Toward a More Managed International Monetary System?

Abstract

For the first time in modern history, leading emerging nations have a real chance to shape the evolution of the world economy. Key actors in this scenario are the BRIC countries - Brazil, Russia, India, and China - whose growing presence on the global stage has been the defining feature of the world economic landscape in the early 21st century. Backed by rapid economic growth, growing financial clout, and a newfound sense of assertiveness in recent years, the B RICs are a driving force behind an incipient transformation of the world economy away from a U S -dominated system toward a multipolar one in which developing countries will have a major say. Meanwhile, increasing economic cohesion in Europe - particularly among the 16 member states of the euro area - is a separate source of pressure on the international governance structure. Both the BRICs and the euro area will contribute to the continued evolution of the international monetary system as they work to strengthen their relative positions and mould the system to their purposes.It is true that multipolarity is not evident in all aspects of contemporary international relations. In politics, where much of the discussion has been focused, the debate centres on nonpolarity, in which numerous concentrations of power exist with no single centre dominating - a viewpoint forcefully argued by Richard Haass.1 In trade, multilateralism reigns, in the sense that a formal framework of rule-making and compliance has emerged from successive rounds of trade liberalization under the aegis of the World Trade Organization. However, the stalling of the current Doha round of international trade negotiations shows the challenges that multilateralism feces in contentious areas, such as agricultural subsidies and services, where the interests of developed and developing countries diverge. In the international monetary arena, the notion of bipolarity or multipolarity - the existence of two or more dominant poles - also stimulates vigorous debate. Some, such as Barry Eichengreen, argue that there is no substitute for the US dollar at the top of the international monetary system.2 This position, however, ignores the recent dramatic shifts in relative economic power and the deep interdependencies between the United States and other major players. Broadly speaking, important decisions regarding the international monetary system must now account for the interests of Europe and fastgrowing emerging market countries (the BRICs for certain, but for some purposes also such countries as Korea, Mexico, and Saudi Arabia). In our view, the debate has been wrongly defined: the issue is not whether other national currencies will take over from the dollar, but instead whether the international monetary system will once again be managed at the global level - as it was under Bretton Woods - rather than being the result of uncoordinated actions of member governments. The BRICs have laid down a powerful challenge to the existing system, where US hegemony persists in a laissez-faire world of flexible exchange rates and monetary policies focused on domestic objectives. They argue that some international currency - managed not by a single country but by international agreement - should eventually supersede the current unmanaged, dollar-dominated international monetary system.Though they are rivals in some respects, the three emerging poles - the United States, the euro area, and the BRICs - share a common interest in maintaining financial stability and facilitating trade and economic growth. Trade and investment between the three of them account for a large part of global flows. About one quarter of US exports go to the euro area and a similar amount to the BRIC countries, while 16 percent of total BRIC exports go to the United States and 29 percent to the euro area. Dense crossborder foreign direct investments have created strong mutual interests and interdependencies. American multinationals hold more than one third of their total direct overseas investments in companies located in the euro area, and European banks have established a strong presence in the BRICs through extensive networks of subsidiaries and branches. …