The Bretton Woods Institutions, 75 years on: reform or risk irrelevance.
The Bretton Woods Institutions were built on the ruins of an old world-order, at the end of World War II, and the dawn of a new world order, marked by the birth of many new nation-states and the onset of the cold-war. Ostensibly, the Institutions were created to preserve the peace by ensuring macroeconomic stability, supporting development and discouraging the creation of hostile trade or currency blocs. Yet, right from their beginnings, they have been the source of critique and concern. There were concerns about asymmetries of power, particularly in favour of the US. Then came concerns about uneven-handed treatment of countries in very similar circumstances. On the one hand, post-war Europe could quickly recover thanks to the US stepping in and instituting the Marshall fund. On the other, in the “third world” cold-war dynamics demonstrably impacted on which countries would receive loans from the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) (Morrison, 2011) . Later, as the self-styled thought-leaders of international development, the Bretton Woods Institutions were criticised for combining lending with conditionality that recklessly promoted the Washington Consensus’ doctrine of the “free market.”
Unsurprisingly therefore, the original intention to maintain macroeconomic stability and promote development ended up a pipe-dream. From the Mexican financial crisis in 1982, to the Asian financial crisis in the 1990s, to the Argentinian crisis at the beginning of the new millennium and the financial crisis of 2008, the Bretton Woods Institutions have often proved ineffective and, at worst, counterproductive.
Yet their standard package of policy prescriptions- advocating (pro-cyclical) monetary and fiscal (austerity) policies and structural adjustment- has not changed substantially from the era of the “Washington Consensus.” Eurodad research has found that the International Monetary Fund (IMF) continues to promote fiscal consolidation as part of its lending programmes. The large majority of IMF programmes that Eurodad has investigated, require that countries apply austerity measures as part of loan programmes. These policies risk hypothecating economic growth, aggravating recession and a debt overhang. What is worse, social spending floors are weakened as a result of fiscal austerity measures, leaving no buffer to cushion the effects of austerity. A classical case in point is Argentina which received a record-breaking US$56 billion loan in 2018. Based on overly optimistic growth and debt sustainability forecasts, conditions attached to the programme characteristically called for tight fiscal and monetary policies. It included a series of budget cuts which has resulted in considerable social costs. The health budget has suffered an estimated cut of 8%, public services for women suffered a 19% cut and the public sector has faced massive layoffs, while the cost of living has spun out of control. The result has been a worsened debt to GDP ratio, negative GDP growth, small and medium-sized enterprises closing by the thousands, increased unemployment and poverty and a third of Argentinians currently living in poverty.
Despite their apparent immunity to criticism, the Bretton Woods Institutions have tried to recast themselves as forerunners of progressive thought-leadership. On assuming office, former President of the World Bank, Jim Kim promised a focus on ending extreme poverty and promoting shared prosperity in a sustainable manner but steered the Bank closer to the private sector than ever before. His premature departure from the Bank to join a private infrastructure investment firm was the ultimate symbol of how cosy relations had become with Wall Street during his time there. Christine Lagarde, the former Managing Director of the IMF went to great lengths to talk about gender equality, climate change and inequality. Once describing inequality as being “corrosive for economic growth and for society as a whole,” during her term as its Managing Director, the IMF started to take income and gender inequality more seriously. Nevertheless, this rhetoric about inequality has not led to actual changes. Faced with a trade-off between policy measures that could be growth-enhancing or that would tackle inequality, the IMF systematically opts for the former. The IMF’s response to climate change has also been assessed as being “too little, too late” and questionably supportive of carbon pricing, the subject of great critique and controversy. Lagarde did warn of rising debt levels across the globe in recent years. However this did not translate into concerted efforts to push through the long overdue reforms of the international financial architecture, such as the creation of a sovereign debt workout mechanism that would contribute to more orderly and balanced resolutions of debt crises. Failure to push for the firming up of the legal framework for sovereign debt restructuring has driven up risks for developing countries at a time when the IMF has been encouraging more low- and middle-income countries to issue debt on international capital markets, and its lending practices continue to send a message to private creditors that they will be bailed out despite reckless lending to over-indebted countries.
These failures are strongly reinforced by the fact that governance structures of the Bretton Wood Institutions are long past their expiry date. The majority of the shareholders are from the global north, with the US still holding on to its veto power. These countries have disproportionately more decision-making power than other nations, based on their economic weight in the world economy. While so-called ‘quota reviews’ are meant to update voting shares to reflect the real positions of countries in the world economy, the fourteenth review has been tenaciously stalled by the US administration. Trump is threatening to block the fifteenth review, fearing a greater say for Beijing.
Similarly, the process to select the heads of the IMF and World Bank is still based on the 75 year old- gentleman’s agreement whereby the US selects the President of the World Bank and Europe selects the IMF’s Managing Director. That neither institution has been able to depart from this practice and institute a transparent selection process based on more current norms –such as merit, diversity, gender equity etc. demonstrates just how trapped these institutions are in a time-warp.
This structural trap that the Bretton Woods Institutions find themselves in risks making them irrelevant and defeating their original purpose to uphold multilateralism in the economic and financial spheres. One symptom of this is the creation of new institutions like the Asian Infrastructure Investment Bank and the New Development Bank of the so-called ‘BRICS’ (Brazil, Russia, India, China and South Africa). They are an indication of the discontent of emerging countries while still replicating the same financial orthodoxy of the Bretton Woods Institutions.
Finally it is low-income and new middle-income countries that are impacted the most by the failures of the Bretton Woods Institutions to reform. The fact that the leadership of the institutions still dance to the tune of their political masters and that low and middle income countries cannot effectively weigh-in on the vision and orientation of the Bretton Woods Institutions means that their needs will never be effectively prioritised. Furthermore, the Washington Consensus being replaced by the “Wall Street Consensus,” with the increasing role of market-instruments to finance development, there is an even greater risk that principles of democratic ownership are side-lined with an even greater push to deregulate and liberalise economies.
Built on shaky foundations and headed in a direction that raises even greater questions of legitimacy, the Bretton Woods Institutions face a deeply existential question. Are they willing to reform to become fit for purpose or risk become irrelevant, leaning on the same old economic orthodoxy that has been proven wrong time and again and the same, unequal power structures as when they were founded 75 years ago.