In the intro, give a brief background of Bretton Woods system as well as the advent of new financial system in the eastern part of the World.
In the 1st part of the answer discuss the issues with these old institutions like IMF, WB etc.
Briefly discuss some of the new financial institutions and how are they going to impact the older ones.
In the way forward, suggest governance and policy reforms in these old institutions and end the answer with decent conclusion. Try to be specific with your solutions and avoid general statements
The current global financial governance system is large and complex. Although having experienced dynamic changes and reforms, the Bretton Woods system established after the Second World War still shapes the global financial and economic order. The International Monetary Fund (IMF) and the World Bank, the multinational institutions of the Bretton Woods system and ADB lead the development lending and international financial regulations
Issues with IMF, World Bank and ADB
Both these institutions are accused of being undemocratic, not reflecting the present economic realities of the world and propagating the interests of the western countries. Although China is the biggest economy in Asia, the ADB is dominated by Japan; Japan’s voting share is more than twice China’s and the bank’s president has always been Japanese. Therefore there is a need to change the governance reforms in these institutions.
• The global financial system has been facing many problems. The initial signs of the system having reached a crossroads came during the 1997 Asian Financial Crisis when many Asian countries objected to IMF interventions and played with the idea of setting up an Asian Monetary Fund.
• The problems persisted however, and after the global crisis in 2008, the need for reform became ever more obvious to many. China and other emerging economies wanted to re- evaluate the existing international financial governance structures, especially the issues of
the undervalued quota shares of China and other emerging countries in the IMF and the World Bank.
But these suggestions encountered strong resistance. The 2010 reform package to reform the Bretton Woods institutions by offering emerging economics a larger voting share, for example, were stymied for years by the US congress.
New financial institutions:
The challenges facing the current global financial governance system also form the background for the establishment of the AIIB and NDB.
Both of these reflect the present realities of the world and have more democratic governance structure.
What will be the impact of new institutions on older ones
• However, as matters now stand, the impact of these new institutions on the global financial governance may nevertheless be limited. This is because China has explicitly positioned AIIB as a multilateral development financing bank investing in infrastructure and other productive sectors. The areas of ADB, WB and IMF are different in this respect, which focus on poverty alleviation, gender equality, environment protection, and exchange rate stability. However NDB focuses on ensuring exchange rate stability.
• Therefore their role largely is to supplement existing multilateral financial institutions and invest in those areas and sectors that had been neglected, so as to meet new dynamic changes in global financial markets.
• As the old and new institutions does not compete with each other, the impact on governance will not be direct. But, the symbolic importance of countries, neglected in present system, coming together will be a great force for reforms.
• The democratic governance of NDB (the responsibilities related to functioning of the bank are spread amongst the member states. So while China will host the headquarters of the NDB in Shanghai, the regional headquarters will be located in South Africa.
• Similarly the first President of the Bank will be from India, the First Board of Governors from Russia and the first chair of Board of Directors from Brazil.) will have its own impact.
• As the heft of these countries grow, they will be able to put greater pressure and exact more reforms.
It is imperative for any institution to reflect the ground realities, otherwise it stands chance of losing ground. Since finances and economics are related to strategic calculations and balance of power, western world will be more willing to cede ground to democratic forces in Bretton Woods institutions and ADB rather ceding ground to China. This should bring in more reforms.