TABLE OF CONTENTS
Abstract
Keywords
1. Introduction
2. Origin of the Bretton Woods institutions
3. Criticism of the Bretton Woods institutions
4. The new geopolitical order
5. Conclusion
References
Abstract
Prior to the global recession in 2007, the Bretton Woods institutions faced concerns about their relevance in a world absent economic crises. Two years later in the wake of the most severe economic downturn in recent history, policy makers and scholars have called for a stronger international financial architecture and policy coordination aimed at preventing future financial crises. Despite the interest in improving the international economic framework, prospects remain bleak for new institutional, policy, or regulatory agreements. Two fundamental problems exist to redesign the Bretton Woods system. First, despite agreement over the consequences, little consensus exists about appropriate international responses. Second, it is unlikely a new institutional framework will emerge due to the evolving geopolitical order. Coordinated international institutional response to the financial crisis may ameliorate the impact of future economic downturn. However, based upon the current diversity of proposed policy responses and the geopolitical landscape, there seems little near term opportunity to facilitate new international institutional or policy agreements.
Keywords
Bretton Wood institutions; International Monetary Fund (IMF); International Bank of Reconstruction and Development (IBRD); World Trade Organization (WTO); New Development Bank (NDB).
1. Introduction
Prior to the global recession in 2007, the International Monetary Fund (IMF) faced concerns about its relevance in a world absent economic crises. Critics contended that in a world devoid of economic crises and the IMF beginning to lose money and downsize, the need for a global lender of last resort waned (Eichengreen 2007, Rose 2006, and Mussa 2006). A variety of policy makers, scholars, and practitioners openly questioned the efficacy and reason for the World Bank with developing countries flush with cash from record high commodity prices (Einhorn 2006). With global multilateral trade talks at a standstill and bilateral agreements becoming more widely used as a method for trade stimulation, the World Trade Organization seemed less important (Dobson 2005). The major international policy institutions of the Bretton Woods system devised in the post-World War II era seemed doomed to irrelevance if not termination. Two years later in the wake of the most severe economic downturn in recent history, policy makers and scholars have called for a stronger international financial architecture and policy coordination aimed at preventing future financial crises. Despite the interest in improving the international economic framework, prospects remain bleak for new institutional, policy, or regulatory agreements.
Two fundamental problems exist to redesign the Bretton Woods system. First, despite agreement over the consequences, little consensus exists about appropriate international responses. Ten years ago one researcher noted this problem commenting: The recognition by members of the establishment of the need to overhaul the system is perhaps more significant than the specifics of their proposals….If the call for a ‘new Bretton Woods’ is to have any resonance, that is, sufficient popular appeal to make its way in the face of vested interests and inertial forces, it must be broad enough in its participation, its objectives, and its institutional modalities to inspire support(Miller 1995, emphasis in the original).
Popular support around broad principles or institutions does not exist. The United States has called for significant coordinated fiscal stimulus by major economies which European and Asian countries have criticized as excessive and exacerbating a cause of the downturn in addition to including protectionist legislation (Time 2009). Asian economies urge the United States to correct financial imbalances and the United States pressures others to employ greater financial and currency flexibility. Scholars note the role that excessively loose monetary policy played in facilitating the downturn, while politicians focus on a lack of regulation. Disagreement exists over the reasons for and significance of financial imbalances (Mendoza, Quadrini, and Rios-Rull 2007 and Roubini and Setser 2005).
Economists now openly question how they “got it so wrong’’ (Krugman 2009). Though parties agree over the severity of the downturn and the need to address its impact, few agree on policies or an international framework to address financial crises in the future. Second, it is unlikely a new institutional framework will emerge due to the evolving geopolitical order. As one well known economist put it, “the international monetary system depends on the power configuration of the countries that make it up (Mundell 1999). The Bretton Woods system arose from the wreckage of World War II when the United States enjoyed unparalleled global hegemony. The lack of powerful rivals allowed the United States to design a financial architecture around their vision of the post war world (Ikenberry 1993 and Ikenberry 1992). Today the geopolitical landscape is not conducive to a redesign of the international economic architecture. China does not have the inclination to commit to a long term international financial framework or the clout to line up supporters even if it found a deal it liked. The United States faces international skepticism on its role in creating the crisis and policy proposals. The current White House and Congress demonstrate no interest in engaging on broad issues of international economic concern. Discordant European voices fail to find common ground about the scope and focus for international financial reform. Finally, rapidly expanding emerging economies would make the establishment of a new Bretton Woods system difficult without their support. Coordinated international institutional response to the financial crisis may ameliorate the impact of future economic downturn. However, based upon the current diversity of proposed policy responses and the geopolitical landscape, there seems little near term opportunity to facilitate new international institutional or policy agreements. The geopolitical changes brought on by rapid economic growth and shifting alliances make any significant international policy or institutional agreements difficult.
2. Origin of the Bretton Woods institutions
The Great Depression of the 1930s, a period characterized by high protective tariffs and the breakdown of global markets, offered strong reasons to build international economic and financial institutions. Many believed that protectionism had slowed economic recovery and provoked extreme nationalism, led to a struggle for territory and resources, and ultimately contributed to World War II. In 1944, representatives of the United States, the United Kingdom, the Soviet Union, France, and China met in Bretton Woods, New Hampshire, leading to the creation of the International Monetary Fund (IMF) and the International Bank of Reconstruction and Development (IBRD) (Peet 2009). After the Soviet Union backed out of the Bretton Woods agreements in 1946, both institutions became the pillars of Western capitalism. Participating states agreed to contribute parts of their gold reserves to a global ‘’pool’’ to maintain the balance of payments in international trade. The United States, the wealthiest contributor, played the leading role in the functioning of these institutions. The IMF has grown more than four times from forty-five members in 1945. Its goals are to maintain stable exchanges between national currencies and to provide financial help to countries in trouble. The IBRD (commonly called the World Bank) involves almost all states (except for Cuba, North Korea, and a few others) and makes loans to developing countries for long-term projects. In both institutions the wealthiest donors have more authority. The IMF and the World Bank provide financial help conditionally: Usually, the recipient of assistance must reform its finances according to these institutions’ prescriptions. These prescriptions, which commonly involve privatization and deregulation, often draw criticism. For example, it is argued that the key lending institutions do not pay enough attention to the local conditions of recipient countries (Strand 2013). The prescriptions may also stimulate the growth of certain industries yet cause the decline of others, thus sparking unemployment and economic disparities.
Other liberal international institutions created after the Bretton Woods agreements were the General Agreement on Tariffs and Trade (GATT), signed in 1947 in Geneva, and the International Trade Organization (ITO), created the next year in Havana. The members of GATT held periodic trade negotiations, gradually leading to reductions of tariffs. The ITO failed, however, because the U.S. Senate rejected its charter: Many American politicians feared that it would become a kind of global government. However, GATT became successful during the 1960s and in 1995 was renamed the World Trade Organization (WTO), which is today a global organization with membership exceeding one hundred and sixty countries. Back in the 1940s, European countries beneficiaries of the Marshal plan, mostly decided for themselves how to spend it. They had to comply with only one condition: keep the Communists away from power. Now, assistance from the International Monetary Fund (IMF) comes with many strings attached. Should countries themselves, rather than international organizations, decide how to spend such funds? Should they follow the example of the United States and other liberal democracies ? China never complied with the IMF regulations yet successfully combined private entrepreneurship with state controls, with remarkable results.
3. Criticism of the Bretton Woods system
Criticism of the World Bank and the IMF encompasses a whole range of issues but they generally centre around concern about the approaches adopted by the World Bank and the IMF in formulating their policies, and the way they are governed. This includes the social and economic impact these policies have on the population of countries who avail themselves of financial assistance from these two institutions, and accountability for these impacts. Critics of the World Bank and the IMF are concerned about the ‘conditionalities’ imposed on borrower countries. The World Bank and the IMF often attach loan conditionalities based on what is termed the ‘Washington Consensus’, focusing on liberalisation of trade, investment and the financial sector, deregulation and privatisation of nationalised industries. Often the conditionalities are attached without due regard for the borrower countries’ individual circumstances and the prescriptive recommendations by the World Bank and IMF fail to resolve the economic problems within the countries.
IMF conditionalities may additionally result in the loss of a state’s authority to govern its own economy as national economic policies are predetermined under IMF packages. Issues of representation are raised as a consequence of the shift in the regulation of national economies from state governments to a Washington-based financial institution in which most developing countries hold little voting power. IMF packages have also been associated with negative social outcomes such as reduced investment in public health and education.
With the World Bank, there are concerns about the types of development projects funded. Many infrastructure projects financed by the World Bank Group have social and environmental implications for the populations in the affected areas and criticism has centred on the ethical issues of funding such projects. For example, World Bank-funded construction of hydroelectric dams in various countries has resulted in the displacement of indigenous peoples of the area.
The World Bank’s role in the global climate change finance architecture has also caused much controversy. Civil society groups see the Bank as unfit for a role in climate finance because of the conditionalities and advisory services usually attached to its loans. The Bank’s undemocratic governance structure ; which is dominated by industrialised countries ; its privileging of the private sector and the controversy over the performance of World Bank-housed Climate Investment Funds have also been subject to criticism in debates around this issue. Moreover, the Bank’s role as a central player in climate change mitigation and adaptation efforts is in direct conflict with its carbon-intensive lending portfolio and continuing financial support for heavily polluting industries, which includes coal power.
There are also concerns that the World Bank working in partnership with the private sector may undermine the role of the state as the primary provider of essential goods and services, such as healthcare and education, resulting in the shortfall of such services in countries badly in need of them. As an increasing shift from public to private funding in development finance has been observed recently, the Bank’s private sector lending arm, the International Finance Corporation (IFC) has also been criticised for its business model, the increasing use of financial intermediaries such as private equity funds and funding of companies associated with tax havens.
Critics of the World Bank and the IMF are also apprehensive about the role of the Bretton Woods institutions in shaping the development discourse through their research, training and publishing activities. As the World Bank and the IMF are regarded as experts in the field of financial regulation and economic development, their views and prescriptions may undermine or eliminate alternative perspectives on development.
There are also criticisms against the World Bank and IMF governance structures which are dominated by industrialised countries. Decisions are made and policies implemented by leading industrialised countries, the G7 (France, Japan, Canada, Italy, United States of America, Germany, United Kingdom); because they represent the largest donors without much consultation with poor and developing countries.
4. The new geopolitical order
The establishment of the Bretton Woods system captured a unique moment in time. Created from the wreckage of a post World War II era which witnessed the destruction of many countries, the economic architecture for a new world came from unique circumstances. Though countries coalesced around broad economic principles upon which to establish the new international economic architecture from the hard lessons of previous failures, the geopolitical environment increased the possibility of agreement. The current geopolitical environment however is not conducive to broad agreement on a restructuring of the international economic architecture.
The devastation brought by World War II decimated the industrial base of participants destroying infrastructure and industry. Virtually all the World War II industrialized and numerous developing countries lay in waste from years of war. Learning from previous mistakes of major wars such as the Treaty of Versailles, the victorious states led by the United States created an international system to encourage redevelopment and economic cooperation designed to foster growth and stability. The underlying philosophy was more political than economic in that it aimed to encourage political harmony and stability between and within the states conditional upon prosperous and growing economies. As one author noted,
They (Bretton Woods institutions) are part of a wider undertaking to further international cooperation in the postwar world. Befitting its imposing influence, the United States took a prominent part in this enterprise. The overall design lending coherence to the blueprints for economic collaboration is predominantly of American authorship. As the charters of the International Monetary Fund and the International Bank for Reconstruction and Development bear the imprint of official American thinking, so their policies are subject to decisive American influence(Knorr 1948).
The United States enjoyed unrivaled political, economic, and military superiority in the post war era and held no qualms about exercising its authority. The Bretton Woods system arose under unique circumstances capturing an historical opportunity. The current geopolitical does not hold similar promise of a broad new international agreement. There are two fundamental reasons when focusing on the geopolitical environment to be pessimistic. First, despite the global recession, no countries of significant importance lay in economic or physical wreckage. Many face serious long and short term challenges such as demographic decline, excessive debt levels, struggling economies, or structural deficits. However, no country suffers from the devastation faced by many countries after World War II. In fact, prior to the recession that began in 2007 developed economies had enjoyed one of the longest periods of sustained and robust growth in modern economic history. The developing world enjoyed a sustained period of economic growth that led to lower debt levels and improvement in many social development indicators. The lack of economic and physical destruction removes the desperate need to sign broad multilateral economic agreements. The relative strength of countries, compared relatively to a post World War II world, place countries in a much stronger bargaining position.
Second, broad multilateral agreement on a new Bretton Woods will be more difficult in a fragmented multipolar world than a bipolar world (Eichengreen and Kenen 1994). As other have noted, maintaining a Bretton Woods system requires the subordination of individual state interests to a collective interest at some supra-national level making broad multilateral institutional agreements difficult (Eichengreen 2004). The post war era existed in a bi-polar world with the Bretton Woods agreement stemming primarily from near unilateral political landscape dominated by the United States. Rapid economic growth throughout numerous areas of the world and increased political engagement has brought the multipolar world. As one prominent economist noted in describing WTO Doha Round negotiations;
The WTO has a larger membership than the GATT, and its remit is much wider. Both differences make it harder to reach agreements, a problem evident from the lack of progress in the Doha Round to date. (Collier 2006)”
The agreements that created the Bretton Woods institutions did not widely consult the majority of countries and not with the current relative economic or political importance (Griesgraber 1995). It is more difficult to come to agreement in a more balanced multipolar world with no dominant states than in a small fractured world where power is concentrated among fewer states (Martin and Messerlin 2007). We see these two principles of geopolitical agreement demonstrated in two current negotiations over existing Bretton Woods institutions. First, the WTO has failed to reach an agreement on a new trade round because rather than acquiescing to positions of the developed world, emerging markets buoyed by years of sustained growth and improved economic management refuse to accept offers on agriculture from developed countries (Anania and Bureau 2005). Second, IMF negotiations over changes in voting stakes and quota contributions have been lengthy and difficult. A number of economically ascendant states seeking to expand their role in the management and oversight of the IMF have negotiated to increase their voting shares. The difficulty in achieving these modest reforms has prompted criticism from a variety of parties for many reasons (Hefeker 2006). These countries which enjoyed rapid economic growth increased the number of relevant states requiring agreement among major IMF quota holders and the other states concurrently holding negotiations to increase their stake. The process became increasingly complicated. Turning to the potential for broad agreement about a new Bretton Woods, the possibilities for a new institutional framework seem just as difficult due to these two principles. The United States has lost significant economic and political standing in the world making a U.S. led attempt to redesign the international economic architecture difficult. Research indicates that countries with large deficits prefer to negotiate bilaterally rather than multilaterally as they hold negotiating leverage over countries with large surpluses (Agur 2008). Systems in balance however will see improved multilateral negotiations. The US role in causing the initial macroeconomic imbalances and the global recession has weakened both their willingness to create a new economic framework and their ability to persuade others to join. Though the United States still remains the global leader, their ability to construct a broad multilateral coalition has come into question. Europe is problematic on numerous levels to the creation of a new Bretton Woods. Despite thinking of Europe, any multilateral agreement would require agreement by the individual states of Europe all of which have differing opinions and economic philosophies (Bibow 2006). There is little agreement between European states on many broad economic issues and some of the biggest conflicts in WTO negotiations are between Europe and the United States. Any agreement to restructure the Bretton Woods system would require the complete and full support and cooperation of China. At the current point in history, China has little interest or reason to support a new international economic architecture. Rapid economic growth over the past thirty years has transformed China from a rural agrarian society into one of the largest economies in the world. Countries enjoying rapid and sustained economic growth that fundamentally improves their bargaining position do not agree to constrain themselves. China is actively working to undermine the existing international monetary system challenging the global supremacy of the United States
Dollar. By increasing the importance of the Yuan to international trade and finance, China is actively trying to establish its own vision for a global monetary system. China likewise has designs on becoming a dominant financial market supporting Shanghai, Shenzhen, and Hong Kong. Inviting foreign companies to list on Chinese stock markets and building up necessary infrastructure, China demonstrates its interest in global monetary hegemony. These are not the actions of a country interested in establishing a multilateral framework for global monetary and financial agreements. Other countries also play less vital but important roles in any potential agreement. Oil exporting Middle East countries which accumulated large dollar currency reserves and assets in sovereign wealth funds play an important role in sustaining the fiscal deficits in the United States. Though rapid reallocation away from dollars is unlikely, the importance of accounting for the new financial importance of Middle East oil exporters and their rapidly expanding financial markets in a new Bretton Woods is important (Momani 2008). India, though less important than Chinese involvement, will be an important piece of any agreement. Economists argue that India as an emerging market should play a larger role in a new Bretton Woods system (Mattoo and Subramanian 2008). Brazil and Russia due to sustained economic growth during the past decade and increased political importance are important to any broad international coalition needed for the legitimacy of the new Bretton Woods. Brazil has played a major role in Doha Round WTO negotiations demanding major agricultural concessions from developed countries and would likely require similar concessions to redesign Bretton Woods. Russia though taking a less explicit role in a new Bretton Woods has made calls to lessen the importance of the United States dollar and for a new global currency. Similar to China, they show no near term willingness to expend political or economic capital to establish a new Bretton Woods system. Based upon the increased importance of the number of important states required to make a new Bretton Woods, it seems unlikely in the near to medium term that the geo-political conditions will coalesce to allow a new Bretton Wood
The BRICS’ New Development Bank as a possible alternative to the Bretton Woods institutions
The BRICS – Brazil, Russia, India, China and South Africa – is a group of countries with emerging economies and nationalistic governments, which considers that existing managment of global order, is unfair to them, and in different degrees have opposed to the rules dictated by Western powers. Although most of BRICS dynamic has been rhetorical, their joint statements have had a meaningful impact on international public opinion. That is why, since the formation of the group, the question of what position would the BRICS take towards existing international institutions and norms has been raised. These countries are perfectly integrated into the global markets. However, the unwillingness of Western nations to accommodate BRICS’ demands of reform pushed the group towards more revisionist and balancing positions. As a result of this situation, the need to develop an alternative institutional framework under BRICS control was laid on the table. Bretton Woods institutions of financial governance, the World Bank (WB) and the International Monetary Fund (IMF), embody a structural pillar of the contemporary global order. The BRICS has a collective sense of grievance of being underrepresented in such institutions. They share 21.6% of the world GDP and represent 46% of the world population. However, they only have the 13.23% of voting power in the WB, while the G-7 countries (32.8% of world GDP) have the 41.49% of it. But although liberalism defends the neutrality of financial institutions, Western powers have managed to block any attempt for reforming the voting system. Mostly motivated as a response to this situation, during their Fortaleza (Brazil) summit in 2014, the BRICS launched a new international financial institution: the New Development Bank.
The idea of creating a New Development Bank (NDB) first appeared in official statements in the BRICS Summit in New Delhi in 2012 as an Indian initiative. At the same time, China was already planning its Asian Infrastructure Investment Bank and did not seem to be interested in the creation of an institution with a similar function. However, once the negotiations began, China adopted a more active role, competing with India for the location of the NDB Headquarter. This issue was resolved with an agreement to settle it in Shanghai and not in New Delhi, and to give the first presidency to India. Finally, as mentioned before, the NDB was founded in 2014 and nowadays it is fully functioning. As stated in its official documents, the NDB’s main purpose is to mobilise resources for infrastructure and sustainable development projects in the member countries and other developing economies. Equality and democracy appear as core values of the NDB sharing of BRICS practices, according to its new general strategy for 2017-2021. In contrast to other existing international financial institutions, the initial capital contribution of 50 billion dollars, which are aimed to be raised to $100 billion along the share of votes, are equally shared among the founding members. Thus, an important innovation that the NDB incorporates is its model of governance.
Ideologically, the respect and commitment to the principle of non-interference in internal affairs is also one of the leading features of the bank. The NDB aims to work within the margins of state law without imposing any political condition on the loan beneficiaries. This is another clear different standpoint to the World Bank approach, which demands changes in national legislation. Besides, the lack of a common currency is another innovation. Although US dollars are used in the official documents, the NDB works through a system of green bonds that can be obtained using the national currencies of all member countries and the projects are also funded on local currencies. This measure makes of the NDB not only a tool against dollar’s hegemony, but it is also a safeguard for other member countries to mitigate the risk of depending on China’s currency.
Due to the short life of the NDB, it is difficult to assert to what extent it is going to succeed and assess if it is going to be able to challenge Bretton Woods institutions or, eventually, they could coexist. However, the fact that NDB has been implemented means a turning point in the BRICS relationship with current institutions of financial governance. Although the unwillingness to reform the WB and the IMF has been the principal driver of the creation of the NDB, it is unclear to what extent BRICS reformism was just part of a hedging strategy. In the end, the impossibility of reforming Bretton Woods institutions could have been a favourable by-product, which has given to China and the BRICS an argument to legitimate the development of alternative institutionalism.
5. Conclusion
In 1947, many European cities lay in ruins after world war II. Economies began to revive but still struggled. Unemployment was rampant. Lack of fuel, food and clothing was endemic. In France and Italy the threat of communist coups grew. In June that year, the U.S. secretary of state, George Marshall announced an assistance program to Europe which that became known as the Marshall plan, which actually laid the foundation for the settlement of the Bretton Woods institutions. This was favoured by the state in which Western Europe found itself after the war which allowed the United States to rise as an hegemon power in the international system putting down a world financial system which suits them. Today, alongside many criticisms against the Bretton Woods system, we are no longer in the same situation of the after world war II, the international system is no longer the same. There has been a strong rise of emerging economies over the years led by China, India, Russia, Brazil which contest the hegemonic power of the United States, pointing at its influence over the Bretton Woods system. For China to rise as an economy power; it has never complied with the IMF regulations yet successfully combined private entrepreneurship with state controls, with remarkable results. China having support of other frontline emerging countries came up with the BRICS initiative, an inter-regional cooperation with their bank, the New Development Bank which plays the role of the World Bank and IMF in the country members. Loans are gotten by member-states for development and void of any interference in domestic affairs of the state-members, what the Bretton Woods system fails to do.
Nevertheless, the internal cohesion of the BRICS is weak, and they have meaningful differences between them, for example, with regard of the reform of the United Nations Security Council. Besides, they are economic and geopolitical competitors in some areas; the rivalry between China and India can seriously jeopardize the expectations of the group. Moreover, their economies have been fluctuating and, at present, only China appears to have met the foresight regarding their impact on the global economy. Thus, the BRICS should be considered more like a coalition of interest than a block, which compromises their capacity to build stable institutions in the long term. Then, this puts on the table a continued relevance of the Bretton Woods institutions.
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