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Baht/$ 35.00/03 (Bid/Ask)
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12100
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ECO CAFE
TIENTIP SUBHANIJ
Lost in the current market turmoil, global leaders are contemplating a new world financial order. This is not the first time we have heard widespread calls for a new financial architecture. But this time, the plan appears more likely as the G-20 nations are planning for tomorrow's summit in Washington to be similar to the Bretton Woods meeting in 1944.
It is hoped that this summit will be the first in a series of such meetings to apply lessons learned from the recent financial crisis to bring about a new world order.
The G-20 is made up of the G-7 plus a small number of emerging market economies. From Asia, this group includes China, India, Indonesia and South Korea.
In preparation for the summit, European Union leaders met last Friday in Brussels and the G-20 central bankers and finance ministers convened in Sao Paulo last weekend.
As a result, a set of principles were agreed upon among EU leaders and five principles were put forth: Submit ratings agencies to registration and surveillance as they have misled markets about the quality of several firms and financial assets; align accounting standards and review the application of the fair value rule; agree that no market segment, no territory, and no financial institution should escape regulation or oversight; set banking codes of conduct to reduce excessive risk-taking including the system of remuneration; and give the IMF the initial responsibility of suggesting ways to calm the crisis.
The Sao Paulo meeting also concluded there is a need to reform the Bretton Woods system. The statement said the IMF, World Bank and other international financial institutions will have an important role to play in stabilising and strengthening the international financial system and leading international co-operation. Increased communication and co-ordination in the face of the crisis are seen as essential and officials pledged to take "all necessary steps" to boost market confidence and to give a bigger voice to developing nations in global economic matters.
Other possible features of the new financial system include a lesser role for the US dollar, more strict regulations of tax havens and private equity funds, more counter-cyclical regulation as well as stronger role for the Financial Stability Forum (FSF).
The origin of Bretton Woods lies in the Great Depression. After World War II, an international monetary conference took place at a small resort in Bretton Woods, New Hampshire and so the agreement reached there became known as the Bretton Woods Agreement.
One important outcome of the Bretton Woods Agreement was the creation of the IMF, whose principle function was to lend to member nations experiencing a shortage of foreign exchange reserves. Two other important institutions that arose were the World Bank and the General Agreement on Tariffs and Trade (GATT).
Under the Bretton Woods system, the exchange rate was pegged, but adjustable.
Each country maintained an agreed-upon exchange rate with US dollars convertible to gold at the official price of $35 per ounce. Nations used the US dollar to settle international transactions and so made the dollar the primary reserve currency of the world.
The success of the Bretton Woods arrangement, therefore, depended on the ability of the US to maintain confidence in the dollar. The system worked well for a period of time. Inflation and other economic problems led to the abandonment of the Bretton Woods system in 1971. An important legacy of the Bretton Woods, however, remains - that is the US continued to be the ultimate guarantor of the international financial market. And when the guarantor undergoes a crisis, it affects the rest of the world.
There is great expectation that this weekend's summit will mark the beginning of the new Bretton Woods, especially for the European leaders who appear more active in pushing for reform than their US counterpart. Nonetheless, it is too soon to say that US power will diminish. The new Bretton Woods may not be about challenging US significance, but more likely about increasing the degree to which the rest of the world can influence the dynamics of the US economy and prevent it from accidentally destabilising the international financial system.
One risk of having this kind of summit is that it might create uncertainty in the marketplace. Any agreement from this meeting will be a long way from a global consensus because it may not win approval from a large number of countries excluded from the negotiations.
It is uplifting to talk about the so-called new Bretton Woods. But it should be noted that the agenda for the new world order is large and will not be completed overnight. The reforms themselves are also more easily proposed than they are implemented.
Dr Tientip Subhanij holds a PhD in economics from the University of Cambridge, and currently has a career in banking as well as academia. She can be reached at tien201@yahoo.com
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