From Biagio Bossone: Global Finance Needs a Real New “Bretton Woods”

Posted by Biagio Bossone on 28 January 2009

The ongoing international financial crisis has raised the issue of reforming the governance of the global financial system. The epochal nature of the undertaking has led many to evoke the onset of a new “Bretton Woods” era, and last November the Leaders of the G-20 have indicated their intention to push for changes at the Bretton Woods institutions. Yet what was truly fundamental about the Bretton Woods agreements of 1944 cannot be found anywhere in the Leaders’ statement nor, even more importantly, in the method that today underpins international financial cooperation.   


It is important that the world leaders, starting from newly-elect President Obama as head of the major shareholding member of the Bretton Woods institutions, raise their attention to the importance of reforming global financial governance bearing in mind the very principles of economic and financial multilateralism laid out at Bretton Woods.


Global finance needs today a leading governance body that is both effective and legitimate. Only a body that is perceived as legitimate by most of the world nations and their citizens can ultimately make choices that are accepted and effective. Legitimacy requires (direct or indirect) participation to decision making, and participation to decision making provides the only way to make choices that draw on the views and interests of all. Only those who see their right recognized to participate in decision making are then motivated to “own” the decisions taken and to respect them.


These principles inspired the launch of the “Bretton Woods” agreements in 1944, and they were again defended in the ‘70s, when the international monetary system needed reform. On the occasion–on instigation of the US–international discussions and negotiations took place at the IMF, where all member states were represented, and not within small groups of relevant countries (like the then powerful G-10). The Committee of Twenty Members of the IMF Board of Governors was established as a ministerial body that was to act as the place for international dialogue. The ministers who sat at its table did not come from countries selected informally and arbitrarily, but from countries that were represented in the Executive Board of the IMF, identified through formal criteria accepted by everybody, responsible vis-à-vis those countries that were not directly represented, and called upon to take on their views and concerns.


Regrettably, this is not where the world is heading today. In the name of flexible and efficient decision making, the leading countries are unilaterally experimenting with unrepresentative groupings that will set new international policy directions with the presumption to determine what is best for all. This likely portends new arrogance of the strongest on the weakest, and resentment and disenchantment from the latter.    


It is fundamental that world leaders walk the same path that was traced in Bretton Woods precisely not to leave anyone out. They need to renew that same obligation to engage all, which they were willing to accept at Bretton Woods. Keeping strategic decision making on international financial cooperation within self-selected and exclusive country groupings weakens the cooperative spirit that Bretton Woods was meant to engender. Participation and voting power may be asymmetric, but need be universal.


The International Monetary and Financial Committee of the IMF (which not by chance derives from the old Committee of Twenty) remains “the” forum to advance the global financial reform agenda. Unlike any “G”, it was created within the framework of the Bretton Woods system to supervise the international financial system and watch over its stability, and gives voice to all member countries in a way that is unequalled by any of the “G”’s so far mobilized.   


The IMFC should take on the leading role that the “G” countries have given to themselves, and become the political body responsible to oversee all international financial policy activities. There is no reason why other entities should play its role. The committee itself needs major reform to be made more effective and representative, by adapting its composition and work practices. This will require strong goodwill and tough negotiations (like, for instance, to reduce the number of seats and to have European members consolidate their positions into one or two chairs only), but all countries will have a say on the process and this will again lay the ground for a credible and effective economic and financial multilateralism.


It is necessary that the leading countries re-enact the true principles of Bretton Woods. Perhaps, once again, no countries other than the US can express the vision and have the political clout to be the driving force behind this re-enactment, and President Obama’s aspiration to a more open and just world can prove essential to make this happen. The crisis we are going through offers a unique opportunity to design a global financial order that is inclusive, fairer, less arrogant and more caring.

Biagio Bossone Former member of the Executive Board of the IMF and World Bank Group Rome, Italy