Major international crises often
produce tectonic shifts in international relations. Under pressure from
key European counterparts, President Bush has agreed to a "new Bretton
Woods" summit on Nov. 15.
It would be hard to overstate the potential significance of this meeting. The first Bretton Woods, in 1944, set the rules
for monetary relations among nations, and it created the International Monetary Fund (IMF) and the World Bank.
While
European leaders are pushing for greater regulation and a major
overhaul of the international financial order, US policymakers have
been lukewarm, emphasizing the preservation of free-market capitalism.
This transatlantic drama has obscured the more fundamental problem—how to accommodate the historic shift of economic power away from the
West toward Asia.
Including India, broader East Asia encompasses
more than half of the world's population. The region already accounts
for about one-third of global economic output, oil consumption, and CO2
emissions, and this is only likely to grow in the future. Over the
course of the 21st century, Asia's economic and geopolitical weight in
the world will, in all likelihood, come to rival that of Europe in the
19th century. Asian problems will become increasingly indistinguishable
from global problems.
In the face of such dramatic change, the IMF and
World Bank are becoming relics of a bygone era. At the time of their
creation, by US and European negotiators, the major challenge was to
get capital flowing from the US to war-ravaged Europe. The days of the
US as creditor state are long gone—our massive current account
deficit is financed by importing nearly $1 trillion in foreign capital
every year. Major US banks are being rescued by sovereign wealth funds
and financial institutions from the Middle East and East Asia. China
and Japan alone held over $600 billion of securities issued by Fannie
Mae and Freddie Mac, making the bailout of those institutions a major
foreign policy issue.
Despite these changed realities, both Bretton
Woods institutions remain dominated by the West. By convention, the IMF
is led by a European, the World Bank by a US national. The US is the
only country with veto power over important decisions in either body.
My analysis of voting shares in the IMF indicates
that the Allied powers of World War II have been consistently
overrepresented compared to Axis powers despite the passing of more
than 60 years since the end of that war. Studies show that IMF lending
is biased in favor of recipients with strong economic and diplomatic
ties to the US and key European states at the expense of other members.
This unbalanced representation had real
consequences during the Asian Financial Crisis of 1997-98, when the
IMF, as part of its rescue operation, implemented policies widely
viewed as contrary to Asian interests. During the crisis, Japanese
financial authorities proposed an Asian Monetary Fund as a potential
alternative source of liquidity. This proposal was rejected by US
officials, who feared dilution of IMF authority. However, over the past
decade, East Asian states have stockpiled foreign currency reserves and
developed regional cooperation that may eventually develop into a
credible alternative to the IMF.
The IMF and World Bank should be reformed to
better reflect the interests and concerns of rising economic powers.
Voting shares need to be further redistributed to reflect underlying
economic realities. Decisionmaking rules should be modified to give
greater weight or agenda-setting authority to regional actors—the US
may have a strong interest in loans to Mexico, but Japan may have a
greater stake in Indonesia. Assignment of the top positions should be
made truly competitive. Core functions should be decentralized—both
institutions are headquartered in Washington, impeding employment of
top talent from Asia and limiting intellectual exchange.
An international financial architecture that
fragments or remains centered on the West as Asia rises will probably
prove grossly ineffective. Europe attempted much the same during the
turbulent period between the two World Wars, resurrecting a system
based on British hegemony even as Britain was in relative decline.
Those were scary times, with free riding and beggar-thy-neighbor
policies feeding mutual distrust and economic catastrophe.
This will not be the last financial crisis we
face. Next time, ad hoc cooperation by the US and Europe may prove
insufficient. Franklin Roosevelt had the foresight to include China on
the United Nations Security Council long before that nation became a
geopolitical heavyweight. Similar foresight should be brought to bear
as world leaders debate the future of the international financial
architecture.
