The Brandt Proposals: A Report Card
MONEY AND FINANCE
The Brandt Reports noted that the global economy set off on a daredevil track when it adopted the flexible exchange rate system in 1971. Previously, nations could ensure stable rates because their currencies were convertible into gold at a fixed rate.
The new system – or rather, non-system – has been a disaster (as the British economist John Maynard Keynes had warned in his proposals for an International Clearing Union and his negotiations at the Bretton Woods conference in 1944.)
Floating exchange rates have, for the most part, benefited developed countries, while creating waves of recession, currency instability, and financial risk for the rest of the world. Unregulated financial markets cause erratic fluctuations in exchange rates, as private capital travels with the speed of a keystroke from one country to another in search of safety and profit. This volatility was a primary concern of the Brandt Commission, because wild currency swings alternately cause speculative bubbles, then abrupt shocks, which hit developing economies especially hard.
When a developing country is in debt, it struggles to meet its interest payments, let alone pay its principal. As massive flows of cash abruptly leave a country, or when global interest rates or inflation suddenly spike upwards, the interest payments of an indebted country can rise astronomically. Investment drops off, imports are cut back, trade credits are lost, and growth rates fall. As the Brandt Reports pointed out, recession in debtor nations has a subsequent deflationary impact on creditor nations.
The Brandt Reports proposed reforms in the world monetary system to address exchange rates, the reserve system, liquidity, and adjustment problems in financially troubled nations. The Brandt Commission stressed the need for global financial sustainability.
"Our proposals in the monetary field keep in mind the necessity of a more orderly monetary system for the world economy as a whole, as well as for meeting the needs of the developing countries. Greater stability in the exchange rate system encourages both trade and investment" (N-S, 74).
The Commission also suggested that the role of the World Bank and the International Monetary Fund be retooled, and that overall management of the global economy be undertaken with the full participation of the international community. No major reforms have occurred. The World Bank, which is owned by 181 member nations, finances massive industrial and infrastructure projects for long-term structural adjustment in developing countries – public works such as roads, dams, and pipelines. The IMF, owned by 182 nations, provides temporary loans to countries that face shortages in foreign exchange. Instead of policies emerging from a consensus of member nations, however, voting power in both institutions is based on the size of a country's financial contributions. Since G-7 nations are the largest donors, plans and procedures at the Bank and the Fund reflect their foreign policy objectives.
Under the original mandate of the Bretton Woods Conference in 1944, these two institutions were not created to be catalysts for the privatization of national public assets, but that is one of the missions they have recently assumed under the influence of global monetarism. World Bank programs have been widely accused of subsidizing corrupt governments, contributing to poverty, and destroying the environment. IMF loans are well known for their fine print – terms which require a nation to divert its monies out of public employment, welfare, pension systems, education and healthcare, and into debt repayment and maintenance of exports. Somewhere along the line, the meaning of development – enabling the poor and dispossessed to realize their potential – is lost in the international push for high returns on investment and productivity.
In the late 1990s, the World Bank and the IMF each conceded that its programs could be better targeted to actually reach the poor. Both the Bank and the Fund are under new management, which has acknowledged that simply opening borders to trade and liberalizing capital markets is not enough to help developing nations. By 2001, however, both institutions seemed to be singing a different tune, announcing plans to increase private sector development and decrease public lending in developing nations.
The charters of both institutions – nearly sixty years old – need to be reexamined and overhauled to meet the realities of the twenty-first century and restore the credibility of these global financial pillars. Greater representation and voting power from developing countries would be a start. A more open public decision-making process would also help. Perhaps, in time, the Bank and the Fund could be trusted to expand their scope of activity, but both institutions still need vast restructuring, both in philosophy and in technique. The very nature and purpose of development must be reformulated, balancing financial considerations with human needs. For nations too poor to save themselves, real development is needed far more than austerity programs or balanced budgets.
The micro-credit movement, which helps people without access to formal credit sources, particularly poor women, is one of the great breakthroughs of the last twenty years. Millions of poor people in villages and remote areas have launched small businesses, staked to a new start by loans that are miniscule in comparison with World Bank budgets. Though micro-credit banks are grassroots enterprises with no economy of scale, they can teach the bureaucratic lending agencies a valuable lesson: small loans are a key to development. Above all, the world's major financial development institutions need to distinguish clearly between projects geared to strengthen markets, and those that actually satisfy the everyday concerns of impoverished people.
Citizens of developing countries often cry, "Save us from development!" –namely, the insensitive policies imposed on the poor by the rich nations. In the end, throwing money at the problem of poverty to 'fix' it serves no one.
As the Brandt Commission urged,
"We must not surrender to the idea that the whole world should copy the models of highly industrialized countries. One must avoid the persistent confusion of growth with development, and we strongly emphasize that the prime objective of development is to lead to self-fulfillment and creative partnership in the use of a nation's productive forces and its full human potential" (N-S, 23).
The Brandt Commission proposed the creation of an international advisory body to apprise governments, as well as the UN General Assembly and its organs, on the progress of the various international bodies in the field of development. This type of capability is needed more than ever to help coordinate an international relief program for poor countries, and pave the way for monetary and financial restructuring at the global level.
A global economy also requires a global currency, primarily to avoid the contraction caused by declining liquidity and rising national deficits. For the world economy to grow, international cash flow must expand along with it. At present, developed nations maintain liquidity through access to private capital markets and by issuing new currency, but developing nations have little access to private capital and must borrow from the IMF to maintain adequate credit and cash flow.
The Brandt Commission believed that gold and paper have operated as national reserves mainly out of tradition and could be phased out gradually. Brandt envisioned the inauguration of a world reserve system, using a unique IMF account as the principal reserve asset. The Special Drawing Right, created by the IMF in 1968, is a line of permanent credit through which national central banks, treasuries, and the Bank for International Settlements obtain foreign currencies to clear and settle outstanding balances. Since the SDR is the world's only means of meeting international payments that has been authorized through international contract, "The SDR therefore represents a clear first step towards a stable and permanent international currency" (N-S, 209).
There would be many advantages to a universal currency. The international money supply would be governed by global demand, rather than state decree. Holders of national currencies would enjoy greater convertibility and reduced risk, business would benefit from uniform price signals, nations would reduce the costs of maintaining separate reserve currencies, and the world would avoid the instability of the present system of competitive national currencies.
Moreover, the distribution of new international liquidity would be geared mostly toward developing nations, where the adjustment burden is the highest and the need for credit expansion the greatest. This would vastly enhance the overall adjustment process of the international monetary system.
No steps have been taken toward the creation of a global reserve system or the phasing out of national currencies since the Brandt Commission made its proposals. Although the IMF has expanded its reserve currency, SDRs are still greatly overshadowed by the volume of national reserve currencies and account for only a fraction of total world credit and cash flow. The Central Banks of the G-7 nations believe they can cover shortfalls in international liquidity and the global balance-of-payments process with their own currencies. As a result, developing nations suffer from a contraction of available finance, erratic exchange rates, unstable reserves, and balance-of-payments deficits, all of which are magnified during periods of recession.
Developed nations are in denial of the need for international development, and appeals for justice have not been heard above the bustle of the global marketplace. Regulatory efforts by finance ministers, bankers, and international organizations have not been able to tame the velocity and volume of capital exchange in markets increasingly integrated through high-speed technology. The society of nations is hostage to the uncertainties and fluctuations of major currencies. The result is the financial anarchy we have at present – a global economy that is not globally managed.
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