Senior figures call for new Bretton Woods ahead of Bank/Fund meetings
09 October 2008
The presidents of the World Bank and France went public with strong criticisms of international institutions just before the annual meetings of the World Bank and IMF. Civil society organisations also used the occasion of these meetings to launch a new statement urging significant reform.
French, and current European Union, president, Nicolas Sarkozy told an audience in Toulon on 26 September “the evil is deep, we must rethink the financial system from scratch, as at Bretton Woods”. Several times in recent weeks he has called for a Bretton Woods II conference, although he has provided few details of how it will be organised or who should attend. Two influential French economists - Christian de Boissieu and Jean-Hervé Lorenzi, writing in Le Monde on 8 October said the meeting should focus mostly on regulatory measures, and that the IMF should gain more power to regulate banks and other finance companies, including ratings agencies and sovereign wealth funds. Surprisingly, given the uncoordinated European announcements of recent days, de Boissieu and Lorenzi call on Europe to take a lead in driving forward this conference, saying that this is the only regional block which can do so. Eurodad director Alex Wilks, speaking at a meeting of EU development ministers in Bordeaux on 30 September, insisted that such a conference should be linked to the UN Financing for Development process and must include low-income countries.
World Bank president Robert Zoellick also urges broader inclusion in agrees reforming the global financial architecture. In a speech on 7 October he called for a “a new multilateral network for a new global economy”. Surprisingly, given the composition of the Bank’s board, he stated: "The G7 is not working. We need a better group for a different time." To improve financial and economic cooperation he called for a new “steering group” including Brazil, China, India, Mexico, Russia, Saudi Arabia, South Africa, as well as the current G7 members. At the same time he cautioned against just fixing another number of governments who would constitute a permanent mechanism. “We will not create a new world simply by remaking the old," Zoellick said.
The “old” world that Zoellick refers to includes a selective and one-sided IMF surveillance of the world’s largest economy, the United States. The Bretton Woods Project, and NGO watchdog, points out that “while the financial system seems to be crashing, the IMF will be finally getting around to performing an assessment of the United States under the financial sector assessment programme (FSAP). The FSAP programme was launched in the wake of the Asian financial crisis to help identify risks and problems in the regulation of banks and other financial institutions. While most developed countries agreed to FSAPs years ago, the US held out and only agreed on the exercise in 2007”.
While this year it has been playing catch up, IMF complacency about the US situation is clear from its 2007 Global Financial Stability Report. While it recognized that the US housing market was slowing down, leading to credit quality deterioration, it commented “this weakness has been contained to certain portions of the subprime market …, and is not likely to pose a serious systemic threat”. Ironically the investment bank stress tests that formed the IMF’s evidence basis were produced by Lehmann Brothers, now defunct because of its own dramatically over-optimistic risk assessments.
The IMF now agrees that the sub-prime crisis will cost at least $1.4 trillion, and urges “a decisive and internationally coherent set of policies” to restore financial stability. The IMF’s new Financial Stability Report indicates that the financial crisis that emerged from the US has established “a very challenging environment for some countries”, especially those with greater reliance on short-term flows or with leveraged banking systems funded internationally. A new UNCTAD briefing goes further, suggesting that “The undesirable effects of the necessary but painful unwinding of unsustainable debt can be compensated only if the surplus countries – especially Japan and the large countries in the Euro zone, where growth is already anemic or negative – reduce their surplus positions at all levels and quickly provide policy stimuli to avoid a long recession or even a depression of the global economy”.
As one of many new initiatives to get money moving again the IMF is discussing a new “rapid liquidity facility” which could help some of these countries. There are as yet, however, few details of how this would work, what its repayment terms would be, and what policy conditions the IMF would impose.
In terms of the policy messages emanating from the Fund, an interesting exchange took place in a press conference on 7 October. A journalist asked: “in the past the IMF has been reluctant to suggest state intervention. This Global Financial Stability Report reads as a license to wide-ranging intervention. Is that a prudent way to interpret it?" Jan Brockmeijer, Deputy Director of the IMF’s Monetary and Capital Markets Department did not take the opportunity to issue a mea culpa on behalf of his organisation. Instead he said “no, I do not think that is quite a right way to read it. This report very much reflects the very exceptional circumstances that we are witnessing, and under those circumstances you have to apply measures that maybe go further or are more far-reaching than you would under normal circumstances”.
Another IMF blind spot is on the issue of tax havens. This issue is not mentioned once in the current Global Financial Stability Report. The secrecy permitted in these offshore jurisdictions is part of the reason why market actors are unable to trust each other, as they do not know where liabilities are hidden.
Many civil society organisations feel vindicated in the criticisms of the IMF, G-7 and other bodies that they have been making for many years. This week more than 200 health, education, faith-based, labour and development organizations from across the world this week released a statement urging the IMF to change policies that have restricted pro-development investments in health, education and HIV/AIDS spending in developing countries. The organizations, including Eurodad, have urged the Fund to make these changes before governments authorize the sale of IMF gold reserves to address the institution's own financial crisis.
The meetings of finance and other ministers in Washington this week may mark a turning point in the efforts to transform the IMF, World Bank, G-7 and other institutions that have mis-governed the global economy. But history shows that little may come of such gatherings. Speaking in the Philippines this week Michel Camdessus, who was IMF Managing Director at the time of the 1997-1998 ‘Asian’ financial drams said “you need a crisis to decide what should be enforced. But once the crisis is over you forget about the reforms and this indeed, I hope, will not be true of this year."
Eurodad’s Nuria Molina is in Washington D.C. this week, organising, speaking at and attending several meetings. They include meetings on the World Bank’s new climate change funds, the financial crisis, and the UN Financing for Development process. She can be contacted on nmolina [at] eurodad.org or on +1 415 489 8910.
Nuria will also attend and speak at a conference, the World After Bretton Woods, in Mexico starting on 15 September.
IFIwatchnet events calendar
Global Financial Stability Report, IMF, October 2008
Un nouveau Bretton Woods, par Christian de Boissieu et Jean-Hervé Lorenzi. Le Monde, 8 octobre 2008.
Joint Bretton Woods Update, Bretton Woods Project, Eurodad and others.