In this interview for janelanaweb.com, economist James M. Boughton, International Monetary Fund historian since 2004, gives an overview of the lessons from the past financial system evolution and his opinions about the window of opportunity for the updated of the Bretton Woods heritage.
The G20 geopolitical surge could be the birth for the «dark swan» – the (positive) surprise factor – in the crisis laguna. Or it may be not – it can be a failure like Paris Peace Conference in 1918-1919 or London World Monetary and Economic Conference of 1933.
Anyway the emergence of a multilateral context larger than the G7 club of «the rich» leaded by the US is a fact of life. The G20 can leverage an out-of-the box thinking about the roots and medicines for the present great depression. Diversity and inclusiveness are vital complements to leadership to thrive in crisis times.
The risk of the G20: neglect the ‘third wave’ of effects of the recession and world trade contraction on the low income countries, refers our interview guest.
Boughton published at the most recent issue of Finance & Development magazine (edited by the IMF) an article about the history of the reforms and agreements in the world financial system since de 1910s and the lessons we can learn. The article titled “A New Bretton Woods” (March 2009 edition, vol.46, nr.1) can be read here.
James M. Boughton is a Duke University Ph.D in Economics from the class of 1969 and works in the IMF since the 1980s. He is assistant director of the Policy Development and Review Department of the IMF in Washington DC from 2001.
PART ONE: THE WINDOW OF OPPORTUNITY FOR THE MULTILATERAL APPROACH
Q: The present economic and financial crisis marks finally the end of Bretton Woods (BW) or we will have only a reengineering of the power balances inside the BW institutions, like the IMF and the World Bank?
A: The institutions and the system established at the Bretton Woods conference of 1944 have served the world very well for more than 60 years. It is clear, however, that they must be updated. The world has changed enormously, and many more countries are important participants in international trade and finance. Only if all major countries have a seat at the table and a real voice in decisions will today’s institutions play a positive role in the future.
Q: We saw the “evolution” of the leading groups from the G2 (the temporary bi-hegemony of the US and the UK in the 1940s) to the G7 and finally the G8 of the 1990s-2000. The G20 is the next in the line? Or it is too big to lead?
A: The G20 emerged naturally a decade ago as a forum for discussions of common issues and concerns involving all of the major participants in international trade and finance. What has happened in the recent months is that the G20 has begun to meet at the summit level, in addition to the regular meetings of finance officials. This broadening of the summit process to make it more inclusive is a very positive sign. Leadership may still come from a smaller group of countries within the G20, but that leadership will be most legitimate if it results from a wide set of inputs from around the world.
Q: You mentioned that some kind of political alliances – major powers that have a seat at the table – are crucial for the change management of the financial order. We saw the bi-hegemony of the 1940s (US and UK) working for a while, then the US and the French trying to restore stability, recently a certain un-formal coordination between the FED, the ECB, the Bank of London and the Chinese. What kind of small inner group do we need now to face the un-precedent global depression and the financial disarray?
A: U.S. leadership is always essential, because it is the world’s only superpower and the world’s largest economy. European unity and leadership are also critical, especially because of the way the current crisis has affected Europe. Countries in the western Pacific and the major emerging markets in Latin America, the Middle East, and South Asia have much to contribute to the discussion. South Africa, also a member of the G20, has a unique perspective because of its understanding of the problems facing its poorer neighbors. The promise of the G20 is that it brings these different perspectives together in one place.
Q: Paris 1918-1919 and London 1933 failed because the US left Europe alone with the problem in its hands. Do you think the BRIC could do the same to the West now?
A: Solutions to the current financial crisis must begin from the premise that the problem is global. Everyone will sail or sink in the same boat. What is important is for the leaders participating in international discussions to recognize that other countries’ interests are also their own, that it is not “us against them.” It is encouraging to know that the key multilateral institutions, the IMF and the World Bank, will also be at the table, because they represent all of the countries and regions of the world, not just those that have been invited.
PART TWO: LESSONS FROM HISTORY
Q: In the 1918-1919 and 1933 initiatives what was the main reason for the un-success in your opinion?
A: At the Paris peace conference in 1919 and then throughout the next two decades, most efforts to strengthen international financial relations focused on restoring the international gold standard that had been in effect before the war. Those efforts largely failed because countries had conflicting interests. Some had stronger economies than they had before the war, while others were weaker. A new gold standard would have required negotiating new exchange rates, and that would have required an effective set of multilateral financial agencies, which did not yet exist. That is why the delegates at Bretton Woods in 1944 felt so strongly about the importance of creating new institutions (the IMF and the World Bank) and not just negotiating bilateral agreements.
Q: It seems that Lord Keynes in 1942-1943 would like to have a kind of dual inner core group based in the US and the British Empire. His idea of two founder states for would be Bretton Woods was a clear heritage of the past Rule Britannia? The «broader view» you mention from the Americans was a clear signal of the new geopolitics from the World War II?
A: Keynes’s goal in wanting the United Kingdom and the United States to be the two main “founder states” in the IMF was to ensure that the two would be equal partners after the war, despite Britain’s greatly reduced economic strength. Britain needed U.S. financial support but did not want to be forced into the same position as other indebted countries. The fact that the U.S. delegation took a much broader view was partly due to the uniquely strong economic position in which the country found itself in the late stages of World War II, but it also reflected the multilateral world view of the administration of Franklin Roosevelt, and more particularly of the lead American negotiator, Harry Dexter White.
Q: Nixon decision in 1971 was a useful decision, or as some will argue a first severe attack on all BW edifice, responsible for the next financial instability in the world?
A: President Nixon’s decision in August 1971 to terminate the convertibility of the U.S. dollar into gold was an inevitable consequence of the macroeconomic imbalances between the United States and other major countries in the preceding decade. The instability that followed did not result from that decision. It resulted from the continuing imbalances as countries were affected in very different ways by the oil shocks of the 1970s.
Q: Why political support for the OECD proposal in the 1970s failed and the treaty for the Financial support Fund was never ratified? The oil cartel surge was the main obstacle?
A: The OECD’s Financial Support Fund was never ratified, primarily because the establishment of an Oil Facility in the IMF made it no longer needed. The OECD fund would have provided assistance only to the industrial countries that were members of the OECD, whereas the IMF facility covered oil-importing developing countries as well.
Q: You finished your article at IMF magazine concluding that “decisions on which countries have a seat at the table have a major effect on what gets done and what gets aside”. Do you think the geopolitics balance of power is the key always?
A: There is a parallel between the way the Bretton Woods conference functioned in 1944 and the way the G-20 functions today. In both cases, leadership is provided by the largest countries, but a representative group of others (44 countries in total in 1944, 20 countries today) participate actively — not just in the conference or the summit meetings but also in the preparatory meetings where the agenda is developed and many preliminary decisions are made. This combination of an inner group of leaders and a wider group of participants seems to me to be of critical importance for successful outcomes.
Q: Last question. You refer also in the article that in all the agreements some goals have to be put aside. Are you worried with particular important goals that probably will be put aside this time?
A: One risk today is that the needs of many low-income countries will be neglected if they are not invited to participate directly in the decisions. The financial crisis of the past year is having devastating effects in the world’s poorest countries, through what the IMF’s Managing Director has called the “third wave” of effects: a severe decline in international trade that is slashing the markets for exports of basic commodities produced in the developing world. That crisis must be addressed. Another risk is that longer-run but even more important issues such as pervasive poverty and environmental degradation will be set aside as attention turns to the immediate needs generated by the financial crisis. It seems clear that the broader is the participation in major international policy discussions, the better is the chance that these issues will be addressed.