A China-dominated global order

Published: March 30, 2015
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The writer is a former caretaker finance minister and served as vice-president at the World Bank

The writer is a former caretaker finance minister and served as vice-president at the World Bank

The last time the economic baton was passed from one country, the Second World War was concluding. It was done in an orderly manner. In 1944, Great Britain, being one of the victors of the Second World War, was economically exhausted. The United States, having aided London in the war effort, had emerged as the leading world economy. Instead of letting the global economy evolve on its own, the victors decided to create a set of institutions to manage the evolution of the global economy. A conference was convened at a small town in the American state of New Hampshire.

The Bretton Woods Conference was held in 1944 with 45 countries and 730 representatives participating. It designed a new global and financial order. The Bretton Woods was a conference of the victors as the European part of the Second World War was reaching conclusion.

The global economy has now entered another phase of transition that to be managed in an orderly way requires both imagination and political will. This time around, the transition of the global economy is from a system dominated by one player, the United States, to a system which has two dominant economic powers with China having overtaken America as the world’s largest economy.

According to Mathew Bishop, a reviewer of the recent book on the Bretton Woods, The Summit, by Ed Conway, an opportunity for making the transition is being missed. “For many people, Bretton Woods stands for the rarest of moments: when governments and experts come together to restore order to a chaotic global economy,” wrote Bishop for The New York Times. “After the financial meltdown of 2008, the president of the World Bank and the financier George Soros joined Bill Clinton and Tony Blair’s earlier call for a ‘new Bretton Woods’. It didn’t happen. The world and America may yet come to regret it.”

For difficult-to-understand reasons, Washington has tried hard to stop China from setting up a new international development bank for which it will provide most of the initial capital. To date Beijing has pledged $50 billion to start up the Asian Infrastructure Investment Bank (AIIB) to finance the enormous needs of the fast developing continent to create the physical infrastructure it requires. It is fully recognised that the United States-dominated system of international finance created 70 years ago does not fully meet China’s needs. Beijing now sits on a mountain of cash reserves — about $4 trillion — which it would like to use for purposes other than buying United States treasuries.

It is interesting to note the nature of the politics behind Washington’s willingness to block the Chinese moves to carve out space for themselves in the international economic system after it has become clear that there are powerful elements in the United States which don’t want to share economic leadership with China. In November 2009 when President Barack Obama made his first visit to Asia, he started with a powerful speech at Tokyo’s Suntory Hall. There, he declared that Washington and Beijing should work together to guide international finance. It was a kind of G2 arrangement that would provide guidance for the global economy, the details of which would be worked out by the larger and more representative group of nations, the G20. But the American political right fought hard against any attempt to create a system in which their country did not have the dominant voice. Opposed on several other fronts by the same group — in particular its effort to kill the president’s attempt to create a national health system that would provide relief to the poorer segments of American society — Obama pulled back. On his next Asian visit, he made India his first stop and attempted to recruit New Delhi as its partner to block China. Dr Manmohan Singh, then the Indian prime minister, was reluctant to have his country cast in that role. However, his successor, Narendra Modi, a more assertive and ambitious politician, seems eager to be seen on the world stage with the American president.

That the large European nations led by Britain have decided to join Beijing in becoming the founding members of the AIIB means that the new institution will begin its life with wide international backing. Had Washington adopted a different approach, this effort by China could have become another ‘Bretton Woods moment’.

Published in The Express Tribune, March  30th,  2015.

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Reader Comments (11)

  • Mukund
    Mar 30, 2015 - 4:48AM

    The author is ignorant on how Indian foreign policy works. The Chinese premier was invited to India before Obama. India works with China on many global issues since we have overlapping interests.
    It looks like wishful fantasy on the part of Pakistanis to think India is with US (the “declining power” which it is not by the way) and Pakistan is with the emerging Superpower China!
    How are you going to cope when Modi visits China soon?!Recommend

  • Karlheinz (Germany)
    Mar 30, 2015 - 5:21AM

    No one lets go of power voluntarily. Its takes an act of great violence (WWI, WWII, etc.) to force a transition of global power. China has avoided conflict or a direct confrontation thus far but how long can it hold that position is an open-ended question.Recommend

  • Anjaan
    Mar 30, 2015 - 6:49AM

    India will emerge as the swing power and will be the king maker of the 21st century … !! … Recommend

  • Iqbal Abbas
    Mar 30, 2015 - 7:52AM

    The author is ignorant of India’s diplomacy of containing China. India works in wide areas of role in global affairs with China, much more than Pakistan. India’s trade with China is more than 70 billion dollars annually. India was one of the first country to be the founding member of China’s AIIB bank. India is also the member of BRICS, first to head as president of BRICS bank.Recommend

  • Tousif Latif
    Mar 30, 2015 - 10:46AM

    China has definitely achieved miracles.But as far as inngovations and inventions are concerned America is still far ahead.Countries like Pakistan and Greece have to fall back upon IMF.Over the years teams after teams of Chinese investors have visited Pakistan but investment is not pouring in.China still has to cover alot of ground and overcome many internal and external bottlenecks.Recommend

  • Vectra
    Mar 30, 2015 - 11:18AM

    AIIB cannot replace and become true competitor of IMF or WB as rightly said by Russia who casts doubt on AIIB despite much hype of AIIB but it was actually the BRICS NDB and CRA that will truly challenge the brettonwood institution as AIIB is more ASIA centric and will focus on infrastructure only while BRICS NDB has a much wider agenda and has focus on range of issues not just infrastructure.That is the reason why Russia joined very late terming AIIB is not much of help to Russia except on some oil and gas infrastructure funding and India terms its participation as mere symbolic and a moral gesture.UK joined because it intended to leave EU sometime may be in future.AIIB is and ASIAN entity whose main rivals is ADB rather than bretonwood institutions whose main rival is BRICS NDB and CRA whose membership will soon be opened to all UN members.Recommend

  • Vectra
    Mar 30, 2015 - 11:24AM

    AIIB cannot replace and become true competitor of IMF or WB as rightly said by Russia who casts doubt on AIIB despite much hype of AIIB but it was actually the BRICS NDB and CRA that will truly challenge the brettonwood institution as AIIB is more ASIA centric and will focus on infrastructure only while BRICS NDB has a much wider agenda and has focus on range of issues not just infrastructure.That is the reason why Russia joined very late terming AIIB is not much of help to Russia except on some oil and gas infrastructure funding and India terms its participation as mere symbolic and a moral gesture.UK joined because it intended to leave EU sometime may be in future.AIIB is an ASIAN entity whose main rivals is ADB rather than bretonwood institutions whose main rival is BRICS NDB and CRA whose membership will soon be opened to all UN membersRecommend

  • Vectra
    Mar 30, 2015 - 11:28AM

    AIIB cannot replace and become true competitor of IMF or WB as rightly said by Russia who casts doubt on AIIB despite much hype of AIIB but it was actually the BRICS NDB and CRA that will truly challenge the brettonwood institution as AIIB is more ASIA centric and will focus on infrastructure only while BRICS NDB has a much wider agenda and has focus on range of issues not just infrastructure.That is the reason why Russia joined very late terming AIIB is not much of help to Russia except on some oil and gas infrastructure funding and India terms its participation as mere symbolic and a moral gesture.UK joined because it intended to leave EU sometime may be in future.AIIB is an ASIAN entity whose main rivals is ADB rather than bretonwood institutions whose main rival is BRICS NDB and CRA whose membership will soon be opened to all UN members.Recommend

  • Rex Minor
    Mar 30, 2015 - 2:51PM

    Competition is always healthy for development and free economy. The emerging super powers of the future world have no other choice but to establish alternative institutions if current one do not give them the appropriate position.

    Rex MinorRecommend

  • harkol
    Mar 30, 2015 - 2:54PM

    The biggest significance of Brenton Woods conference was that US$ was adopted as global reserve & trade currency. This gave US immense power – much more than its military power. The premise at that time was that US would keep an equivalent amount of Gold in reserve to preserve the sanctity of US Dollar as global currency.

    USA Moved away from that plan and delinked US$ from gold. And yet, world did not move away from US$…

    Why did this happen?

    I suspect, there is more at play here than the economic might of USA. I believe it is the faith in a well functioning US democratic system that drives other nations to trust its currency. China may become No.1 economically, but it’s system is non-transparent and most nations won’t trust it. And as lone as US$ is world currency, USA will have massive say in the affairs of the world.Recommend

  • varuag
    Mar 30, 2015 - 4:50PM

    Bretten woods led to gold backed world reserve currency on the back of US controlling almost half of world GDP. Later US removed the gold standard and Kissinger mid-wifed the birth of the petro-dollar. With QE’s and currency wars and China’s massive imports of gold (it is already the top gold producer) along-with Russia’s new found love of the yellow metal, I am sure the Chinese have plans for a gold-backed-yuan. They have the 1985 Plaza Accords as a harbinger of what US did to the earlier economic challenger to their hegemony viz. Japan.Recommend

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