Economist John Lipsky and IMF Managing Director Kristalina Georgieva
Author: Selwyn Parker, features editor
When Russia invaded Ukraine in the winter of 2022, it immediately revealed once again the limits of the two global institutions – the International Monetary Fund and the World Bank – which are supposed to coordinate their policies to address the crisis resulting economic. Following the attack, US Treasury Secretary Janet Yellen, also a former chair of the US Fed, warned that defeating Russia would require measures that the IMF and World Bank may not be able to achieve. apply: “We will have to modernize our policy. existing institutions – the IMF and multilateral development banks – so that they are ready to face the 21st century, where challenges and risks are increasingly global.
A key figure in the Biden administration, Yellen was referring to a range of challenges such as sanctions on Russia, intensifying trade disputes, great power rivalry creating geopolitical tensions and, perhaps most worryingly of all, the decline of the 1980s. year-old Bretton Woods institutions originally designed for precisely this purpose. Bretton Woods was instrumental in saving a world devastated by wars, inept governance and geopolitical confusion. As Kristalina Georgieva, Managing Director of the IMF, pointed out earlier this year: “In 1944, the IMF was created on the ruins of two world wars. In the decades before our founding, populism had taken over much of the globe and the old world order was thrown into chaos. After Bretton Woods, the world saw a dramatic increase in global integration and welfare for which the IMF played a key role.
Bretton Woods was born in July 1944 when delegates from 44 countries, led by the United States and the United Kingdom, gathered in New Hampshire for what was known as the United Nations Monetary and Financial Conference. From the rubble, they created a new economic order based on international coordination with the aim of reconstruction and growth. Hence the birth of the IMF and the World Bank.
Yet, as Georgieva explains, here we are again: “Eighty years later, the global economy once again finds itself in a period of significant turmoil as countries recover from the pandemic and conflicts erupt in Europe, the Middle East and Africa. And amid all this, the question is whether the Bretton Woods Institutions (BWIs) are up to the task in a much larger and more complex global economy. And if not, what is the alternative?
“Today we face many of the same challenges as when we were founded,” Georgieva summarizes. “Once again in Europe, a military power has invaded a neighbor – and outbreaks of regional wars add to global risks. Once again, populism and protectionism are on the rise. Additionally, we are grappling with global megatrends such as climate change and demographic transition, as well as disruptive technologies such as AI and digital currencies.
Global economic fragmentation
Most economists agree that the world is dividing into “global economic fragmentation” (GEF) just when it needs the opposite. In technical terms, the WEF is seen as a political reversal of global economic integration that threatens capital flows to low-income countries, hinders innovation in emerging markets, and discourages cooperation in the face of international crises. In other words, we go backwards by focusing on ourselves.
“In our increasingly fragmented world, nations have focused on relocating essential goods and supply chains, including minerals critical to green technologies, semiconductors and military hardware, due to concerns linked to national security and geopolitical reasons”, explains the IMF, grappling with the crisis. threat of its own uselessness. “Immediately, the effects include higher import prices, market segmentation, reduced access to technology and labor, reduced productivity and lower living standards,” the IMF says.
Bretton Woods was instrumental in saving a world devastated by wars, inept governance and geopolitical confusion.
The triggers for this fragmentation are tariffs, subsidies, currency wars, protectionism, industrial policies and sanctions. Between them, they are stifling the globalized trade that would help save the situation. In short, countries take sides and pull in different directions. The result is a general weakening of the global financial stability that is the reason for Bretton Woods.
As a result, many countries face the threat of a decline in their wealth. As recent research shows, advanced economies and emerging markets could face permanent losses of up to 4% of their gross domestic product. The consequences? Debt crises, social instability and food insecurity, with the most vulnerable countries worst affected.
In hard numbers, according to a recent IMF paper, the spread of the WEF could lead to a long-term decline of up to 7% in global economic output. The price to pay would be catastrophic, estimated at around $7.4 trillion.
A situation at a crossroads
It may be a widely used word, but economists have no doubt that we are at a crossroads, without being close to an agreement on a Bretton Woods type solution. “For the future, we can choose the path of instability and confrontation. Or we can choose the path of cooperation and shared prosperity,” concluded Georgieva.
But is a reform of the BWIs possible? According to macroeconomist Amin Mohseni-Cheraghlou of the American University in Washington DC and head of the Atlantic Council’s Bretton Woods 2.0 project, the IMF and World Bank face “existential challenges.” As proof, he cites a formidable list including the emergence of new players, revolutionary new technologies such as AI, and two decades of financial and social upheaval in the form of the Great Financial Crisis, the devastation 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 – began in the West.
One of the problems, says Mohseni-Cheraghlou, is that power in the BWI is in the wrong hands. In other words, leadership is firmly anchored alongside the United States, the Group of Seven and the EU, at a time when “economies outside the high-income club are playing an increasingly important role.” most important in global trade and finance. In concrete terms, the EU and the United States control around 40 percent of the votes, even though “their relative importance in the global economy has eroded.” And Chinese researchers would agree, citing how China has repeatedly been blocked from playing a role in BWI that they say is commensurate with the country’s unquestionable economic power. Political scientist Qin Yaqing, a professor at Shandong University, insists that what he calls “American hegemony” over these institutions must be replaced by a “multi-level, multi-issue, and global governance system.” multi-organizational. Like Beijing, it believes in economic fragmentation because it suits China better. This would allow China to “operate with agility across regions, issues, and organizations, and choose allies to achieve diverse goals.” Ultimately, the fragmentation of global governance institutions would further lead to the demise of the previous hegemonic order,” he asserts.
Belt and Road Project
Needless to say, most Western countries and several Asian countries are extremely nervous about 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 drawn many countries into Beijing’s net. Of the 24 UN members who voted not to condemn Russia’s invasion of Ukraine, two were Russia and North Korea, as one might expect, but the other 22 are all beneficiaries of the Belt and Road. Perhaps most telling of China’s hegemony among the most disaffected nations, no fewer than 49 of the 58 who abstained from voting are also part of the Belt and Road Initiative.
We can choose the path of instability and confrontation. Or we can choose the path of cooperation and shared prosperity
Looking ahead, the IMF and World Bank must now work in a much more complex world of international financing, because their own pockets are nowhere near deep enough. As Yellen explains, “Experts estimate financing needs in the trillions, and so far we’ve been working in the trillions.”
On the bright side, there are a host of new lenders, such as state-led development finance institutions, multilateral regional development banks, sovereign wealth funds and pension funds. At last count, for example, there were more than 40 development banks and multilateral financial institutions, while the number of purely national development banks has risen to at least 50. There are also no fewer than 130 sovereign wealth funds deploying 12 trillion dollars between them. Public pension funds have global assets of $24 trillion, while private pension funds have $42 trillion in assets in their coffers.
Additionally, over the past 80 years, the number and financial power of multinational corporations have exploded. As Mohseni-Cheraghlou notes, they “have greater economic and technological power than many countries.” In concrete terms, multinationals represent almost a third of global GDP and a quarter of global employment. Consider that in 2023, the revenue of just one of the multinationals, Walmart, was greater than the GDP of more than 170 countries.
In summary, Bretton Woods was designed for a different era and desperately needs to be modernized to cope with these new and infinitely more complex times. Institutions have weathered storms skillfully before, for example the Nixon administration’s abolition of the gold standard in 1971, which was a huge shock to the system.
Yet beyond what one economist called “intractable geopolitical tensions,” there is much on the Bretton Woods table. Economists summarize a few: an unfair global tax system, a firefighting role in crises such as Covid (Yellen says the response to the GFC was “too timid and short-lived”) , the rapid mobilization of capital to support developing countries and the reform of the World Trade Organization (China favors regional trade blocs which help it circumvent WTO rules). Altogether, this is a huge package that will test both pillars of Bretton Woods to their limits.