The Bretton Woods institutions must align representation with countries’ relative importance
COMMENT | Paola Subacchi | This October, the International Monetary Fund and the World Bank will hold their annual conference. It can’t be business as usual.
To remain legitimate, effective, and accountable, the Bretton Woods institutions, established in the very different world of 1944, must align representation with countries’ relative economic weight and systemic importance.
What about a scenario where emerging economies, led by China, decide to replace, rather than reshape, today’s institutions?
Already, China has spearheaded the creation of two multilateral development banks – the Asian Infrastructure Investment Bank and the New Development Bank. China’s initiatives have fewer resources than the World Bank, but they are big enough to finance significant infrastructure projects.
In addition, regional facilities have been put together to provide support at times of financial distress. The Chiang Mai Initiative pools the foreign-exchange reserves of the ASEAN+3 countries – approximately $240 billion. And BRICS countries can rely on a Contingency Reserve Arrangement of approximately $100 billion. These facilities would help with occasional liquidity crunches rather than offering a more extensive financial safety net which remains the IMF’s prerogative. But this facility can be expanded if necessary.
To respond to the need to reform the Bretton Woods institutions an “Eminent Persons Group on Global Financial Governance” was set up last April. This group is to make recommendations on reforming the world economy’s institutional structure, but it has only until next year’s IMF/World Bank conference to build a firm consensus.
Any attempt to reform the global economic order might clash with the US’s rethinking of its own involvement in world affairs. Trump has made clear his distaste for multilateral institutions, and he has been explicit that the US should no longer bankroll the provision of global public goods. An attack on financial multilateralism would deal a massive blow to the global economic order.
But partial US disengagement need not spell disaster. A year is probably not long enough to deal with the disruption that a reluctant hegemon may create, but it might reveal the scale of that disruption, and the capability of other stakeholders to adapt.
Paola Subacchi is Research Director of International Economics at Chatham House and Professor of Economics at the University of Bologna.
Copyright: Project Syndicate, 2017.