Need for greater global financial competition
A good part of the world lay in ashes at the end of the Second World War. Rebuilding the world's economies and financial systems was necessary. Additionally the free world was being threatened by the Soviet Union's ambition to create a Stalinist world order, writes Prince Michael of Liechtenstein.
America took the lead to create a global financial framework at the 1944 Bretton Woods Conference in the US with the dollar as the leading currency. The International Monetary Fund (IMF) was founded at Bretton Woods with a mission to restructure the international payment system, promote growth and economic strength, investments, and particularly to stabilise exchange rates by providing funds in cases of balance of payments needs. Support from the IMF is linked to strict criteria.
The World Bank was founded at the same conference with a vision to reduce poverty. The US was the clear leader and the dollar the global currency.
These were some of the American measures which helped efficient rebuilding of the free world.
The Asian Development Bank was set up in 1966 as a copy of the World Bank with a similar mission – to fight poverty in Asia.
Like many outstanding systems, especially those with a somewhat monopolistic character, they will eventually need some competition to remain efficient.
Competition in global financial frameworks could be beneficial as it would force the institutions to innovate.
In July 2014, the so-called BRICS bank was created by Brazil, Russia, India, China, and South Africa. This was clearly a political move, attempting to break the West-dominated IMF and World Bank. The political motive for the move is counterproductive and defeats the purpose.
The Asian Infrastructure Investment Bank (AIIB) could be a different story.
It was formed in China in October 2014 with strong international participation including the UK, France, and Germany. It appears the US wanted to block this development and discourage its allies’ participation. However, with proper governance - and provided it is not politically misused by China - this institution could become effective.
It is likely to be followed by other institutions in various regions, bringing greater innovation and dynamics to the global financial system.
The financial systems shaped decades ago are now showing signs of weariness and a lack of innovation. The US could participate actively in various regions and lead by innovating global financial systems. The potential for innovation is large and should be unleashed. This could offer the US the opportunity to stay in the lead without blocking new developments. In the long term it is dangerous to protect a status quo.
Greater and sound competition which challenges the system could even give dollar leadership more strength and sustainability. It could enhance the impact of development and stabilisation measures, including the work of the IMF and World Bank.
A shift in global influence