Showing posts with label finance. Show all posts

Sunday, September 8, 2024

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/

The National Debt is now more than $35 trillion. What does that mean?

Will US debt ceiling deadlock push capital to yuan market?

Abuse of hegemony is why de-dollarisation is trending

China, Brazil to trade in local currencies

World witness peace, development, cooperation, yuan settlement, as Brazil's President Lula starts China tour, shrugs off noise from the West, ties see deeper and wider potential for growth

China to be pioneer in building new global financial system: scholars

Tuesday, May 28, 2024

China to be pioneer in building new global financial system: scholars

A view of Shanghai Photo: VCG

China will be a pioneer leading the world into a new and innovative financial and monetary system, as global calls for an overhaul of the Bretton Woods system - which has been in place for 80 years - gain traction due to the US abuse of the dollar's hegemony and its irresponsible policy, as well as a fragmenting global economy, Chinese and foreign scholars said.

The new financial system is envisioned to be one based on a diversified set of currencies rather than a single currency, they noted. It will be an open, inclusive system where the voices of emerging market economies would be better represented, and it will enable countries to join hands to promote global economic growth and financial stability.

The comments were made at the 2024 Tsinghua PBCSF Global Finance Forum in Hangzhou city in East China's Zhejiang Province. The two-day event concluded on Tuesday. This year, the forum was themed "80 Years after Bretton Woods: Building an International Monetary and Financial System For All."

"A system as old as Bretton Woods built after a world war is not the right proxy for the future forever and needs to be adapted… The world is undergoing geopolitical tensions, wars, demographic challenges and a climate crisis. We need to have one system going forward that includes everybody," Andreas Dombret, a global senior advisor at Oliver Wyman and former board member of the Deutsche Bundesbank, told the Global Times on the sidelines of the forum.

Dynamic emerging market economies such as China and India have grown in importance in the past decades, which needs to be reflected in their quotas in the IMF, he said.

Taking account of how the US has been weaponizing and abusing its dollar hegemony by imposing unilateral sanctions on other countries, attendees of the forum expressed hopes that a less dollar-centric system could be created from both a theoretical and pragmatic point of view.

The Federal Reserve's policies to deal with US inflation and a recession, which have had negative spillover effects on the world, have raised widespread concerns over an excessive reliance on a single currency.

"The Americans changed the Bretton Woods System in favor of the American economy [during the 80 years of development]. But we cannot sustain a global financial system based only on the one national currency, which is unsustainable," György Matolcsy, governor of the Central Bank of Hungary, told the Global Times in an exclusive interview on Monday.

A view of the 2024 Tsinghua PBCSF Global Finance Forum in Hangzhou, East China's Zhejiang Province, on May 28, 2024. The two-day forum ended on Tuesday. Photo: Li Xuanmin/GT

Massimiliano Castelli, managing director and head of strategy at UBS, said at a panel discussion on Monday that he has heard the view that although the US has mature financial markets and institutional credit, it is not a safe haven given its hegemonic positioning and reckless weaponization of its currency. If the world is subject to more geopolitical fluctuations, other countries may opt to reduce their reliance on the US dollar.

While the US dollar remains the world's most frequently used currency, de-dollarization has been gaining momentum, especially in emerging markets.

For example, China and Brazil agreed last year to trade in their currencies. In addition, a number of other countries including Russia, Malaysia, India, Saudi Arabia, Ghana and the United Arab Emirates have moved to settle trade in their local currencies.

As the global financial governance system is at a crossroads of adjustment and transformation, the scholars expect China - an active participant in global financial governance and policy coordination - to play a prominent role in making globalization more open, inclusive, balanced and mutually beneficial.

Although the yuan has a limited role in the international monetary system, it is expected to compete with the US dollar and become a substitute in the long run, they said.

"If the internalization of the yuan moves forward smoothly, the new system will be based on not only the US dollar but also on the euro and the yuan," Ju Jiandong, chair professor at the PBC School of Finance in Tsinghua University, told the Global Times.

The yuan accounts for a growing share of international payments. In March, the figure hit a record of 4.69 percent, up from 4 percent a month earlier, remaining the world's fourth most active currency ahead of the yen, data from global payment services provider Society for Worldwide Interbank Financial Telecommunication showed.

"I hope that we have a joint effort so that the global economy would not fall into two parts where one is competing with the other and making the global economy less effective. It would be best to have a global system that is deemed to be fair by everybody rather than having competing systems, which means a loss of competitiveness and a lot of loss of effectiveness," Dombret said.

Germany's central bank added the yuan to its currency reserves in 2018, a decision that Dombret said was significant, and he is confident that the share of the yuan in the mix of currency reserves will "grow."

Matolcsy suggested that Asian economies such as China, Japan, South Korea, India and Indonesia could create an Asian basket for central banks' digital currencies, offering the world a new border financial transaction system.