The international monetary system is the unquestioned common ground for all economic activities.
Stefan Brunnhuber, trustee of the World Academy of Art and Science and member of the Club of Rome asks: how and why will an upgraded financial system be a game-changer? Are we ready to think and act outside the box? Do we need a new, green Bretton Woods 2.0?
Read the original research: springer/10.1007/978-3-031-23285-5
Read more in Research Outreach
Visit the World Academy of Art and Science website: worldacademy.org
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Hello, and welcome to ResearchPod. Thank you for listening and joining us today.
In this episode, we talk about a spinoff from the research of Stefan Brunnhuber, trustee of the World Academy of Art and Science and member of the Club of Rome. Brunnhuber seeks to address the following questions: how and why will an upgraded financial system be a game-changer? Are we ready to think and act outside the box? Do we need a new, green Bretton Woods 2.0?
The international monetary system is the unquestioned common ground for all economic activities. That is true both in democracies and autocracies, in open societies and failed states, in free market systems and planned economies. Even terrorist groups, black market actors and the informal sector use – or misuse – the international monetary system.
When delegates from 43 countries met at the Mount Washington Hotel in Bretton Woods, New Hampshire, in July 1944, they embraced a new spirit and mindset. There, they set new rules that would determine the course of the world economy in the post-war era up until the 1970s. Bretton Woods stands metaphorically for a collective project involving at least three main aspects:
First, international collaboration: agreements on common rules were seen as beneficial for all parties. Even non-binding, ‘light-touch’ rules were considered to be better than taking ad hoc decisions in times of crisis or having no rules in place at all.
Second, a search for a set of monetary mechanisms that would enable the real economy to better adjust for trade imbalances, including: capital controls that permit governments to insulate and protect domestic markets to some extent and give them scope to meet their own targets; and pegged, but adjustable, currencies to reduce economic instability and currency volatility.
Third, the implementation of new institutional monetary bodies, in particular the World Bank Group, the International Monetary Fund, or IMF, and later on the World Trade Organization.
After the Bretton Woods system broke down in the early 1970s, deregulation, privatisation and liberalisation came to dominate the international monetary system. This all finally led, after the 2008 crisis, to an era with no system at all.
Since the original Bretton Woods era, the overall political power game has changed dramatically, due above all to three megatrends:
First. we live in A multipolar world: The bipolar world of the Bretton Woods era, where the US dollar was the dominant currency, has been replaced by one with multiple new actors, in particular the BRICS+ countries, which are pursuing (sometimes) conflicting agendas. This necessitates an update to the underlying currency regime. At the same time, a global middle class is emerging that will triple in size to over 4.5 billion people within the next two decades, creating a need for additional funding for public infrastructure, healthcare, education and housing.
Second, we face Serial ecological crises: Climate change, species loss and land degradation will trigger multiple asymmetric shocks and negative externalities, which will impact our prosperity and well-being all over the world. The damage has already been done, leaving current and future generations confronted with an exponential cost curve in the years ahead. This requires a fundamental shift in the financial incentives underlying our domestic and international trading system.
Last, ours is an age of New and emerging technologies: AI, big data correlations, blockchain-based currencies and various spinoffs of these technologies will substantially disrupt our economies, our very way of life, and will ultimately determine what it means to be human in the 21st century. They will also help us to master the overall increase in complexity.
Professor Stefan Brunnhuber is calling for a new, green Bretton Woods – an approach which accepts these new realities and updates the spirit of the initial Bretton Woods idea. New forms of international rule-based collaboration, new and unorthodox financial engineering mechanisms and new institutional players will be needed to manage, hedge and finance it all.
We finally need to realise that the international monetary system is a public good. Not a private enterprise with limited liability, nor a lawless land where anybody can do whatever they want, but a common agenda that we all depend on, whether we like it or not.
This new, green, updated Bretton Woods agenda would respect past achievements, criticise flaws and move beyond the current financial architecture in order to address and account for these new realities. It will need to comprise the following components:
We must acknowledge that we are living in a new era, which requires a new narrative that takes account of multilateralism and reconciles national interests and global commons. We must all be a part in a shared mission, in which the need for development, restructuring and dealing with external global shocks is considered, and these tasks are shared fairly and equally. Transcending conflicting political interests with a unifying agenda could achieve greater inclusivity, fairness and sustainability.
This also means transcending our traditional way of financing and funding development. Currently, we tend to transfer money via taxation, restructure our loans, pursue austerity policies via cutting public spending, privatise our commons and-or rely on generous philanthropy to solve problems.
This approach has had its successes, but it is too slow, too low in volume and too inaccurate to address the challenges that lie ahead.
Managing debt, nominated in external currencies, has become a key challenge, especially for emerging countries. Servicing debt undermines a country’s ability to meet its population’s healthcare, education and infrastructure needs. This has become an unresolved dilemma for almost half the global population. Where the growth rate of external debt exceeds that of domestic GDP, a vicious circle is created where countries are caught between servicing debt, responding to external shocks and managing uneven capital costs, population growth and people’s needs. A fair debt haircut and an adjusted debt relief campaign could help break this vicious circle.
Any fair reworking of finance must acknowledge and challenge illicit financial transactions: Fraud, tax evasion, corruption and black market activities erode our tax base, increase inequality and reduce growth and efficiency, leaving the public sector chronically underfunded and unable to manage public goods. New technologies, like distributive ledger technology, blockchains – including smart digital contracts – and AI-driven predictive algorithms will enable us not only to better manage capital flows but to channel them towards a greener future. Additional green taxonomies and regulatory efforts will help to prevent greenwashing and steer capital flows in the right direction.
The amount of liquidity required to transition our societies from fossil fuels to renewables is about ten times higher than historical precedents, such as the Marshall Plan after WWII, Germany’s reunification, official development aid to developing countries or the eastward expansion of the EU. A new international monetary system will be able to generate additional purchasing power above and beyond anti-cyclical spending, so that we can address the serial asymmetric shocks and negative externalities that lie ahead. Major measures will include reforms to the public banking sector, multilateral development banks, adjustments to the IMF’s special drawing rights, massive upfront funding of the WHO and new taxation schemes to address international capital flows, offshore and off-sheet transactions and ultra-high-speed trading.
Moreover, Central banks will become the lender and actor of last resort. New central bank digital currencies are already being introduced, which will be able to provide the liquidity needed to, first, hedge and de-risk private capital flows, especially in emerging countries, and, second, fund and manage global common goods. Additionally, central bank currency swaps would enable smaller countries to convert their currencies into convertible ones (such as USD, euro, yen or renminbi) in order to manage the burden of global common goods. We would then end up with an additional, conditioned, green convertible currency system that enables the currency diversification which is so desperately needed.
Above and beyond all efforts to increase our resource efficiency through research and technology, an upgrade to the investor–state dispute settlement, or ISDS, system so that international investors can no longer sue nation states to protect their foreign direct investments, but will instead be forced to share the systemic risks associated with those investments, which will change the playing field for international investors and governments. And, finally, a reform to the voting quotas of existing international organisations (ie, the UN, World Bank Group and IMF) will better reflect the new power dynamic in a multipolar world.
In summary: a new monetary agenda that goes beyond ad hoc collaboration has the potential not only to save costs and reduce damage but also to better manage the challenges of the 21st century than the original Bretton Woods agreement or any monetary non-system. From austerity and control to additional conditioned liquidity, from analogue to digital currencies, from fair debt relief to restructuring and development, from damage control and repair to preventive and restorative approaches, from new rules to adjusted voting quotas and taxonomies, a Bretton Woods 2.0 will ensure that our common future will no longer be driven by finance but will instead drive it, with new, almost unlimited, out-of-the-box financial engineering mechanisms, privateؘ–public partnerships, hedging instruments, state guarantees, currency swap agreements, loans, grants and funds.
This institutional collaboration to create an upgraded international monetary system has great potential to help the world community transition to a greener, more balanced and more secure future. But that potential has been almost entirely overlooked, even though it is probably the most powerful social mechanism that humans have ever invented. A new Bretton Woods agenda is not a panacea, but all aspects of a green global transformation in a multipolar world where new technologies are emerging depend in some way or other on an upgraded international monetary system that is more inclusive, balanced and effective.
To read more about the initiatives of the World Academy of Art and Science, you can either check out the academy’s website (link in the episode description) or read the book Financing Our Anthropocene or the forthcoming Towards a New, Green Bretton Woods, available online and in all good bookshops.
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