[DEBATE] : Bretton Woods II, with caveats - HaJoon

[Riaz K Tayob]

Bretton Woods II, with caveats Ha-Joon Chang

In setting out his agenda for Bretton Woods II, Professor Jeffrey Sachs 
has gone far. He proposes a Tobin tax ? a tax that has been a bete noire 
of the international financial industry and hence the rich country's, 
especially US, governments. His rejection of emission trading in favour 
of a straightforward carbon tax is also bold ? and in my view correct.

There are many things, however, that he could have added in relation to 
the reform of the international financial system. For example, he could 
have proposed the introduction of a country bankruptcy code that will 
enable orderly sovereign debt restructuring. He could have talked not 
only of expanding the capital adequacy requirement, but also making it 
counter-cyclical, rather than pro-cyclical as it currently is. More 
strict regulations of tax havens and private equity funds, which have 
greatly contributed to increasing opacity in the financial market, 
should also have been mentioned. He could also have talked about the 
credit rating agencies. In light of the critical role they play in 
today's financial system and the damages they have inflicted by blessing 
all those toxic assets, these agencies need to be much more heavily 
regulated or even replaced by an international public body. All of these 
would have been compatible with his overall approach, so the differences 
between us in this regard are a matter of emphasis rather than of 
principles.

However, I have some disagreements with Sachs's vision of how to reform 
the IMF, the World Bank, and the world trading system.

As for Sachs's proposal to turn the IMF into a proper 
lender-of-last-resort, I fear that a vastly strengthened IMF without a 
serious reform of its missions and its governance structure is likely to 
make things even worse. The IMF has caused great damage to developing 
(and former socialist) economies that have come under its tutelage by 
insisting on deflationary macroeconomic policies and premature financial 
de-regulation and opening up. Without abandoning these policies, an 
expanded IMF will be even more capable of inflicting damages on its 
client countries.

Of course, the IMF has been able to continue with these problematic 
policies because the suffering countries do not have much say in the 
running of the organisation. Therefore, the voting shares in the IMF 
(and in the World Bank) need to be re-distributed in favour of 
developing countries. This is partly to reflect the dramatic changes in 
international economic power balances since its foundation, but more 
importantly to increase the voice of the "customers" (mostly developing 
countries), when there is no competitor to whom dissatisfied customers 
can turn.

I am also not persuaded by Sachs's development strategy. I am all in 
favour of achieving the millennium development goals as soon as 
possible, but, unlike what its middle name suggests, the MDG is mainly 
about providing basic needs (health, education, and poverty reduction) 
and little about development in the true sense of the world ? expansion 
and upgrading a country's productive capabilities. True, making 
individuals more productive through better health and education will 
increase a country's productive capabilities, but there is only so much 
that can be achieved through individual improvements. A lot of 
productive capabilities in modern economies need to be accumulated in 
the form of organisational routines and institutional memories in 
(public, private, and cooperative) productive enterprises through actual 
production experiences. To put it graphically, what really distinguish 
the US or Germany, on the one hand, and the Philippines or Nigeria, on 
the other hand, are their Boeings and Volkswagens, and not their 
economists or medical doctors. The achievement of the MDGs is a noble 
goal in itself, but it is not the same as development.

Even more problematic is Sachs's support for "aid for trade" deal. In 
this deal, developing countries are asked to liberalise their trade in 
order to get the additional foreign aid that will enable them to make 
extra investment in skills and infrastructure. However, trade 
liberalisation will destroy, and make it very difficult to newly set up 
in the future, the very locales of accumulation of productive 
capabilities, namely, productive enterprises in high-productivity 
industries. This is why all of today's rich countries ? starting from 
18th century Britain and 19th century US and Germany, down to late 20th 
century South Korea and Taiwan ? did not first invest in education and 
skills in general and then developed new industries. They first set up 
new enterprises with the help of (intelligently used, of course) 
protectionism and subsidies and then went on to invest in skills and 
technologies that those industries needed, as I document in my book, Bad 
Samaritans. Asking the developing countries to give up those policy 
tools is telling them to give up development.

We need a more wide-ranging and more productivity-oriented approach than 
Sachs's, if we want to make the global system more productive, durable, 
and equitable. guardian.co.uk © Guardian News and Media Limited 2008

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