When Russia invaded Ukraine in the winter of 2022, it immediately exposed once again the limitations of the two global institutions – the International Monetary Fund and the World Bank – that are supposed to coordinate policies to deal with the resulting economic crisis. In the wake of the attack the US Treasury Secretary Janet Yellen, also a former chairwoman of the US Fed, warned that the defeat of Russia requires measures that the IMF and World Bank may not be able to apply: “We will need to modernise our existing institutions – the IMF and the multi-lateral development banks – so that they are fit for the 21st century where challenges and risks are increasingly global.”
A key figure in the Biden administration, Yellen was referring to a whole host of challenges such as sanctions against Russia, intensifying trade disputes, big-power rivalry that is creating geopolitical tensions and, perhaps most concerning of all, the decline of the 80-year-old Bretton Woods institutions that were originally designed for exactly this purpose. Bretton Woods was instrumental in rescuing a world devastated by wars, incompetent governance and geopolitical confusion. As Kristalina Georgieva, managing director of the IMF, pointed out earlier this year: “In 1944 the IMF was forged from the ruins of two world wars. In the decades leading to our creation, populism had swept over much of the globe and the old world order was in chaos. After Bretton Woods, the world saw dramatic increases in global integration and wellbeing for which the IMF played a key role.”
Bretton Woods was born in July 1944 when delegates from 44 nations, led by the US and the UK, met in New Hampshire for what was known as the United Nations Monetary and Financial Conference. Out of the rubble they created a new economic order based on international coordination for the purpose of reconstruction and growth. Hence the birth of the IMF and World Bank.
Yet as Georgieva explains, here we are again: “Eighty years later the global economy is once again in a moment of significant turmoil as countries recover from the pandemic and conflict has flared across Europe, the Middle East, and Africa.” And in the middle of all this the looming issue is whether the Bretton Woods Institutions (BWIs) are up to the task in a much bigger, much more complex global economy. And if not, what is the alternative?
“Today we face many of the same challenges as we did at the time of our inception,” summarises Georgieva. “Yet again, in Europe a military power has invaded a neighbour – and flares of regional wars add to global risks. Yet again, populism and protectionism are on the rise. On top of that, we are grappling with global mega-trends such as climate change and the demographic transition, as well as disruptive technologies such as AI and digital currencies.”
Global economic fragmentation
Most economists agree that the world is splintering into ‘global economic fragmentation’ (GEF) at the very time that it needs the opposite. In technical terms GEF is seen as a policy-driven reversal of global economic integration that threatens capital flows to low-income countries, hinders innovation in emerging markets, and discourages cooperation on international crises. In other words, we are going backwards by focusing inwards.
“In our increasingly fragmented world, nations have focused on reshoring essential goods and supply chains, including minerals crucial for green technologies, semiconductors, and military hardware due to concerns over national security and geopolitical motives,” explains the IMF, which is grappling with the threat of its own irrelevance. “In immediate terms the effects are seen in higher import prices, segmented markets, diminished access to technology and labour, reduced productivity, and lower living standards,” the IMF states.
Bretton Woods was instrumental in rescuing a world devastated by wars, incompetent governance and geopolitical confusion
The triggers of this fragmentation are tariffs, subsidies, currency wars, protectionism, industrial policies and sanctions. Between them, they are stifling the globalised trade that would help rescue the situation. In short, countries are taking sides and pulling in different directions. The result is a general undermining of the very global financial stability that is the raison d’etre of Bretton Woods.
As a result many countries face the threat of declining wealth. As recent research shows, advanced economies and emerging markets could face permanent losses of up to four percent of gross domestic product. The consequences? Debt crises, social instability, and food insecurity, with the most vulnerable nations being the worst hit.
In hard numbers, according to a recent IMF paper, the spread of GEF could add up to a long-term decline of up to seven percent in global economic output. The price of that would be catastrophic, estimated at about $7.4trn.
A crossroads situation
It may be a much-used word, but economists are in no doubt that we face another crossroads, without being anywhere near to agreeing a Bretton Woods-type solution. “Looking forward, we can choose the path of instability and confrontation. Or we can choose the path of cooperation and shared prosperity,” concluded Georgieva.
But is reform of the BWIs possible? According to macro-economist Amin Mohseni-Cheraghlou of Washington DC’s American University and leader of the Atlantic Council’s Bretton Woods 2.0 Project, the IMF and the World Bank face “existential challenges.” For proof he cites a formidable list comprising the emergence of new players, game-changing new technologies such as AI, and two decades of financial and social upheavals in the form of the Great Financial Crisis, devastations wrought by Covid, and the enormous problems posed by climate change, particularly in Sub-Saharan Africa. And as non-western economists regularly point out, at least two of these scourges – climate change and the GFC – started in the west.
One of the problems, argues Mohseni-Cheraghlou, is that power in BWIs lies in the wrong hands. That is, the leadership is firmly anchored with the US, Group of Seven and EU at a time when “economies that are not part of the high-income club are playing an increasingly large role in global trade and finance.” In hard numbers, the EU and US control about 40 percent of votes even though “their relative prominence in the global economy has eroded.” And Chinese researchers would agree, citing how China has been repeatedly blocked from a role in the BWIs that, they argue, is commensurate with the country’s undoubted economic might. Political scientist Qin Yaqing, a professor at Shandong University, insists that what he calls “US hegemony” of these institutions must be replaced by a global governance system that is “multi-level, multi-issue, and multi-organisational.” In common with Beijing, he actually believes in economic fragmentation because it suits China better. It would allow China to “operate nimbly across regions, issues, and organisations, and choose allies to achieve various objectives. Ultimately, the fragmentation of global governance institutions would further realise the demise of the previous hegemonic order,” he argues.
Belt and Road project
Needless to say, most western countries and several Asian ones are extremely nervous of an increasingly militant and assertive China assuming a dominant role in a post-Bretton world. In fact, they are already halfway there. As American political scientists point out, China’s Belt and Road project has pulled many countries into Beijing’s net. Of the 24 members of the UN who voted not to condemn Russia’s invasion of the Ukraine, two were Russia and North Korea, as would be expected, but the other 22 are all beneficiaries of Belt and Road. Perhaps more revealing of China’s own hegemony among the more disaffected nations, no fewer than 49 of the 58 who abstained from voting are also part of the Belt and Road.
We can choose the path of instability and confrontation. Or we can choose the path of co-operation and shared prosperity
Looking forward, the IMF and World Bank must now work with a much more complex world of international financing because their own pockets are nowhere near deep enough. As Yellen explains, “experts put the funding needs in the trillions, and we have so far been working in billions.”
On the bright side there is a host of new lenders out there such as state-led development finance institutions, regional multi-lateral development banks, sovereign wealth funds and pension funds. At the last count there were, for instance, over 40 multi-lateral development banks and financial institutions, while the number of purely national development banks has jumped to at least 50. There are also no fewer than 130 sovereign wealth funds deploying $12trn between them. Public pension funds boast $24trn in global assets while the private pension funds have $42trn of assets in their coffers.
Additionally, in the last 80 years the number and financial power of multi-national corporations has exploded. As Mohseni-Cheraghlou notes, they “command economic and technological might larger than many countries.” In hard numbers the multi-nationals account for nearly one-third of global GDP and a quarter of global employment. Consider that in 2023 the revenue of just one of the multi-nationals, Walmart, was larger than the GDP of over 170 countries.
In summary, Bretton Woods was designed for a different era and desperately needs to be modernised to cope with this new and infinitely more complex one. The institutions have adroitly navigated storms before, for example the Nixon administration’s abolition of the gold standard in 1971 that was a huge shock to the system.
Yet quite apart from what one economist called “intractable geopolitical tensions,” there is a lot on the Bretton Woods table. Economists sum up a few of them: an unfair global tax system, a fire-fighting role in crises such as Covid (Yellen believes the response to the GFC was “too timid and short-lived”), the rapid mobilisation of capital to support developing countries, and reform of the World Trade Organisation (China favours regional trading blocs that help it circumvent WTO rules). Altogether, it is a huge package and one that will test the twin pillars of Bretton Woods to the limit.
