By Nicholas Stern
When John Maynard Keynes from Britain and Harry Dexter White from the US were designing a system on international economic institutions, agreed at Bretton Woods in July 1944, their judgments were shaped by the preceding three decades of depression and World Wars.
The colonial structures were still in place and the Cold War was about to begin. But the world has profoundly changed in the past 65 years with decolonisation, globalisation, the collapse of the Soviet Union and the rise of China, India and other leading developing countries.
Furthermore, the world has committed itself to fighting world poverty, embodied for example, in the Millennium Development Goals, and we are at last understanding the great dangers of climate change. These are the two great challenges, of the 21st century.
However, we are also now experiencing the biggest economic and financial crisis since the Great Depression, demonstrating that a globalised international system makes us all ever more dependent on each other and vulnerable to disruptions that occur elsewhere in the world.
It is hard to imagine that Keynes and White would have designed anything like the existing structures to meet these 21st century challenges. Institutions should be shaped by their functions. The International Monetary Fund and World Bank were designed to deal with international payments and disequilibria, and establish rules for commercial and financial relations among the world’s major industrial states in the mid-20th century, as well as to finance post-war reconstruction. Only the World Trade Organization would now have a roughly similar role. The necessary functions have changed dramatically and so too have the international structures in which they must operate.
If Keynes and White sat down now they would design institutions very different from the current Bretton Woods sisters of IMF, WB and WTO. Given the 21st century challenges, I think they would propose one institution for development (something like a merged WB or IMF), one for environment (let us call it the World Environment Organization – WEO) and a WTO.
In addition, we need a small and very independent institution to monitor international systemic stability. This fourth institution must have the authority and independence to assess and criticize the functioning of the world’s biggest economies, and thus the most likely sources of instability.
Such institutions must be agreed at an international level. But they cannot be designed within existing international structures such as the G8, G20, the boards of the IMF or WB, or the Security Council or General Assembly of the United Nations.
The civil servants who would be charged with such a task might be talented and well-intentioned, but too many of them would be instructed to ‘protect their own national interests and voice’, and too many countries would be involved for coherent design to emerge. If we allow such processes to shape our choices as a world, then we risk wasting the opportunity for radical re-thinking that this economic crisis has created.
All or some of the UN, boards of WB and IMF, and the G8/G20 could ask a small group of those who have been involved in development and international issues at a senior level to produce within six to 12 months a set of three or four options.
Each option should be coherent and explicitly designed to focus on and take account of the two great challenges of the 21st century (climate change and fighting world poverty), the stability of the international system, the advantages of an open system of trade, and current and possible future structures of the world economy.
There should be a commitment to choose between the proposed options rather than, as is all too common, treat each one as a menu from which to pick and choose. It is hard to imagine a coherent structure emerging in any other way. The structure for institutions that I have described may or may not be one example amongst the options, but we should not regard the status quo, or one with minor reforms, as one of them.
The existing studies of reform of individual elements of the system, launched by each of the WB and IMF, would provide valuable input into the process outlined here. But one-by-one institutional reform, which is largely generated internally by each institution, cannot possibly produce the recasting and restructuring for the 21st century we now need.
As Rahm Emmanuel, the White House Chief of Staff, has said: “You never want a serious crisis to go to waste”. We face three crises: world poverty and climate change, which are medium and long-term, and one, the economic crisis, which is shorter-term but symptomatic of the necessity for longer-term reform. We should not waste the opportunities that these three crisis present: to borrow from Oscar Wilde, to waste two crises may be regarded as carelessness; to waste three looks like negligence. Now must be the moment to redefine our international structures and not merely to tinker around the edges.
Nicholas Stern, IG Patel professor of economics & government, London School of Economics and Political Science and formerly chief economist of the European Bank for Reconstruction & Development (1994-99) and World Bank (2000-03)
His book A Blueprint for a Safer Planet will be published on 2 April 2009
