Reforming the Bretton Woods Institutions (IMF and World Bank)?

Reforming the Bretton Woods Institutions (IMF and World Bank)?

he Bretton Woods system of international finance devised by 44 nations after the Second World War, mostly represented by the IMF, World Bank, was designed to help reconstruct and stabilize a post-war global economy.

In the 70s, the purpose of these international financial institutions (IFIs) shifted towards a neoliberal economic agenda, championed by Washington, (also known as the Washington Consensus).

It was at this time that policies such as structural adjustment started to be pushed to much of the developing world, following a “one size fits all” prescription of how economies should be structured, which had disastrous consequences for much of the world’s population.

As journalist John Vandaele writes,

From then on the Bretton Woods Institutions (BWIs) were very asymmetrical organisations. The rich countries didn’t need the BWIs any more, but with more than 60 percent of the vote they called the shots in both institutions. Developing countries really depended upon the BWIs, but didn’t have a lot to say there.

And so the BWIs developed into an instrument of western power.

— John Vandaele, Bretton Woods II: New Lifeline for Ailing Giants, Inter Press Service, October 28, 2008

The same policy prescriptions led to predictable problems such as

Developing countries opening markets before they were really ready to do so (something often forced through by “gun-boat diplomacy” during colonial times)
Rich countries became “judge and party,” as Vandaele puts it: “When they forced developing countries to open their markets, it was no coincidence that western multinationals tended to be among the first beneficiaries.”
Worsening poverty from things like structural adjustment policies that sapped the ability of poor country governments to make decisions about how their economies would be run.
Although such institutions have rarely been held accountable for such policies and their effects, for many years, people have been calling for their reform, or even for their abolition. Lack of transparency in these institutions has not helped.

There have been signs of discontent, however.

As mentioned on the structural adjustment page on this site, the IMF and World Bank have even admitted their policies have not always worked. For example, back in 2003, they warned that developing countries face an increasing risk of financial crisis with increasing globalization because effects in one part of the world can more easily ripple through an inter-connected world. “Financial integration should be approached cautiously,” they warned. In addition, they admitted that it was hard to provide a clear road-map on how this should be achieved, and instead it should be done on a case by case basis.

While former chief economist for the World Bank, Joseph Stiglitz is now a well-known critic of the IMF/Washington Consensus ideological fanaticism, as also mentioned on that previous page, others at the IMF have also started to question things, noting that developing countries have not benefited from following these ideologies so rigorously.

Fast forward a few years to this financial crisis and there are more calls for reform of the global financial system, perhaps with a difference: the crisis now seems to be so deep and affecting rich countries as well that even some rich countries that benefited from the inequality structured into the global order are now calling for reform. In addition, although developing countries had called for reform many times before, they now have a slightly stronger voice that in the past.

People within the IMF/World Bank are now themselves publicly entertaining the thought of reform. The World Bank’s own president, Robert Zoellick has said the idea of the G7 “is not working” and that a “steering group” of more nations would be better.

With the limited role the IFIs have played in this crisis, until recently, it seems their significance may be dwindling. Fewer countries have turned to them as last resort, and when they have, they have been able to push for far less stringent conditions than in the past. Some countries have looked to other countries like China, Russia and Arab countries, first.

There are still some concerns that some countries turning to the IMF will find themselves being prescribed the old formulas that are now quite criticized. Joseph Stiglitz also adds that these financial institutions have been slow to respond in the past and now:

We may be at a new “Bretton Woods” moment. The old institutions have recognized the need for reform, but they have been moving at glacial speed. They did nothing to prevent the current crisis; and there is concern about their effectiveness in responding to it now that it has hit.

It took the world 15 years and a world war to come together to address the weaknesses in the global financial system that contributed to the Great Depression. It is to be hoped that it will not take us that long this time: given the level of global interdependence, the costs would simply be too high.

— Joseph Stiglitz, Let’s throw away the rule book; Bretton Woods II must establish economic doctrines that work in emerging economies as well as in capitalism’s heartland, The Guardian, November 6, 2008

French President and head of the EU presidency, Nicolas Sarkozy has called for major changes to the IMF and World Bank. Yet, as John Vandaele added “This is as much a rescue operation for two organisations that have lost muscle as a call for a new financial architecture.”

Sarkozy’s ideas include tighter supervision of the international banking system and a crackdown on international tax havens to address harmful tax competition between states. These and other proposals are not new however, as many have called for this—and more—in the past 2 or 3 decades.

As Vandaele also adds, “if Sarkozy is serious about a Bretton Woods II, he’d better keep in mind that developing countries want more voice.” Governance issues such as better representation, more transparency and accountability are some of the things these institutions have long tried to promote, but often faced charges of hypocrisy as these institutions lack many of these fundamentals.

For a while now, talk of G20 meeting rather than just the G8 has signified this possible power shift. The G20 was actually set up in 1999 in the wake of the financial crisis that hit Asia. However, the G8 retained its influence, until now it seems.

The G20 represents the G8, the EU as a bloc and 12 emerging economies: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States of America. As well as the EU being represented as a bloc, IMF and World Bank representatives are usually present at G20 meetings.

Although it is an informal structure, it comprises 90% of the world’s economic output and some 80% of the world’s population, although the poorest 20% (over 160 nations) are not represented by this group.

The United States invited the G20 for a financial crisis meeting in mid-November. As many noted, the meeting was of the G20 and not the G8, indicated how emerging nations might be gaining more prominence.

While many emerging nations and even some European countries wanted the meetings to discuss fundamental reforms to the global financial system, the US and others wanted to focus on ways to address the current crisis with specific short term measures. These divergent aims threatened to make the talks less effective.

At the same time, a more global UN conference on Financing for Development towards the end of November has received far less media attention. This is to include all 192 member states and is broader in scope, continuing on from the 2002 Monterrey conference.

Some emerging nations such as China are now finding domestic pressures may outweigh their contributions to global resolutions. China for example is being asked by Britain’s Gordon Brown to provide billions from its dollar reserves to help out while China is worried about the increasing slowdown in the domestic economy and the need to stimulate its own internal markets. It has therefore poured billions into domestic stimulus packages, implying that it is not likely to provide so much money to institutions such as the IMF.

Some are also wondering whether the resolve of nations such as China to support an alternative to a US dollar dominated world will really hold up; China for example, has benefited from the US development model driven by consumption. It has meant more exports for China. However, now as consumer confidence in the US has been seriously rocked, China is feeling the effects. But if it can see a future where that model is revived, it would benefit. Would it want that to change?