by George Soros, The Japan Times, Nov. 8, 2009
NEW YORK — Twenty years after the fall of the Berlin Wall and the collapse of communism, the world faces another stark choice between two fundamentally different forms of organization: international capitalism and state capitalism.
The former, represented by the United States, has broken down, and the latter, represented by China, is on the rise. Following the path of least resistance will lead to the gradual disintegration of the international financial system. A new multilateral system based on sounder principles must be invented.
While international cooperation on regulatory reform is difficult to achieve on a piecemeal basis, it may be attainable in a grand bargain that rearranges the entire financial order.
A new Bretton Woods conference, like the one that established the international financial architecture after World War II, is needed to establish new international rules, including treatment of financial institutions considered too big to fail and the role of capital controls. It would also have to reconstitute the International Monetary Fund to reflect better the prevailing pecking order among states and to revise its methods of operation.
In addition, a new Bretton Woods would have to reform the currency system. The postwar order, which made the U.S. more equal than others, produced dangerous imbalances. The dollar no longer enjoys the trust and confidence that it once did, yet no other currency can take its place.
The U.S. ought not to shy away from wider use of IMF Special Drawing Rights. Because SDRs are denominated in several national currencies, no single currency would enjoy an unfair advantage.
The range of currencies included in the SDRs would have to be widened even if some of the newly added currencies, including the renminbi, are not fully convertible. This would let the international community press China to abandon its exchange-rate peg to the dollar and be the best way to reduce international imbalances. The dollar could still remain the preferred reserve currency, provided it is prudently managed.
One great advantage of SDRs is that they permit the international creation of money, which is particularly useful at times as now. The money could be directed to where it is most needed. A mechanism that allows rich countries that don’t need additional reserves to transfer their allocations to those that do is readily available, using the IMF’s gold reserves.
Reorganizing the world order will need to extend beyond the financial system and involve the United Nations, especially Security Council membership. That process needs to be initiated by the U.S., but China and other developing countries ought to participate as equals. They are reluctant members of Bretton Woods institutions, dominated by countries no longer dominant economically. The rising powers must be present at the creation of this new system to ensure that they will be active supporters.
The system cannot survive in its present form, and the U.S. has more to lose by not being in the forefront of reforming it. The U.S. is still in a position to lead the world, but without farsighted leadership, its relative position is likely to continue to erode. It can no longer impose its will on others, as George W. Bush’s administration sought to do, but it could lead a cooperative effort to involve both the developed and the developing world, thereby re-establishing American leadership in an acceptable form.
The alternative is frightening, because a declining superpower losing both political and economic dominance but still preserving military supremacy is a dangerous mix.
We used to be reassured by the generalization that democratic countries seek peace. After the Bush presidency, that rule no longer holds, if it ever did. In fact, democracy is in deep trouble in America. The financial crisis has inflicted hardship on a population that does not like to face harsh reality.
President Barack Obama has deployed the “confidence multiplier” and claims to have contained the recession. But if there is a “double dip” recession, Americans will become susceptible to all kinds of fear-mongering and populist demagogy. If Obama fails, the next administration will be sorely tempted to create some diversion from troubles at home.
Obama has the right vision. He believes in international cooperation, rather than the might-is-right philosophy of the Bush-Cheney era.
The emergence of the Group of 20 as the primary forum of international cooperation and the peer-review process agreed in Pittsburgh are steps in the right direction. What is lacking is a general recognition that the system is broken and needs to be reinvented.
The financial system did not collapse altogether. The Obama administration made a conscious decision to revive banks with hidden subsidies rather than to recapitalize them on a compulsory basis. Those institutions that survived will hold a stronger market position than ever, and they will resist a systematic overhaul. Occupied with many pressing problems, Obama is unlikely to give reinvention of the international financial system his full attention.
China’s leadership needs to be even more farsighted than Obama’s. China is replacing the American consumer as the motor of the world economy. Since it is a smaller motor, the world economy will grow slower, but China’s influence will rise very fast.
For the time being, the Chinese public is willing to subordinate its individual freedom to political stability and economic advancement. But that may not continue indefinitely — and the rest of the world will never subordinate its freedom to the prosperity of the Chinese state.
As China becomes a world leader, it must transform itself into a more open society that the rest of the world is willing to accept as a world leader. Military power relations being what they are, China has no alternative to peaceful, harmonious development. Indeed, the future of the world depends on it.