Current debate and recommendation for a new Bretton Woods

Mohammed Sawkat Hossain

Different schools of thought (or studies) commented on the introduction of a new
international monetary system in the paltern of Bretten Woods (BW), for the course of the
economic emergence of a fixed exchange rate periphery in the post-Asian crisis years. Under
Bretten Woods-2 regions, the world appeared until 2007 to be back a at series of fixed
exchange rates and therefore once again pegged to the US Dollar, particularly in peripheral
Asian economies and some others in South America.
Here the normal evolution of the international monetary system involves the emergence of
a periphery for which the development strategy is export-led growth supported by
undervalued exchange rates, capital controls and official capital outflows. The smoothness
of the current system depends on the close co-operation between the major economies in
the world.
The success of this strategy in fostering economic growth allows the periphery to graduate
to the centre. The fact is that the current international financial crisis has, however, put
Bretton Woods 11 under considerable strains. By analyzing the Bretton Woods 11 system in
the context of current international monetary system, it can be concluded that the current
exchange rate regime between China and the U.S. can last for the near future. Other
authors -- Eichengreen 2004; Goldstein and Lardy 2005; Palley 2008; Rogoff 2009; Glick and
Hutchison 2009 and so on -- have also argued that the system will crash.
However, the current account deficits and surpluses cannot be solved fundamentally. China
tends to buy more assets from the U.S., either real or financial, which is an alternative route
for channelling the capital flow back. Financial liberalization, in turn, requires floating
exchange rates among the centre countries. But there is a line of countries waiting to follow
the Europe of the 1950s/60s and Asia today as being sufficient to keep the system intact for
the foreseeable future.
Therefore, from the latest existing literature, it can be figured out that the expectation and
requirement for a "New Bretton Woods" has become one of the core issues for global
debate and subjective argument. Martin Wolf, the leading financial journalist and columnist
has reported that all financial crises since 1971 have been preceded by large capital inflows
into affected regions. In fact, ever since the seventies there have been numerous calls from
global justice movement for a revamped international system to tackle the problem of
unfettered capital flows.
But it wasn't until late 2008 that this idea began to receive substantial support from leading

politicians and leaders. On September 26, 2008, Nicolas Sarkozy, French President and also
the president of European Union (EU), had announced "We must rethink the financial
system from scratch, as at Bretton Woods. "(Broda, Ghezzi and Levy-Yeyati, 2009).
Mr. Gordon Brown, the former-British Prime Minister had later announced that world
leaders must meet to agree to a new economic system and we must have a new Bretton
Woods, building a new international financial architecture for the years ahead. However,
Brown's approach is quite different to the original Bretton Woods System, basically
emphasising the continuation of globalisation and free trade as opposed to a return to fixed
exchange rates.
It can be acknowledged that there have been tensions between Brown and Sarkozy who
argue that the "Anglo-Saxon" model of unrestrained markets has failed. However, European
leaders were united in calling for a "Bretton Woods 11" summit to redesign the world's
financial architecture. As a matter of fact, President Bush was agreeable to the calls, and the
resulting meeting was 2008 G-20 Washington summit. International agreement was
achieved for the common adoption of the Keynesian fiscal stimulus, an area where the US
and China were to emerge as the worlds leading actors. However, so far there was no
substantial progress towards reforming the international financial system.
Giulio Tremonti, Italian Economics Minister later said that Italy would use its G7
chairmanship to push for a "New Bretton Woods." He was critical of the U.S.'s response to
the global financial crisis of 2008 and suggested that the dollar might be superseded as the
base currency of the Bretton Woods system.
Choike, a portal organisation representing southern hemisphere non-government
organisations (NGOs), called for the establishment of "international permanent and binding
mechanisms of control over capital flows" and as of March 2009 achieved over 550
signatories from civil society organizations.
Gordon Brown, continuing to advocate for reform and the granting of extended powers to
international financial institutions like the IMF at the April G20 summit in London, was
reported to have got president Obama's support about introducing a monetary system.
Dr. Zhou Xiaochuan, the governor of the People's Bank of China came out in favour of
Keynes's idea of a centrally managed global reserve currency in a speech entitled Reform
the International Monetary System on March, 2009. Dr Zhou argued that it was unfortunate
that part of the reason for the Bretton Woods system breaking down was the failure to
adopt Keynes's Bancor. Dr Zhou continued that national currencies were unsuitable for use
as global reserve currencies as a result of the Triffin dilemma. He proposed a gradual move
towards increased used of IMF Special Drawing Rights (SDRs) as a centrally managed global

reserve currency. His proposal attracted much international attention. As a consequence of

this, leaders meeting in April at the 2009 G-20 London summit agreed to allow $250 billion
of SDRs to be created by the IMF and it would be distributed to all IMF members according
to each country's voting rights. In the aftermath of the summit, Gordon Brown declared "the
Washington Consensus is over". Last but not the least, President Sarkozy, in his opening
address to the 2010 World Economic Forum in Davos, repeated his call for a new Bretton
Woods.
From the above discussions relating to developments unit recently, it can be stated that
today's global financial system is a haphazard, suboptimal creation. The East Asian
economies were strategically manipulating their exchange rates and the US policy-makers
have rejected intervention on the grounds that markets know best and should be left alone.
This asymmetry allowed East Asia to pursue neo-mercantilist policies that contributed to
today's massive global financial imbalances (Aizenman and Glick, 2009). In fact, BW2
attracted considerable attention because it offered a relatively parsimonious explanation
both for recent exchange rate policy in a number of Asian countries and for recent exchange
rate and interest rate behaviour in the United States. However, the BW2 model is at
variance with the Chinese reality at many important points that can be summed up:
* It suggests that China should focus exclusively on undervaluing its exchange rate vis--vis
the dollar, but more than half of China's exports go to markets other than the United States
or to countries with currencies not pegged to the dollar.
* The exchange rate that matters most for China's competitiveness and for employment in
the export sector exhibited a nearly 30 per cent appreciation between 1994 and early 2002.
That is not consistent with the view that keeping the real trade-weighted exchange rate
undervalued has been an integral part of China's development strategy.
* BW-2 implies that China's currency has been significantly undervalued for about a decade.
In real judgment, significant undervaluation of the renminbi is a phenomenon that dates
from early 2002.
* One of the findings from the analysis is that without the capital stock argument, BW-2 is
just another employment-oriented case for exchange rate undervaluation.
* BW-2 underestimates the costs of sterilisation, particularly those associated with financial
repression. Focusing on the low interest rate for central bank paper is misleading (Goldstein,
2004).
* The argument has been that supra-normal profits generated by foreign firms exporting
from China would provide them with both the incentive and the resources to lobby to

maintain trade openness in the United States. It appeared to have misunderstood several
dimensions of reality in China (Arslan, 2009).
* Finally, BW-2 sets out a faulty development strategy for China over the coming decade.
Rather than seeking to promote an enclave economy based on a significantly undervalued
exchange rate and on domestic financial repression, China needs to accelerate the pace of
financial reform, liberalize interest rates and reduce reliance on administrative controls and
move toward greater flexibility in the exchange rate over the medium terms. This is what we
have called a "two-stage currency reform" (Goldstein and Lardy, 2005).
Regarding the implications of the Bretton Woods experience for future international
monetary relations, all will agree that simply stabilizing exchange rates is not sufficient to
automatically deliver the benefits provided by the proponents of such an initiative. It is
crucial that national economic policies (budget deficits) and economic outcomes (inflation)
converge to a certain extent before countries decide to fix exchange rates.
However, a short term divergence of policies is not detrimental to the functioning of such a
system. It is rather a credible commitment to fixed exchange rates that ensures its stability.
It can be stated that ambitious international monetary reforms like the system of Bretton
Woods can only work if they are integrated into wider economic and political convergence.
With this fact in mind it is easy to understand how far the world, with its various countries,
standards, policies and economies, is from a "new system of Bretton Woods".
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The writer is Lecturer Faculty of Business Studies, Department of Finance & Banking,
Jahangirnagar University. Email: M. Hossain@wlv.ac.uk / sawkat-031 @yahoo.com.
Mohammed Sawkat Hossain is Lecturer, Department of Management Studies, Jahangirnagar
University. Courtesy: 'Bangladesh at 40: Changes and Challenges,' a publication of Faculty of
Business Studies, Jahangirnagar University (JU) to mark its holding of a three-day seminar on
the afore-mentioned theme from December 09 to December 11, 2011 at the JU at Savar.
The Financial Express is the media partner of the event.