A new Bretton Woods

Older multilateral institutions must adjust to new world order, or see more AIIBs, BRICS banks emerge.

Written by Janmejaya Sinha | Updated: July 11, 2015 8:38 am
The world will need to learn to deal respectfully with declining powers, especially those with nuclear capability. Russia is a case in point. As Russia declines economically, with poor demographics and an overdependence on one commodity, it is important not to allow the Russian people to feel marginalised and humiliated. The world will need to learn to deal respectfully with declining powers, especially those with nuclear capability. Russia is a case in point. As Russia declines economically, with poor demographics and an overdependence on one commodity, it is important not to allow the Russian people to feel marginalised and humiliated.

China’s ability to set up the Asian Infrastructure Investment Bank, overriding the objections of the US, and the BRICS bank, which aims to start lending next year, are just two signs of how some earlier multilateral agency charters do not properly represent current global power equations.

If we go back in time and evaluate how some of these agencies came about, it is wise to ponder on a piece George Orwell wrote in the Tribune in 1944, which was given the title “History is Written by the Winners”.

The point that Orwell made in his article, where he took the specific instance of German claims about bombing London in 1941-42, when the Luftwaffe was busy in Russia, was that if Germany had won the war, that inaccurate assertion would have become historical fact.

What Orwell does not mention in his thoughtful piece is that not only history but also the global institutions that are formed at such a time bear the full imprint of the winners. Once formed, these institutions continue to largely reflect the original power structure.

A country’s power is reflected by its economic, military and cultural might — by GDP size, per capita income, the size of its army and weaponry (especially its ownership of nuclear weapons) and finally its ability to exercise cultural and moral power.  After World War II, three important institutions were created — the United Nations, the World Bank and the International Monetary Fund.  The charter of each of these institutions clearly reflected the results of the war.  The primacy of the US was established. Germany, Japan and Italy were ignored. The five nations that formed the permanent members of the UN Security Council were the US, UK, France, the Russian Federation and the Republic of China (Taiwan), brought in by the US as a check on the Russians. This position was maintained until 1971, when the People’s Republic of China replaced Taiwan. The Russians did not join the IMF and the World Bank after the Bretton Woods Conference, and so the primacy of the US and Europe was established there. The president of the World Bank is always from the US and the managing director of the IMF, from Europe. Even in the IMF, the US has over 17 per cent of the voting rights. Japan and Germany were later allowed to join these institutions. Both Japan and Germany joined the IMF in 1952, Japan joined the UN in 1956 and Germany joined the UN in 1973.

It is hard to get countries inside the club to vacate their spots, even if their positions have weakened dramatically since the original charter. Nor is it easy to get other countries to get into apex positions. For the 50 years post World War II, the original structure held up quite well.

With the collapse of the Soviet Union, the influence of the US became even sharper, but the Russian nuclear stockpile kept it in the Security Council. Over the last 15 years, however, the economic map of the world has been undergoing sharp change, and institutional structures are increasingly less reflective.

Thirty years ago, the US economy was 15 times the size of both China and India.

The Japanese economy was seven times their size. Even though China quadrupled between 1986 and 2000 from $290 billion to $1.2 trillion, even in 2000 it was just 25 per cent of the size of Japan, and only 10 per cent the size of the US. However, by 2014, the position with respect to China has changed completely. It has become 60 per cent the size of the US but has become more than two times the size of anyone else. Even if it continues to grow at only half its current rate, by 2028, it will be a $50 trillion economy. In other words, the US will then become 60 per cent of China. India’s rise was slower. From being roughly the same size as China in 1986, it barely doubled by 2000. But it quintupled between 2000 and 2014 to $2 trillion. Continuing at that pace, it will become a $10 trillion economy in 2028 — much bigger than Japan, Germany or France. Further, both China and India are nuclear capable.

How much will the existing institutions need to adapt or risk obsolescence? Today’s global institutions largely reflect past global reality. China rightly believes that these institutions do not reflect its position. By 2028, China, but also India or Indonesia, will not accept the status quo. In terms of purchasing power parity, this position will become even more untenable. So multilateral institutions will need to adjust rapidly, or be faced with the emergence of more institutions like the AIIB proposed by China, or the New Development Bank set up by the BRICS nations. But that is not the only problem.

How much sagacity must the newer powers show to manage a superior world order? The world will need to learn to deal respectfully with declining powers, especially those with nuclear capability. Russia is a case in point. As Russia declines economically, with poor demographics and an overdependence on one commodity, it is important not to allow the Russian people to feel marginalised and humiliated. Jingoism and calls to former glory can allow its leaders domestic popularity that will be at odds with their position in the world.

A North Korea is bad enough, but a badly behaved Russia will be a much more serious problem. It has a massive nuclear stockpile, and if it starts to behave like a rogue state, global peace will be seriously threatened.

This is the challenge for the world. We need global institutions to manage the world. Increasingly, the world will be challenged to recognise global best interest more than just national self-interest. We will be challenged to create new institutions that recognise the new but don’t humiliate the old. The new cannot be impatient and assertive, and the old cannot lack grace or act with belligerence. This will be the challenge to build a new stable world order.

The writer is chairman, Asia Pacific, Boston Consulting Group. Views are personal