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Status quo

By Andrew Sheng (chinadaily.com.cn)
Updated: 2008-11-17 10:22

Special Coverage Exclusive: An Asian view of the global financial crisis

Contents:  Preface  A historical inflexion point  The macro question  The micro origins  Lessons for China and Asia  Back to basics  One world, three paths  Status quo  The rise of regional markets  Romance of the three regions  Conclusion

Although there are signs that there is some willingness to change, I think there is every chance that the status quo in the international financial order will continue.

The reason is very simple. The vested powers in the majority shareholders in G7 will not want to let go of power and the emerging markets are psychologically and institutionally not ready to share power.

The 1944 Bretton Woods framework was essentially a tradeoff between the opening up of global trade in exchange for finance for development under Pax Americana. There is currently little to trade off between the Emerging Markets and G8, because the surplus countries do not have an alternative to put their excess savings, except with the advanced markets.

Under globalization, debt is the connectivity, but if power is unequal, the creditor is hostage to the debtor.

In other words, I see relatively little change within the next five years to the present international monetary order. The advanced countries will ask the surplus economies to place more savings with the Bretton Woods institutions that will remain under their control.

The IMF and World Bank will continue to lend to help emerging markets in problems due to their excessive reliance on external financing. The dollar and Euro dominance will continue and the balance between the two will depend on their respective geo-political strengths.

To be continued...

The author is chief advisor at the China Banking Regulatory Commission and former chairman of the Hong Kong Securities and Futures Commission.