[Viewpoint] G-20 and the monetary systemIs the current international monetary system properly working for today’s global economic environment? No.
Unlike many commodity markets, financial markets work where promises and credit are exchanged. They can fail with the slightest loss of trust.
Many nations have proposed systematic measures to avoid a repeat of the financial crisis we have just gone through. They have proposed a central bank to serve as a lender of last resort with the sole right to issue currency notes. They have also suggested a new system of supervisory agencies and regulations to ensure the sound operation of financial institutions.
Today, while global financial markets are integrated into a one-market system with the disappearance of national business borders in terms of capital flow, monetary and financial systems are still restricted by national boundaries. Neither a world central bank to serve as a lender of last resort nor supervisory authority exists.
A huge gap has occurred between evolving market realities and social institutions that remain unchanged. Problems derived here are basically undermining the stability of global financial markets and the global economy.
The Bretton Woods system, which was put into effect after World War II, was a global monetary system featuring a fixed exchange rate system where the U.S. dollar was the key currency. The international monetary system insisted on strict foreign currency regulations by countries other than the United States in order to prevent trade protectionism through currency devaluations. This was meant to bring sustainable growth to the world economy.
The dollar reserve system was similar to the gold standard where gold was a global currency. Buying and selling gold was allowed at a fixed rate of conversion to dollars. The International Monetary Fund was established to maintain the operation of these systems, and countries with a lack of foreign currency reserves due to current balance deficits have been offered short-term loans to adopt macroeconomic policies to correct deficits. However, as the overall balance of payments of the U.S. has deteriorated sharply since the 1960s and countries’ dollar reserves soon exceeded the gold reserves of the U.S. government. President Nixon ended convertibility between dollars and gold in 1971 and the Bretton Woods system collapsed. Since then, major countries have begun to choose a system of floating rates and the era is referred to as the “Second Bretton Woods.”
However, this second Bretton Woods system is substantially the same as a “non-system.” There are some countries, such as Britain, the United States, and those in the euro zone, in which currency exchange rates are wholly decided by the market. However, there are other countries, such as China, where the government continues to intervene in the exchange market and maintains a depreciated exchange rate in order to foster trade protection. No regulative authority or body exists in global financial markets.
On the other hand, newly emerging or developing countries have no choice but to accumulate high foreign currency reserves in an effort to protect themselves from another financial crisis.
This will inevitably lead those countries to actively seek exchange rate intervention and positive current account balances, thus contributing to sustained financial imbalances in the world economy.
When Japan, Germany and other countries with trade surpluses became developed countries, the G-7 summit meeting was able to resolve exchange rate issues and correct a current-account imbalances to some degree, as the “Plaza Agreement” did in 1985.
However, as major trade surplus countries are now China and oil-producing countries in the Middle East, the G-7 meeting has been made powerless.
Against this backdrop, the launch of the G-20 has a significant meaning for the sustainable operation of the world economy. After the recent financial upheaval, the G-20 succeeded in creating an unprecedented global policy alliance that has never before existed to help right the boat.
However, no remarkable progress has been achieved so far in establishing a new global financial order during the post-crisis period.
Macroeconomic policy alliances have been possible because of the shared benefit of preventing a recurrence of financial panic, while the revision of the global monetary system is a zero-sum game in which one participant’s gain results only from another’s equivalent loss.
Therefore, we face a very difficult task. However, this task should be dealt with skillfully to ensure that the G-20 will secure its position as a deliberative body in charge of effectively addressing future global economic problems as well as responding suitably to any emergency situation.
The G-20 summit meeting is scheduled to open in Seoul in November 2010. It is high time that the world begins to devise a new post-crisis economic system.
In addition, Korea, as the host country, should be responsible for transforming the G-20 from the deliberative body in times of crisis to the deliberative body during normal times.
It is thought that Korea can play a significant role in realizing the aforementioned aims, as it has undergone its own economic transformation from a developing country to one of the world’s major trading countries. And after experiencing the 1997 Asian financial crisis, it made bold reforms in its economic system.
If we exert active leadership, perhaps the newly emerging international monetary system may be dubbed the “Seoul System,” rather than the “Third Bretton Woods System.”
*The writer is head of Sogang University’s Graduate School of International Studies. Translation by the JoongAng Daily staff.
by Cho Yoon-je