ARI SHAPIRO, host:
The G-20 summit comes after Western countries and some developing nations passed bailout packages in hopes of limiting the economic damage. Simon Johnson came to our studios to give us a summit preview. He's a former chief economist at the International Monetary Fund, and he's a senior fellow at the Peterson Institute for International Economics. Simon, how optimistic is it to hope that this G-20 meeting could actually produce a new global economic framework?
Professor SIMON JOHNSON (Entrepreneurship, Sloan School of Management, MIT; Senior Fellow, Peterson Institute for International Economics): Well, I think that some of it is for appearances. I do think the Europeans asked for a summit - a grand summit, if you like - on the crisis, in part to look busy and also to put some of the blame very publicly on the United States. I think the U.S. sort of came back at them and has made it - or just could be a bit more substantive than the Europeans were initially planning.
Once you come into a summit, once you show up in Washington, you don't really want to come empty-handed. And we've got some moves on the U.S. side. The Germans announced a fiscal package. The Chinese put a whopping great package on the table on Sunday. And it will be awkward if other countries don't follow those moves.
SHAPIRO: Tell me about the tensions here between the Western world and the developing world. Because it sounds as though the Europeans and the Americans are to some extent taking the lead on this, and yet countries like China and India remain major forces. How does that tension play out?
Professor JOHNSON: Well, the traditional tension is exactly between these established industrialized countries - the ones who founded the system back in 1945 and joined it very, very early - and, on the other hand, emerging markets that have risen recently. They've grown much faster and become much more powerful economically and politically. So these two sides, traditionally jockeying for position. But there are some new fissures opening up. In particular, the U.S. and the Europeans are not as close as they used to be. The Europeans, some of them will want to pursue a lot more regulation, for example. The U.S. not so much.
The U.S. and China actually may have more emerging convergence of interests. So the U.S. and China could together be asking, for example, for less voice from the Europeans. The Europeans are overrepresented at the International Monetary Fund, for example. That's a legacy from, you know, 40 years ago. But the U.S. and China both have an interest in having a smaller group, a more focused group, a group in which the Europeans have a voice, but not so much voice as they have right now.
SHAPIRO: You mentioned that the system we have now was developed in the 1940s. Remind us how that developed.
Professor JOHNSON: Well, it was a huge move at the time. We obviously had the Great Depression in the 1930s, a lot of trade wars, some people raising tariffs, competitive devaluations - I reduce my exchange rate, you reduce your exchange rate. It all goes badly. And then of course we had the war, the Second World War. And at the point where the U.S. and its allies were pretty clear in their own minds that they were going to win, they just said, OK, could we come up with a trading system and also an associated monetary system, an associated system of exchange rates, that'll be more stable, less prone to this sort of beggar-thy-neighbor type of policies?
And they had a very deep think about it, and they had a conference at Bretton Woods in New Hampshire where they basically camped out for a couple of months. And they came up with something that's subsequently been known as the Bretton Woods system that more or less has served us pretty well for over 50 years.
SHAPIRO: Economists speak about Bretton Woods reverentially, and there is some talk that this G-20 meeting could produce a Bretton Woods II. What would that mean?
Professor JOHNSON: Well, there's lots of different ideas about what Bretton Woods II could be. Basically, the idea is that we should change something about how we regulate trade or - and I think this is where the interesting piece is going to be - capital flows. So capital flows in 1945, 1946, when the system started, were small. And the IMF, for example, had a lot of resources relative to capital flows, so we could step in and help countries if they needed help, and it could manage the system of exchange rates. Well, the IMF doesn't manage exchange rates anymore. So this enormous pool of money that moves daily is unregulated. So I think Bretton Woods II will be about the capital flows.
SHAPIRO: So is there a way in which this global financial crisis provides an opportunity to reshape the financial systems from the systems that were set up in 1945?
Professor JOHNSON: Yes, I think bringing them up to date is long overdue. The problem is we have first to have to get through a pretty nasty recession. And the nasty recession, of course, needs to be dealt with. That's what the summit really should focus on this weekend with fiscal stimulus, with measures to support weaker members of the global economy. Now if we can get through that, and particularly if we could have some sort of coordinated or concerted action on these pressing problems, then you might see a consensus emerging. There will be a lot of tough negotiation. I mean, it would be a two, three, five-year process to come up with a new system. But, yes, we could move in that direction. And I think that'll be a good idea.
SHAPIRO: Simon Johnson is a senior fellow at the Peterson Institute for International Economics, and he runs the Web site Baseline Scenario. Good to talk with you.
Professor JOHNSON: Thank you. Transcript provided by NPR, Copyright NPR.
