CODA: Volume XV, No 1, SPRING 1998

Bretton Woods II?
James Chace

What President Clinton needs to make clear over the next few months is the connection between economic security and national security. The world's statesmen who met at Bretton Woods in 1944 as the Second World War drew to a close recognized the connection between national security and a new international economic order. Half a century later, that vital connection has to be made once again to the American people, so that reforms can emerge that will guard against new economic crises that impoverish the peoples of both rich and poor nations.

This may not be easy to do. By late spring, Americans may once again be riveted to their television screens watching a trial involving the alleged sexual shenanigans of the president and a former low-level employee in the Arkansas state government. And if the American economy continues to speed ahead, most Americans will be cheerfully planning their summer vacations, especially those hoping for trips abroad where the dollar is strong and prices are low.

On the other hand, the American economy may be heading toward a slowdown. The aftershocks of the Asian financial crisis may be beginning to affect U.S. exports to the Far East. If our goods are too expensive, who will buy them? Will unemployment rise rather than remain at the lowest level in a generation? Where will we see the next financial upheaval-which usually comes from improvident policies, as it did in Mexico in 1994-95, and in Indonesia, South Korea, and Thailand in 1997-98. Moreover, when these new economic failures occur, doubtless the same prescriptions as in the past will be administered by the International Monetary Fund. Like medieval physicians, the "doctors" at the IMF insist on the same cure for each nation's economic ills, no matter what the cause, and without regard for how painful the treatment may be for the patient: apply leeches, or in economic parlance, clamp down on credit to strengthen the currency. This "cure" causes interest rates to rise, which leads to unemployment. The foreign bankers who have made unwise loans will be paid off, of course. And in the long run, if the patient survives, that is, if social unrest does not tear the country apart, a healthier economy will eventually prevail.

There are, however, a number of ideas surfacing that are beginning to stimulate policymakers to think about reforming the international economic order. The Harvard economist Jeffrey Sachs argues that the high interest rates resulting from the IMF regimen simply freeze economic activity. "Even healthy companies cannot get letters of credit to make the exports they need generate revenue," he says.1 To avoid this outcome, the best alternative may be to set up an early-warning system that would alert us to incipient economic crises. The international financier George Soros proposes that a new authority be set up as a sister institution to the IMF. What Soros calls the International Credit Insurance Corporation would guarantee international loans for a modest fee. Borrowers would have to provide data on all borrowings, public or private, insured or not. This information would be used to set ceilings on the size of the loans the ICIC would be willing to insure. Soros writes: "Up to those amounts the countries concerned would be able to access international capital at prime rates. Beyond these, the creditors would have to beware."2

Henry Kaufman, who heads his own financial management and consulting firm, calls for the establishment of a Board of Overseers of Major Institutions and Markets to supervise and regulate financial institutions and markets. Such an organization, he suggests, "would supervise risk-taking not only by banks and other financial institutions but also by new participants in the global markets. It would be empowered by member governments to harmonize minimum capital requirements, to establish uniform trading, reporting, and disclosure standards, and to monitor the performance of institutions and markets under its purview." In short, unlike "today's reactive IMF," it would be responsible for "anticipating problems and forcing preventive action."3

Kaufman further suggests that the new European central bank, which will come into being in 1999 with the advent of the single-currency Euro, and the central banks of the United States and Japan open discussions on how to harmonize their countries' monetary policies. And Kenneth Courtis, chief economist for the Deutsche Bank's Asia Pacific group, demands that the IMF take on the task of "detailed monitoring of the financial situation within each of its member countries."4

Echoing Soros, who contests the notion that "free markets are self-sustaining and market excesses will correct themselves," the historian Arthur Schlesinger, Jr. calls for an international mechanism modeled after America's Securities and Exchange Commission. Under the watchful eye of the SEC, Schlesinger points out, the American free-market economy operates within a broad regulatory framework unknown to the nonregulated Asian economies, which have been ravaged by "crony capitalism."5

Many of these suggestions have come in response to Secretary of the Treasury Robert Rubin's stated belief that the global economy needs "to develop and maintain strong supervisory regimes and regulatory structures" to avert new financial crises.6 On the other hand, global regulations, no matter how deft in execution, cannot in themselves solve a nation's economic and financial problems. As Robert Hormats, the vice chairman of Goldman Sachs International, said at the last world economic conclave in Davos, Switzerland: "If your domestic institutions are strong, then you don't need very strong global institutions. If domestic institutions inside countries are weak, it won't matter how strong your global institutions are. They will not be effective."7

What seems evident is that the great debate ahead will surely be about trying to find the right balance between regulation and free markets.

Notes
1. Quoted in the New York Times, February 8, 1998, sec. 3, p. 8.
2. George Soros, "Avoiding a Breakdown," Financial Times, December 8, 1997.
3. Henry Kaufman, "Preventing the Next Global Financial Crisis," New York Times, January 28, 1998.
4. See Louis Uchitelle, "Ounces of Prevention for the Next Crisis," New York Times, February 1, 1998.
5. Arthur Schlesinger, Jr., "Government Isn't the Root of All Evil," Wall Street Journal, January 30, 1998.
6. Quoted in Schlesinger, "Government Isn't the Root of All Evil."
7. Quoted in Thomas Friedman, "Heal Thyself," New York Times, February 7, 1998.

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