rights and at a minimum restoring their dignity in today’s laws.

In former colonies like India and South Africa, the British “Raj” mentality is being replaced by homegrown narratives in which the country seeks “strategic autonomy” in foreign affairs and greater sovereignty (some call it nationalism) in owning data and developing control or regulation over generative AI.

No one has total sovereignty when a few platforms can use AI to obtain full data of how individuals and even nations are thinking or behaving.

We are in a cusp of uncharted mental territory where no man has gone before.

The self-order of free markets is being replaced by an unpredictable non-order arising from competition by new state-market bureaucracies that are neither fully elected nor humanly designed.

The new order may even be machine or AI generated. Where is the justice when Ai-generated algorithms can order the execution by missile strike or drone of someone branded a terrorist outside legal jurisdiction?

Who will enforce natural justice when the system systematically dehumanises humanity by treating individuals as digits to be manipulated, controlled or deleted?

In an entangled over-crowded planet, the system is inherently unstable when we resolve differences through conflict and war, because history has shown that war begets more war.

Humanity survived through cooperation and peace. the neocon presents the case for preparing for war to maintain peace, but since war can only be destructive, we must prepare always for the postwar peace.

If there is a fundamental difference between the West and the Rest, it is that the theory-biased, principles-based West often forgets history and context, opting for fundamental “principles” of inalienable rights to guide action.

Russian historians remember that it was the Western Europeans (Napoleonic France and Nazi Germany) that invaded Russia twice in the last two centuries. the Israeli expansion of territory in Palestine over time is there for all to see.

In population terms, the West is in the minority of one plus billion in an eight billion world, owns more than half of global wealth and income, but on a per-capita basis, consumes more than its fair share of planetary resources.

For the majority Global South to consume like the average Westerner is a suicidal path because the world will run out of planetary resources.

The paradox of the UN Sustainable Development Goals is that the Global South must find its own paths and intellectual paradigms in a diverse search for sustainable living and meaning.

Decolonisation of the mind therefore requires the courage to reject the unsustainable, but also to find new pathways that are more holistic and democratically legitimate than the old. In short, decolonisation is a journey waiting to unfold.

The Spanish poet Antonio Machado, in his famous poem, “Caminante no hay camino – traveller, there is no road”, made the important point that the road is made by walking. In the post-western world, the Global South must walk their own paths in search for a more peaceful and sustainable future.

 -  Andrew Sheng andrew Sheng writes on global issues from an asian prospective. the views expressed here are the writer’s own.

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