A new Bretton Woods must consider developing countries

While giving a speech last week, Kristalina Georgieva, the managing director of the International Monetary Fund (IMF), started and ended her speech with quotes from Franklin D. Roosevelt’s message to the Congress, asking them to adopt the Bretton Woods Agreement: “The point in history at which we stand is full of promise and danger.” The moment Georgieva is invoking, of course, created the institutions she is currently presiding over. The United Nations Monetary and Financial Conference was held in July 1944 at the Mount Washington Hotel in Bretton Woods, New Hampshire to set the post-war rules of the global economic order. Delegates from 44 nations created a new international monetary system. That was the beginning of what we often call the rules-based international order and the new global trading regime.

Today, we are witnessing a realignment on both sides of the Atlantic, the likes of which have not been seen since Bretton Woods and the establishment of NATO in 1949. It’s a Carbon Club taking shape this time, a new trading bloc with climate change as its focus. The course seems to be set, with only technicalities left to agree upon.

Mired in a galaxy far, far away, Turkey ended its spell of economic sensibility by changing its third Central Bank governor in two years, a process that wreaked havoc in FX markets, adding policy uncertainty to the existing pandemic-related uncertainties. John Kerry, the U.S. president’s Climate envoy, visited Europe and urged them against implementing carbon-related import tariffs and to leave them for the last resort. Yet a day after Kerry visited Brussels, the European Parliament endorsed a carbon border adjustment mechanism (CBAM) that put a tax on all imports to level the cost of producing those goods would incur inside the EU. The CBAM has started to move on to a system of new trading rules based on carbon neutrality everywhere on the planet. Henceforth, if you want to become part of the largest market in the world, you have to adopt new rules, and those rules are green. That’s the Carbon Club to you.

The Carbon Club is not only about climate and trade policy. It’s also about industrial policy and a new geopolitical tool. That’s also going to be a new arena for the technology race between the U.S. and China. The climate debate was the concern of nongovernmental organizations (NGOs) 20 years ago. Now it is the basis of the new order, the animating principle of the new global rulebook, if there is going to be one.

I think that the April 22 meeting hosted by U.S. President Joe Biden may give more signals about the formation of the Carbon Club. It may signal a second Bretton Woods meeting as well. All of the G20 have been invited, but Turkey is the only country among them that has yet to ratify the Paris Agreement, an essential treaty of the new Carbon Club.

Let me follow the fashion and also quote Franklin D. Roosevelt. In his speech at the opening of the Bretton Woods meeting in 1944, he said that “Economic diseases are highly communicable. It follows, therefore, that the economic health of every country is a proper matter of concern to all its neighbors, near and distant.” I hope that the Carbon Club does not deepen the technological and digital divide between the developed and developing countries. It has to include proper financial measures to deal with the costs of transition to carbon neutrality in countries like Turkey, where companies are highly indebted, bank balance sheets are problematic, and the CDS risk premiums and policy uncertainty are high. Otherwise, it will only deepen global inequalities, and we all know where that leads.