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Sunday, September 8, 2024

Bretton Woods should heed the cries for fair play or go, how China can help reshape the global financial system

 Is Bretton Woods fit for the 21st century?


America is financed by the rest of the world because of the hegemomic of the US dollar.

The world's largest economy has moved from a giver of global public goods to a taker of global resources.



Probably the best way to increase global funding is to raise the capital of the global multilateral development banks like the World Bank, Asia Development Bank, etc.

In July 1944, delegates from 44 countries gathered in a UN-sponsored conference in Bretton Woods, New Hampshire to decide on a post-World War II monetary and financial order. 

In the closing speech of the gathering, then US Treasury secretary Henry Morgenthau concluded that the conference had succeeded in addressing the twin “economic evils – the competitive currency devaluation and destructive impediments to trade” that led to the war.

To prevent competitive devaluation, the Bretton Woods conference established the fixed but adjustable exchange rate system, which was based on the US dollar linked to gold and capital controls, securing funding from a newly created World Bank and the International Monetary Fund (IMF). 

The global free trade mechanism was negotiated first through the General Agreement on Tariffs and Trade, which decades later became the World Trade Organization.

The Bretton Woods negotiations were led by the US chief delegate Harry Dexter White and the eminent British economist John Maynard Keynes. Keynes argued unsuccessfully for the creation of an new international currency called the bancor, whereas the United States preferred to use its own currency.


In 1944, the US had the largest share of world GDP and was a major creditor to economies suffering from the destruction of war. It is no surprise that the Bretton Woods order was largely US-led and designed.


This Bretton Woods structure lasted until 1971, when rising US fiscal and trade deficits led US President Richard Nixon to delink the US dollar from gold at the fixed price of US$35 to one ounce of gold. 

After flexible exchange rates became the global norm, the US continued to be financed by the rest of the world because of the hegemonic position of the US dollar. It was protected by the might of the US military and its status as the strongest economy, including being the consumer of last resort.

Eighty years later, the US share of world GDP has been pared down to 26 per cent by current exchange rates but the US dollar remains as mighty as ever.

People walk past an image of US dollar bills outside a currency exchange bureau in downtown Nairobi, Kenya, on February 16. Photo: Reuters
People walk past an image of US dollar bills outside a currency exchange bureau in downtown Nairobi, Kenya, on February 16. Photo: Reuters

Unfortunately, having the US dollar act as the global reserve currency is both a blessing and curse. The US is able to fund its fiscal and trade deficits easily because the rest of the world prefers to hold the US dollar.

But running protracted deficits means that the US net liability to the rest of the world is now US$21 trillion, or about 20 per cent of world GDP, with a gross sovereign debt of US$35 trillion, or roughly one third of world GDP. Fiscal debt cost is rising as interest expenses will rise from 3.4 per cent of GDP in financial year 2025 to 4.1 per cent by 2034.

The irony is that the world’s largest debtor absorbs more of the world’s natural and financial capital that encourages global consumption to drive growth. Since increased levels of consumption ultimately generates more carbon emissions, the current model is neither ecologically nor financially sustainable.

To address these global imbalances, the United Nations has suggested that a “just transition” requires US$2.4 trillion annually to fund clean energy and climate resilience. Where is this money going to come from?


What is climate finance, and why is it crucial to the global energy transition?

This is both a flow and a stock problem. The annual shortfall, or flow, can either be funded from an increase in taxation or a cut in spending. The stock issue is whether there is enough wealth to be taxed or used to fund the needed climate action.
There is growing momentum behind an initiative proposed by French economist Gabriel Zucman, in which a minimum wealth tax of 2 per cent would raise US$200-US$250 billion per year globally from 3,000 billionaires who currently pay little to no tax. Current evidence suggests ultra-high-net worth individuals have an observed pre-tax rate of return to wealth of 7.5 per cent on average per year during the last four decades, while the current effective tax rate is equivalent to roughly 0.3 per cent of their wealth.

Alternatively, the Austrian Institute for Economic Research thinks that a global financial transactions tax of 0.1 per cent could yield between US$238 billion and US$419 billion per year. Needless to say, the rich who control the electoral process in countries across the world will not allow such tax increases.



There are two big-ticket items in global fiscal spending which could be cut. The largest is subsidies on fossil fuels, which were US$7 trillion or 7.1 per cent of global GDP in 2022. On top of that, global military expenditure was US$2.4 trillion in 2023.

Perhaps the best way to increase global funding is to raise the capital of the global multilateral development banks such as the World Bank and Asian Development Bank. If the countries which control the special drawing rights of the IMF can apply their US$650 billion in 2021 to increase the bank’s capital by eight times the leverage, these multilateral development banks can increase their lending by about US$5 trillion.


However, doing so would require these countries to agree that this is a priority, which could be unlikely given the current global atmosphere leaning towards protectionism and isolationism.


In short, the 21st century requires multilateral cooperation in dealing with mutual existential challenges involving climate warming, social imbalances and serious polarisation. If the Bretton Woods framework does not serve the Global South because the established powers are unwilling to reform it, do not be surprised if a new set of institutions rise to replace it.

Andrew Sheng
Andrew Sheng is a former central banker and financial regulator, currently distinguished fellow at the Asia Global Institute, University of Hong Kong. He writes widely on Asian perspectives on

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Open questions | French economist Marc Uzan on how China can help reshape the global financial system

With the US-led financial consensus at a crossroads, economist Marc Uzan says China has role to play in systemic reform

French economist Marc Uzan is executive director and founder of the Reinventing Bretton Woods Committee, a non-profit organisation established in 1994 to address issues related to the world’s financial architecture. He has been working closely with central banks and finance ministries around the world, as well as international organisations such as the International Monetary Fund and the Group of 20, to bring stakeholders together to attempt to fix the system.

In this latest interview in the Open Questions series, Uzan reflects on the decades of change since the paradigmatic Bretton Woods conference in 1944, and the role China and other emerging economies will play in the global financial system during an era of heightened unilateralism and confrontation. This interview first appeared in SCMP Plus. For other interviews in the Open Questions series, click here.
As suggested by the name of your organisation, the Reinventing Bretton Woods Committee, why did you think that the Bretton Woods system should be restructured back in 1994? Can it be?

This question brought a multitude of thoughts about the objectives of the 44 nations whose representatives gathered at Bretton Woods, New Hampshire, in the summer of 1944 to establish a new economic order.

The world has changed considerably since then. Instead of a system of fixed exchange rates among major currencies, we now have a mixed system with major floating currency areas but fixed rates among smaller countries. At that time, we had capital controls, and now we are a global financial market. And from a small group of 44 countries that became the founding members of the International Monetary Fund (IMF) and Worl 

U.S. debt just hit $35 trillion. Is it putting the global economy at 

risk ...

This nation’s gross cumulative debt has hit $35 trillion — a number so large, the International Monetary Fund warns that it’s putting the entire global economy at risk. 
https://www.marketplace.org/2024/08/13/u-s-debt-just-hit-35-trillion-is-it-putting-the-global-economy-at-risk/
The National Debt is now more than $35 trillion. What does that mean?

Saturday, September 7, 2024

China aligns with Africa

 
Leaders hold summit on deepening ties in a divided world

Strong bonds: African leaders applauding Xi (centre) after his speech at the opening ceremony of the Forum on China-Africa Cooperation in Beijing’s Great Hall of the People. — AFP

President Xi Jinping has vowed to provide Africa with $50 billion in financial support over the next three years and strengthen military cooperation in an effort to deepen China's relations with the continent. Xi outlined his policy goals at the opening ceremony of the Forum on China-Africa Cooperation.

Dozens of African leaders gathered in Beijing for a summit that signals China’s influence in a continent that it hopes will be a key ally in pushing back against a US-led global order.

Chinese President Xi Jinping promised the leaders billions of dollars in loans and private investment over the next three years and proposed that relations with all African countries that have diplomatic ties with China be elevated to the “strategic” level.

“We have always supported each other, setting an example for new international relations,” he said at the opening of the Forum on China-Africa Cooperation.

Since the forum’s inception in 2000, China has become a major player in Africa, investing in mining, infrastructure and development under Xi’s Belt and Road initiative.

African leaders, while welcoming China’s support, are pushing for aid that aligns with their goals of industrialisation and expanding agricultural exports to address trade deficits.

Xi outlined 10 “partnership actions” that included training for African politicians and future leaders, a further opening of the Chinese market, agriculture demonstration areas, vocational and technical training, green energy projects and 1 billion yuan (RM608mil) in military grants.

“While commending the overall progress so far achieved, we also appreciate the announcement of further areas of partnership actions,” said Tanzania’s President, Samia Suluhu Hassan, speaking on behalf of eastern Africa.

“We salute a new characterisation of China-Africa relations.”

Xi said China would eliminate tariffs on products from most of the world’s poorest countries, including 33 in Africa, in an expansion of existing tariff exemptions.

The relationship has moved beyond trade and investment to take on political overtones as China seeks allies in Africa and elsewhere to define the norms governing global economy and how countries interact with each other. — AP

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Friday, September 6, 2024

'Use AI to counter AI': Experts call for upgraded tech, system to counter AI-powered cybercrimes amid deepfake scandal

 

AI technologies Photo: VCG

Experts call for attention and countermeasures to prevent cybercriminals from using new technologies such as artificial intelligence (AI) powered deepfake technology amid growing concerns over the issue around the world. 


Numerous chat rooms suspected of creating and distributing deepfake pornographic material with doctored photos of ordinary women and female service members have been reportedly discovered on messaging app Telegram recently, with many of the victims and perpetrators known to be teenagers, The Korea Times reported last week.

Telegram had removed certain deepfake pornographic content on its platform and apologized for its response to digital sex crimes, the Yonhap News Agency reported Tuesday citing South Korea's media regulator.

The issue has raised outrage among South Korean netizens, which soon spread to its Chinese neighbors after some South Korean netizen brought it to Chinese social media platforms.

But it is just the tip of the iceberg of the Telegram's deepfake porn scandal. On August 28, a court in Paris filed a charge against Pavel Durov, 39-year-old Russian billionaire and founder of Telegram, for being complicit in the spread of images of child sexual abuse, as well as a litany of other alleged violations on the Telegram messaging app.

While Durov responded mockingly to the charge by changing his Twitter handle to Porn King, global scientists, governments and regulators view the issue as an urgent alert for them to strengthen measures to prevent cybercrimes powered by new technologies.

Deepfake refers to a kind of technology that uses a form of AI technology called deep learning to make images of fake events, hence the name deepfake.

The core principle of deepfake technology is to animate 2D photos using specific image recognition algorithms or to implant a person's face from a photo into a dynamic video, The Beijing News reported citing an industry observer named Ding Jiancong.

Recently, voice synthesis has also gradually been incorporated into the concept of deepfake. With the gradual maturity of AI large model technology in recent years, some AI image generation models, while pursuing greater realism, have inadvertently become accomplices in AI face-swapping or AI nudity, Ding said.

For instance, the well-known large model Stable Diffusion was developed with a one-click nudity feature, which once became widespread. Although the model later modified its related functions to curb such behavior, the open-source nature of the technology has already opened a "Pandora's box," making it difficult to close again, Ding warned.

Apart from the new deepfake crime, there are also two other types of risks brought about by new technologies, Xiao Xinguang, chief software architect from Chinese cybersecurity company Antiy, told the Global Times.

First, new technologies will drive the escalation of traditional threats and risks. For example, in cyberattacks aimed at stealing information or targeted ransomware, AI technologies can significantly assist throughout the entire attack process, including enhancing the efficiency of discovering attack vectors and automating attack activities, according to Xiao.

Second, the infrastructure of new technologies will become targets of exploitation. Large model platforms are becoming new hubs for information assets, and the entry points for large model applications are also becoming new exposed surfaces that are vulnerable for attacks, Xiao said.

The expert believed that with the advancement of AI technology, it is unrealistic to stop people from using AI to generate fake videos or images. Instead, it will be more effective to have strict regulations over the dissemination of technology.

Xiao was echoed by founder and chairman of 360 Security Technology Zhou Hongyi. When talking about the threats brought about by AI technologies at a forum held in North China's Tianjin municipality on Wednesday, Zhou said that "we must use AI to counter AI."

"AI technology is profoundly affecting various industries, bringing opportunities for the development of new productive forces, but also bringing many new security challenges. It is necessary to reshape security with AI and to create security large models and reshape security products with specialized large model methodologies, which will reform the security industry," Zhou said.

Strict regulations and law are also necessary. AI technology platforms should have reviews for the content uploaded and generated, and users should be required to register with their real names. There should also be severe crackdowns on tools or websites that support illegal activities, experts noted.

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