Unrigging the game

New Bretton Woods moment needed to improve coordination and increase cooperation to address rising inequality and insecurity

Almost 80 years on from the United Nations Monetary and Financial Conference at Bretton Woods, the world bears an uncomfortable resemblance to the one its delegates hoped would be gone forever. This has not been caused by populist politicians who have successfully tapped into the anxieties that accompany rising inequality and persistent insecurity, but by powerful interests who have rigged the rules of the economic game to maintain a winner-takes-all world of privileged individuals and corporations.

In this world, the institutions of multilateral governance, designed to foster responsible sovereignty and underpin social stability, have instead become enablers of mobile capital and the build-up of private debt, curtailing the policy space available to governments and preaching the virtues of economic austerity. In the process, the original principles of the Bretton Woods system－avoiding beggar-my-neighbor actions by providing adequate public international finance and disciplining economic aggression－have been abandoned to the short-term dictates of speculative finance.

The result has been a weakening of capital formation and sluggish productivity growth, boom-bust cycles along with exchange rate instability and misalignments, leading to sudden shifts in the pattern of international competitiveness, trade tensions and uneven growth.

The operation (and breakdown) of that same system has, moreover, accelerated the climate crisis by undercutting the possibility of large-scale public investment, fomented feelings of political neglect, and deepened the sense of anxiety on which right-wing populists, who see climate change as a hoax, have fed. The global financial crisis of 2008-09 and the COVID-19 health and economic crises have exposed the fragilities of this system.

Facing today's intersectional economic, environmental and health crises and building a better tomorrow requires, according to the International Monetary Fund managing director, Kristalina Georgieva, "a new Bretton Woods moment". As we argue in our new book, The Case for a New Bretton Woods, she is right.

But unlike then, the existing multilateral system must also undergo a reset that scales back unduly intrusive global rules in some areas and expands the system in others, in order to provide a broader set of global public goods and to align international cooperation with economic, social and environmental goals through a better mix of international resources, dedicated domestic policies and global coordination.

In the United States and across Europe, new coalitions have emerged in the last five years that link concerns over equality with green structural transformation. Policymakers were taking note even before COVID-19, but talk of green recovery strategies is now commonplace. Much of this still remains inchoate and below scale, but the shared narrative and many of the policy details suggest an opportunity for building stronger and more intersectional ties within and across countries.

Developing countries have committed to the United Nation's Agenda 2030 and have been making strides in shifting to renewable energy. However, their lack of policy and fiscal space has been confirmed by the COVID-19 crisis, while the barriers posed by private creditors, intellectual property owners and tax-avoiding multinationals are posing additional obstacles to mobilizing finance and accessing technology in support of alternative development strategies.

New mechanisms have emerged, such as BRICS, along with regional arrangements, such as Africa's Continental Free Trade Area, giving rise to a new generation of development banks, reserve funds and trading areas that have better rules and governance. However, unlike in the 1970s, developing countries have not been able to build the kind of solidarity that backed up the idea of a new international economic order through international negotiations.

Hovering over these new initiatives is the difficult issue of leadership and, in particular, what role a hegemonic power can or should play in building a better future for all. The attempts at hegemonic leadership over the past century have run afoul of the "paradox of success", whereby the very economic strength that enables the hegemon to play a leadership role tends eventually to undermine the self-restraint on which that leadership depends, eroding trust both within the hegemon itself and across the system.

The costs of preserving the centrality of the dollar, as the global economy transitioned from a fixed to a more flexible exchange rate system, have been high, with inadequate liquidity support, asymmetric governance, weak policy coordination and regulatory oversight belying talk of a "global financial safety net".

The inevitable result of these gaps and asymmetries is a slide toward some kind of neo-mercantilist system as stronger governments seek to use international negotiations to advance the interests of select domestic parties with a predictable erosion of trust in the system.

Despite operating in an international economic environment designed to advantage large corporations from advanced economies, China has employed considerable policy acumen to develop and diversify its own economy. This has not only propelled the fastest reduction in extreme poverty in human history but has seen China progress to the technological frontier in some of the leading sectors of today's global economy, including in renewable energy systems.

This economic success has made it an essential player in any resetting of global governance, including on climate strategy. But China's transformation has also provoked an increasingly hostile stance from advanced economies. And while that hostility is as much a cover for their own policy failures over the last 30 years as it is about the malfeasance of Chinese policy, it is arguably the most serious obstacle to improving coordination and increasing cooperation among the key players, which is needed to ensure a multilateral system fit for purpose.

President Xi Jinping has made it clear that along with a commitment to common prosperity at home, macroeconomic policy coordination in support of strong, sustainable, balanced and inclusive growth of the world economy is a priority for China. This sentiment, which echoes the US goal at Bretton Woods of establishing "a satisfactory standard of living for all the people of all the countries on this earth", provides the basis for constructive dialogue between the world's two largest economies, which should form part of a global conversation that includes voices from Bali, Buenos Aires, Beijing and beyond.

Kevin P. Gallagher is director of the Global Development Policy Center at Boston University. Richard Kozul Wright is director of the Globalization and Development Strategies division at the United Nations Conference on Trade and Development. The authors contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn