Our global economic system is in crisis – we need a new Bretton Woods

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In 1944, with World War II still raging, US President Franklin D Roosevelt called for a new future for the global economy and the way it was governed. This new global economic system – which included the International Monetary Fund (IMF) and the World Bank – was endorsed by representatives of the Allied Powers in Bretton Woods, New Hampshire.

“We cannot afford to have [prosperity] scattered here and there among the wealthy or enjoyed at the expense of others, said Henry Morgenthau, US Treasury Secretary at the time.

Morgenthau, who chaired the Bretton Woods Conference, later explained that instructing international institutions to help develop the world’s resources for the benefit of all its people would require them to provide financial support to countries in economic difficulty; strengthen economic sovereignty through reliable access to international public finance; and discipline the abuse of economic power by big players, both states and corporations.

These goals were only partially achieved in the three decades since 1945. But in the past 40 years they have been completely abandoned, undermining the ability of the multilateral system to meet today’s global challenges. today.

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Against the backdrop of the war in Ukraine and the fallout from COVID, US Treasury Secretary Janet Yellen has proposed a bold six-point reform agenda to address “the scope of unaddressed global challenges.” His program, which aims squarely at modernizing multilateral institutions, strengthening international cooperation and restoring confidence in global governance, is inspired by Roosevelt.

There is much to applaud in Yellen’s agenda, which recognizes that the current system is failing. For example, the US Treasury recently issued a warning to the World Bank to take a much stronger lead on climate change. And Yellen continues to push to close global corporate tax loopholes.

But its approach must be even more ambitious and inclusive.

Havana Charter 1948: a missed opportunity

By focusing on working with “countries we know we can count on,” as Yellen said, we fear his approach is actually one step closer to renewed multilateralism.

Delivering global public goods – such as financial and climate stability – requires global solutions. An exclusionary approach not only risks creating a segmented multilateralism unsuited to addressing our global challenges, but underestimates how far the current international economic order has strayed from the approach nurtured at Bretton Woods.

Then, as now, the governance of international trade remains a major obstacle to achieving a more inclusive multilateralism. After World War II, the effort to repair and extend the international trading system received its strongest expression in the Havana Charter of 1948, which sought to establish an “International Trade Organization” to complement the arrangements financial agreements agreed at Bretton Woods.

The charter – which was broad in its scope and bold in its ambition – laid out a blueprint for a “more balanced and expanding world economy” through increased domestic spending, increased international trade and the flow of long-term capital.

It recognized that the full utilization and equitable distribution of the world’s resources must be managed through strong public action, both nationally and internationally, to ensure favorable market access for exports from developing countries, the stability of commodity prices, support for industrial development and strengthened workers’ rights.

But although the United States is a signatory to the Havana Charter (along with 52 other countries, mostly from the developing world), it was sabotaged by domestic political forces and then abandoned by the Truman administration.

Instead, a sub-chapter of the charter – the GATT (General Agreement on Tariffs and Trade) – was retained as the framework for managing international trade. While preserving the pragmatic approach of the charter, the GATT limited itself to tariff reductions (mainly among developed countries) and abandoned all efforts to remedy the biases and asymmetries in international markets which hamper the development of the most poor.

While much has changed in the international landscape since 1948, growing imbalances of market power in recent decades have deepened the inequalities that developing countries face in the trading system.

These imbalances were highlighted during the recent World Trade Organization (WTO) negotiations in Geneva, where a relaxation of trade rules – such as intellectual property waivers for vaccines – to help developing countries dealing more effectively with the current (and future) pandemic has been sacrificed for what the Financial Times’ specialist editor described as an exercise in institutional self-preservation.

Shared principles and effective mechanisms

So what can today’s policy makers learn from the Havana Charter?

Simply put, effective global governance in support of common goals cannot be limited to talking about a “rules-based international order”. Achieving these goals requires a set of common principles and effective mechanisms that can help mobilize resources and coordinate policies among countries with vastly different public and private sector capabilities.

Three interrelated principles that framed discussions of global governance in the 1940s – which we also highlight in our new book “The Case for a New Bretton Woods” – offer a roadmap for transforming our global economic system to meet to the series of current crises.

First, like efficiency, economic transformation – which includes the addition of more productive sectors, better paying jobs and technological upgrades – should provide the yardstick against which to judge the health of international economic relations, including trade.

Trade rules that unduly restrict fiscal and policy space or the right of governments to regulate areas such as food security, health and climate response (which have become commonplace over the past 30 years) must be reversed.

Arrangements to manage grants, rather than abandon them, will be needed to support resilient and sustainable results. These include financial support measures for industrial policy such as direct public subsidies and tax relief measures.

Widening the mix of waivers (particularly regarding intellectual property rules) and safeguards (such as allowing tariff increases for countries facing balance of payments difficulties) could also help ensure flexibility in the use of legitimate policy instruments for transformation without encouraging their abuse.

Second, corporate power, just as much as government policy, is a major distortion of the trading system. To reduce market monopolization and rent seeking by corporations, domestic regulatory structures – such as mastering financial flows with tighter capital controls – need to be restored.

International support measures will be needed to strengthen antitrust rules, stabilize commodity markets, combat illicit financial flows, facilitate access to technology and prevent international companies from interfering with national economic objectives – such as the cancellation of dispute settlement provisions in bilateral and regional trade agreements known as Investor-State Dispute Settlement (ISDS) mechanisms.

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