op_fofack2_Eko Siswono ToyudhoAnadolu Agency via Getty Images_indonesiacurrencyrupiah Eko Siswono Toyudho/Anadolu Agency via Getty Images

Decolonizing Global Finance

Born in the mid-1940s to serve the interests of the world's leading industrial powers at the time, the Bretton Woods system has long perpetuated and deepened inequalities between advanced economies and the developing world. An overhaul is long overdue.

CAIRO – Today’s international monetary system emerged from the Bretton Woods Conference of 1944, when imperial powers still ruled most of the Global South. It was conceived by and for the benefit of just a few wealthy countries, and it has served them well. Though the Bretton Woods system has occasionally been adjusted to reflect the acceleration of globalization and countries’ deepening economic interdependence, it has amplified business-cycle fluctuations, impeded economic catch-up by poorer countries, and perpetuated the dichotomy of developed and developing countries.

If the world economy is to avoid deeper fragmentation in this new age of multipolarity and geopolitical competition, major reforms will be needed to correct the financial system’s structural birth defects. That is why Indonesian Finance Minister Sri Mulyani Indrawati has taken aim at the high costs associated with over-reliance on just a few reserve currencies, making the case, during Indonesia’s G20 presidency in early 2022, for replicating the kind of local-currency settlement (LCS) arrangements that her country has long championed. Doing so would help many countries manage shocks, especially in the context of emerging economies that face potentially severe capital outflows whenever major advanced economies like the United States tighten monetary policy.

This problem is all too common: during the 2013 “taper tantrum” (a market panic following the Federal Reserve’s announcement that it intended to reduce its monthly bond purchases), the Indonesian rupiah suddenly lost more than 20% of its value. And now there are even greater concerns that quantitative tightening and aggressive interest-rate hikes by systemically important central banks will drive massive capital outflows and trigger a new bout of currency gyrations and sovereign-debt crises.