World faces new Bretton Woods moment: Stiglitz

NEW YORK (Reuters) - World leaders meeting next week in Washington have an opportunity to recognize a new order that gives emerging economies a bigger stake in the global financial system, Nobel laureate Joseph Stiglitz said.

At the meeting of the Group of 20 rich and developing countries, Stiglitz believes the emerging markets stand an even chance of obtaining a bigger role in managing global financial affairs.

The task of redrawing the tattered 64-year old global financial system is perhaps as momentous a challenge as the one faced by leaders exhausted by World War II.

"This is a Bretton Woods moment where we ought to face up to not just the immediacy of the money (issues) but use this as an occasion to make some of the changes that we have needed for a long time and recognized," Stiglitz said in an interview with Reuters on Wednesday.

The current financial crisis has revealed weaknesses in the system, created at Bretton Woods in 1944, when a massive credit bubble in the U.S. housing market burst last year with regulators unable to stop the impact from spreading worldwide.

The present system limits management of world financial regulation to seven leading industrialized nations that make up the Group of Seven.

This is "totally inappropriate", given current economic conditions, said Stiglitz, a Columbia University professor, winner of the Nobel Prize for economics in 2001.

The former World Bank chief economist said a new financing system could be created in which cash-rich nations such as China or Saudi Arabia give more money to the International Monetary Fund and get a bigger say in the global financial institution in return.

That cash is eagerly sought to help grease the wheels of the global financial system that seized up when banks stopped lending to each other because of fears of hidden losses on bad U.S. mortgage related investments.

While developed markets are strapped for cash and facing recession, the IMF said at a meeting of Pacific rim finance ministers in Peru on Wednesday that emerging markets will fuel 100 percent of global economic growth next year.

The IMF, born at Bretton Woods, last week created a short-term financing facility for emerging market economies. It provides financing to countries that don't need to adopt the standard IMF lending program but are suffering from short-term liquidity pressures through no fault of their own.

POSSIBLE OUTCOMES

The meeting in Washington on November 14-15 could call for "a package that includes a social protection fund to help the poorest countries, support for small businesses," Stiglitz said.

Other fundamental reforms Stiglitz said might be floated include the creation of a global financial regulator.

"We have toxic products going across borders. Others might have assumed the U.S. did a good job of regulation. Clearly it didn't so you need to have somebody regulating the regulators, or oversight," he said.

Reforms of the global reserve system, bankruptcy law, global macroeconomic coordination, and global governance might also be under discussion.

"Behind all of this is reform of global governance, you know, who gets to make decisions. We basically had a system which was very U.S. or U.S./Europe dominated. That doesn't make sense in the world today," Stiglitz said.

"Part of the problem with the IMF is that its governance is very peculiar and out of kilt with the sources of liquid funds," he said.

MORE MONEY

British Prime Minister Gordon Brown and others have called on countries with "substantial reserves", such as China, to contribute more to the IMF.

Some think China, with nearly $2 trillion in foreign reserves, should do more for emerging markets at a time when the IMF's overall funding capacity appears limited and global growth is most robust in the developing world.

China has been cool to the idea as it grapples with its own economic slowdown, albeit from enviable levels of nearly 10 percent.

In April, World Bank data showed that 5 out of the 12 largest economies in the world are from the developing world, with China in second place and India in fourth.

But when the IMF overhauled its voting structure earlier this year, many argued that it didn't go far enough to make a significant difference for countries such as these.

"That is why it is not credible to think that China and the Middle East (will contribute). They may do it in the end but it makes much more sense to think of a new credit facility reflecting the balance of financial power that exists in the world today," said Stiglitz.

"It is the old guard saying can we maintain our power using other people's money. So, if I were the U.S. or the UK I could understand why it would be in their interest and they may succeed. But if I were China or the Middle East, it wouldn't make a lot of sense to me," he said.