A new global order: Bretton Woods II

Dangerous climate change could trigger tipping-points in the Earth system. The Amazon rainforest could fall victim to desiccation. The monsoon systems in Asia could collapse. Forty percent of the world's species could vanish. In a report published in 2008, the German Advisory Council on Global Change (WBGU) pointed out that climate change constitutes an international security-risk; entire regions could be destabilised by water scarcities, collapsing agricultural systems and food crisis.

Global leaders are preparing to meet in Washington on 15 November 2008 for a summit of the G20 group of states and representatives of leading international financial institutions. The gathering is being ambitiously named "Bretton Woods II" - echoing the conference on 1-22 July 1944 which established the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade (GATT). With George W Bush presiding, and Barack Obama waiting in the wings, the delegates' task will be to fix a global financial system which has failed with spectacular and highly damaging results. They need to succeed. However, they also need to realize that financial failure is symptomatic of more fundamental failures and fissures in the global order. Fixing the plumbing will be of little help if the house is falling down.

This, by the way, was also true in 1944. The Bretton Woods conference was officially the United Nations Monetary and Financial Conference. Elsewhere - at Dumbarton Oaks on 21 August-7 October 1944, and in San Francisco on 25 April-26 June 1945 - the political framework for the United Nations was being established and the charter written. These grew out of the vision of Franklin D Roosevelt and Winston Churchill, first expressed in the Atlantic Charter in August 1941. A financial initiative set in the context of a vision of global peace and progress: Is that not the kind of platform needed today?

Certainly, the challenges are of a scale to match those of the 1940s.

A world of insecurity

The present financial debacle marks the end of the "Milton Friedman model" of globalization, based on the notion that self-interest and the market are sufficient to organize national economies and the world economy. The economist Jagdish N Bhagwati has pointed out that the collapse of self-regulation has unleashed a huge potential for "destructive creation" - a reversal of the idea developed by Joseph Schumpeter that technological innovation leads to a process of "creative destruction" (see "We need to guard against destructive creation", Financial Times, 16 October 2008). The "Milton Friedman model" is closely linked with the concept - propagated since the Ronald Reagan-Margaret Thatcher era - of TINA: "There is no alternative" to the unrestrained market economy. All of a sudden, TINA has given way to a supple AUN: "Alternatives urgently needed"!

But alternatives cannot be designed by western powers alone. China is already what the United States has always claimed to be, an indispensable actor of world politics and the world economy. China, the world's second-largest economy in purchasing-power parity terms, now holds the world biggest currency reserves, amounting to US$1.8 trillion. If India continues on the path of economic success it embarked on in 1991, the two Asian giants will in the coming two decades profoundly alter the structures of the global economy. In addition, countries like Brazil, South Africa and some Arab Gulf states are on the rise.

The emerging prospect is that the G8-driven global order is coming to an end. Whether the power-transition is managed with trust and sensibility will determine whether we move to a new and uncomfortable hegemony, power politics and bitter rivalry between "old" and "new" powers, or a more inclusive and cooperation based multipolar world order (John J Mearsheimer, the US political scientist, is not alone in arguing that "the rise of China will not be peaceful"). It will be more than interesting to observe what new ideas China, India, South Africa and Brazil bring to the debate on our collective future.

Poverty-reduction will surely feature prominently in their vision - their version of the Atlantic Charter for the 21st century. It is apparent that the recession just beginning will do more damage to the world than financial contagion through the banking system. Even before the crisis hit, World Bank estimated that more than 2 billion people were living below US$2 per day; and the food-price increases of 2007-08 meant that an extra 100 million people had been dragged back below the miserable poverty-line of US$1 per day.

The impact of the recession on poor countries can be gauged by the 1970s precedent (see Paul Rogers, "The world's food insecurity", 24 April 2008). The combination of the oil-price shock of the late 1970s and successive debt crises pushed many developing countries (especially in Africa) into balance-of-payments and fiscal problems which left them running for help to the IMF and the World Bank. The long period of so-called "structural adjustment" followed. Slowly, and often controversially, macro-economic balances were re-established. But in the meantime, growth was often negative, investment collapsed, poverty rocketed and malnutrition spread. The 1980s became known as the "lost decade" of African and Latin American development. By its close, Africa had fallen even further behind the rest of the world.

What can developing countries expect in coming months? Their exports will fall, in both price and volume - affecting also service exports like tourism. Remittances will shrink. Foreign direct investment (FDI) is likely to fall. Aid is very unlikely to rise as promised. Another lost decade is on the cards (see "Development in a downturn", 4 July 2008). But we should understand: a densely interconnected world with 2 billion marginalized people will never be either secure or stable.

The global order and Europe

As solutions are sought to these problems, an overriding issue is climate change - in essence an energy, food and security crisis that will pose far greater challenges for industrial growth than the ongoing collapse of the financial system. Dangerous climate change could trigger tipping-points in the Earth system. The Amazon rainforest could fall victim to desiccation. The monsoon systems in Asia could collapse. Forty percent of the world's species could vanish. In a report published in 2008, the German Advisory Council on Global Change (WBGU) pointed out that climate change constitutes an international security-risk; entire regions could be destabilised by water scarcities, collapsing agricultural systems and food crisis.

The OECD countries must by 2050 reduce their greenhouse-gas emissions by 80 percent. In the wake of 200 years of natural-resource-driven growth, there will need to be a transition from a fossil to a non-fossil world economy - a truly millennial task. This "third industrial revolution" (of which John Schellnhuber of the Potsdam Institute for Climate Impact Research has been speaking for years) is unlikely to come about on the basis of corporate pledges and self-regulation of the market - not even an Alan Greenspan would today make such a claim.

Five steps mark the path to a reshaping of the global order. We see a special role for Europe in this - for the European Union is the largest trading partner of the developing countries, the largest provider of development aid, the key protagonist on climate change, and a region with dense cultural and political networks across all developing regions. As the global development agenda moves rapidly from a national preoccupation to one which requires cross-country collaboration, Europe is well-placed to bring together its economic, political and also military assets.

The paths to progress

The five steps are as follows.

First, successful management of crisis requires a clear-sighted focus on the welfare of the poorest. In the 1980s, UNICEF in particular pioneered the idea of "adjustment with a human face." Thirty years later, we need to focus on the safety nets, welfare programs, long-term investment in health and education, and employment prospects of the poorest. Britain's prime minister Gordon Brown has recognized this in the United Kingdom context. The European Union should now play a far more visible role in the multilateral development agencies, and it should take the lead by presenting, without delay, a development-policy action-plan designed to respond to the impacts of the financial crisis in the developing world. Globally, we need to "manage recession with a human face."

In practice this means a double guarantee: to individuals that their welfare will be protected by means of social-security programs; and to countries, that help will be provided with the costs of social protection, so that budget deficits and inflation do not spiral out of control. The world showed that it could mobilize on these fronts to tackle 2008's crisis of rising food prices. It must do so again to tackle 2009's crisis of failing livelihoods.

Second, the search for a new globalization must not become the march to anti-globalization. Markets have stumbled, not failed. They need to be managed not mauled. For a generation, trade has grown at twice the rate of economies overall, and this has contributed to poverty reduction on a scale not seen since the industrial revolution.

Income inequality has risen too fast and has sometimes reduced the size of benefits to the poor, so better and more progressive tax regimes are needed around the world. Investment in better regulation and better public goods are also needed to reverse recession, and create the possibility of further, shared growth.

Trade liberalization would be of value, but we are realistic about the scope for a successful Doha development deal, at least in 2009. As others have observed, however, there may be other routes to trade facilitation, not least investment in infrastructure in the poorest countries, to reduce costs. In Uganda, for example, the Commission for Africa led by Tony Blair estimated that poor roads are equivalent to an 80 percent tariff on textile exports.

Third, the climate summit set for Copenhagen on 30 November-11 December 2009 must not end in failure. The looming recession has led some in the business community and some governments to question the EU's climate targets. Instead, Europe must retain its pioneering role in climate policy, with concrete proposals for what the New Economics Foundation and Achim Steiner at the UN Environment Programme (UNEP) have called a "green new deal." The forces in support of the status quo are considerable. But long-term, strategic thinking and decision making are required, with significant low-carbon investments.

A key priority is the creation of an international carbon market: carbon taxes, a cap-and-trade system, a renewable-energy mandate - or some combination of all of these. Unambiguous commitments, like those proposed in Britain's climate-change bill, would create the incentives for transformative behavior by businesses and for "green innovators" across the globe.

Large-scale public and private investments in renewable energy are part of this new deal. The German Advisory Council on Global Change has proposed setting up an internationally visible "European-Chinese-Indian Research Institute for Efficient Energy Systems" dedicated to jointly training the engineers needed to get on with the task of building a non-fossil global energy system. A climate-and-energy flagship project of this kind with the two central new powers of the 21st century would serve to underline that the next wave of innovation in the world economy must be based on low-carbon technologies.

It is possible that the incoming Barack Obama administration would be interested to join such a transformative initiative. At the same time, and mindful of the need for a global balance of interests, rich countries should launch an initiative designed to provide significant contributions to reducing the energy-poverty presently affecting 2.3 billion people throughout the world.

The EU should also launch a significant program designed to develop climate-compatible cities. Over 50 percent of mankind lives in cities, and the figure is rising. Cities are responsible for 75 percent of global energy consumption and 80 percent of energy-related greenhouse-gas emissions. By 2020 it will be important for 200 European cities to be able to demonstrate how greenhouse-gases can be effectively reduced by 80 percent by the year 2050. An initiative of this kind would be a major generator of jobs an innovation. There are already some models. In the south of Shanghai, an ecocity called Dongtan is being built for a population of 80,000; in Abu Dhabi (United Arab Emirates) a sustainable city is planned.

It is important to think positively and strategically. The next few years might see an interesting domino-effect: imagine the EU moving in a low-carbon direction, improving its future-oriented competitive advantages, and imagine the new United States president translating into political and economic practice what his climate-policy advisors have been repeatedly saying during the election campaign - that fighting climate change via innovation is like investing in the next green Silicon Valley.

If this dynamic was created, then accelerated, there would be a rethinking of economic strategies in Beijing too. This scenario is about leadership, vision, and realism - one based on accepting the limits of the Earth system, and adapting to them creatively in the interests of all.

Fourth, it follows that aid flows must be not just sustained but increased. Rich countries made ambitious promises at the Gleneagles, Scotland summit of the G8 in 2005, and have repeated them many times since, most recently at the EU council in June 2008 and the G8 summit in Hokkaido, Japan, in July 2008. But actual delivery is currently 30 percent below the target for 2010.

Meanwhile, the talk is of cutting aid, not increasing it. Italy, for example, has proposed cuts of up to 56 percent in its latest budget. Britain so far is holding firm, and Germany is working hard towards its target. Quite right: it would be a bad start for the project of building "a social-market economy on a global scale" of which Germany's chancellor Angela Merkel has spoken if the bailout of the global banking system were to entail budget cuts affecting the poorest 30 pecent of mankind. Those intent on preventing the emergence of further anti-western resentments should have no trouble understanding rthe logic of aid.

On 29 November-2 December 2008 in Doha, governments will meet to review progress since the Monterrey conference of 2002 on financing for development. The Doha declaration should be generous and unequivocal - and rich countries should be held clearly to account. That includes all the members of the G8, but also others. Is it not time that rich oil-exporters in the middle east signed up to 0.7 percent of GNP in aid, as many developed countries have done?

Fifth, the need for collective action is an inescapable conclusion of recent events. Coordinated action has been essential to prevent financial contagion. Even the outgoing George W Bush has recognized that new initiatives will be needed to buttress the security of financial markets, with new regulatory regimes.

It is important to make sure that developing countries are fully engaged in these discussions. Resentment is already evident about who is or who is not on the invitation list for Washington. It cannot be right for all except the richest members of the world community to be presented with a "done deal" imposed without consent.

Robert Zoellick, president of the World Bank, has observed that there is no time to argue the fine points of who might or might not have a United Nations Security Council seat or membership of the G20. A flexible, network solution is needed, open and participatory, but focused on decision-making. A middle way is needed between the closed-shop of the UN Security Council and what has come to look like the talking-shop of the World Trade Organisation (WTO). It is important to make sure that developing countries are fully engaged in these discussions.

The EU may have models to offer for more inclusive global governance. The model of qualified majority voting reflects many painful compromises in EU councils, but does offer a way of taking different interests into account. Could this be applied in the United Nations Economic and Social Council (Ecosoc), or even in the UN general assembly? Alternatively, is it time to revisit the idea of an Economic Security Council, taking into account the enormous challenges that global poverty, resource-scarcity and climate change imply?

2009 is an important year for the EU, with elections to the European parliament in June and a new commission taking office in November. The survival or otherwise of the Lisbon Treaty will also be decided. European partnership is difficult, even stressful. But this is Europe's time. Not alone. Acting with others. Delivering Bretton Woods II - and also San Francisco II.

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