The Bretton Woods agreement—which is 70 years old this month—established three institutions to promote law and order in international economic relations: the IMF to promote macroeconomic stability; the GATT (and its successor, the WTO) to ensure an open trading environment; and the World Bank to provide development finance for poverty reduction.
The smooth operation of this rules-based, US-led global economic architecture contributed to the unprecedented economic growth and worldwide prosperity of the post-World War II period.
However, recently this architecture has lost much of its legitimacy because the world trade and GDP shares of emerging markets—especially those in Asia—have risen more rapidly than their shares in IMF quotas. For example, China accounts for 13.6% of the global economy (in PPP terms), but its voting power is 3.8% less than that of the Benelux countries. It is not that the IMF and the White House have not made the effort. In November 2010, the IMF proposed what it labelled as the “most fundamental governance overhaul in the Fund’s 65-year history”. If approved, it would have reduced some of the quota misalignment at the IMF, fulfilled the G20 pledge to transfer 6% of the quota to dynamic emerging markets, and given China the third-largest voice in the IMF. The target was to make the reform effective in 2011 but, despite the support of Barack Obama, the proposal is still stuck in the US Congress. The cost of this delay is rising.
A consequence of the slow progress in reforming the governance of the IMF has been the move from a centralised to a decentralised global economic architecture, in which regional institutions are being established to deliver international public goods in parallel with ‘senior’ global institutions. Other factors accounting for decentralisation are the need for a multi-pronged approach to manage financial globalisation and the evolution of a multi-polar world. For example, in the area of macroeconomic stability—where the IMF is regarded as the global financial safety net—we have the European Stability Mechanism, the Arab Monetary Fund, and the Chiang Mai Initiative Multilateralization as the regional safety nets. Similar developments can be witnessed in the international trade, financial, and development architectures. These trends complicate the governance of the global economy, and lead to duplication of efforts and wastage of scarce resources.
The situation has been aggravated by the evolution of the China-led architecture in Asia. The establishment of the New Development Bank (NDB) by the BRICS (Brazil, Russia,