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Reform of financial system

(China Daily)
Updated: 2008-11-15 17:07

As leaders of the 20 largest economies gather in Washington DC to discuss a coordinated plan to deal with the global financial crisis, it is necessary to reassess the existing US dollar-dominated international financial system. It is a speculation-rife, supervision-lacking system.

After the collapse of the Bretton Woods System in the early 1970s, the US rushed to introduce the Jamaica System, which is still in effect, in an attempt to carry forward its financial dominance. The Jamaica System, strictly speaking, is not new, and it has elements of Bretton Woods.

Under this financial structure, the US has excessively indulged itself in the benefits, but has tried to shrink from its responsibility as the world's largest economy. The superpower's unrestrained issuance of dollars to bolster its unrestrained domestic credit consumption and its efforts to maximize its national interests by adopting policies, such as transferring financial risk and crisis to other countries, has added vulnerability to the international financial system.

An absolute authority always leads to corruption. The unchallenged hegemony of the US has contributed to its abuse of power and conduct.

Long ago the European Union proposed that the international community strengthen supervision over hedge funds, which mainly stem from the US, and serves as an important source of its financial capital.

The EU's recommendation has repeatedly been ignored by Washington. As an important prop of the Bretton Woods System, the International Monetary Fund (IMF), has long been utilized by the US as a tool to push for neo-liberalism worldwide.

While offering aid to some crisis-plagued emerging economies, the lame-duck organization has never given up its interference in the economic jurisdiction of recipients in contravention of the UN. This has plunged some of these countries into a worse economic situation, sometimes resulting in political and social upheaval.

Since the exposure of the US financial crisis, the IMF has remained idle and other international financial bodies, such as the World Bank and the Bank of International Settlement, due to serious defects, have also been unable to play their roles as creditors and effective monitors.

The current defective international financial system has been widely criticized, but no country can ignore the dominant role of the US in it.

However, the unprecedented international financial tsunami in a century we are experiencing, and the summit on the crisis, have offered a rare opportunity for some competing players to change the existing international financial establishment to their advantage.

The hegemonic status of the US is now under challenge from its friend on the other side of the Atlantic Ocean, the EU. For many years, the expanded EU has pushed for market integration among its members and accordingly consolidated its strength to rival the US. That can be seen by the rising status of the euro in international markets.

It has been elevated to a major international currency, but admittedly it still has a long way to go before dethroning the US dollar as the world's leading reserve currency.

Behind the euro there is no unified capital market, military or fiscal policy. European countries have different economic development levels and political preferences.

At the same time, the regional community is plagued by problems of immigration, and an aging population. All this present hurdles to snatching the world's No 1 financial status from the US.

The EU has also been a beneficiary of the US-manipulated international financial order. So it is not difficult to understand why up to now it has not proposed major reforms.

We look forward to some positive measures from the Washington summit but should not pin our hopes too high.

The author Jiang Yong is a researcher with the China Institute of Contemporary International Relations