At the end of the Second World War, the allied nations were tasked with rebuilding their local economies and the global economy at large. Wartime had prescribed that all industrial output be channelled towards providing for the cause, which was winning the war decisively. Consequently 1944, 44 nations met at the Bretton Woods Conference at the Mount Washington Hotel in New Hampshire, USA, to design a new global financial system. The results of these meetings were the creation of two new institutions, The International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), now known as the World Bank.
These institutions were tasked with distinct responsibilities. In the case of the IMF, regulating the global financial market and playing supervisory roles in monitoring the economy of member states became its primary responsibility, alongside a policy advisory role on economic and monetary policy. The IMF also manages a pool of funds donated by member states, which it uses to lend financial assistance to member states during economic distress. On the other hand, the World Bank is tasked with, amongst other things, lending funds to developing nations to support impactful initiatives such as infrastructural development, agri-business, entrepreneurship, etc. The IMF and the World Bank Group share similar and sometimes overlapping roles and have worked jointly on seminars and reports. They also famously shared the same building and currently have their headquarters situated across the street from each other in Washington, D.C. Renowned economist John Maynard Keynes jokingly stated at the inaugural launch of these institutions that he could not tell the difference between them, believing the IMF should have been made a bank and the World Bank, a fund.
These Bretton Woods Institutions, as they are referred to, have played a vital role in the stability of the global economy post-World War II and in regulating the global financial market. However, up to 80 years after their creation, there is another call for the remodelling of the global financial architecture to reflect the growth of new economies and help deal effectively with new development challenges. Also, with the rise of regional development banks (like the Asian Development Bank and African Development Bank), it would seem that these institutions have amassed a growing importance regionally, lending money to governments and private enterprises in these regions. Finally, the Bretton Woods Institutions are agencies of the United Nations (UN), and budding international organisations like B.R.I.C.S. have criticised a perceived “Western-centric” approach by these institutions, especially as key members of the UN Security Council seem to have an overarching influence on the activities of the World Bank and the IMF. B.R.I.C.S seeks to counterbalance this influence with the proposed creation of a new global reserve currency and the creation of the New Development Bank (NDB) to support public and private projects in member states through loans and grants.
The Bretton Woods Institutions: What Do They Do Really?
It is an open secret that most people have the vaguest idea of these two institutions' mandated roles. In line with the brief distinctions above, it is essential to note that primarily, the duty of the IMF is to provide stability to the global economy through the monitoring of the monetary and financial policy of member states and to provide sound policy advice to manage economic crisis and balance of payment problems that ultimately ensure containment, i.e. that the national monetary policies of a member state, do not adversely affect other member states and thus become an international crisis. Interestingly, the IMF, like the World Bank, also issues loans to member states in dire economic straits from the pool of funds it manages, which is donated through a quota by member states.
The World Bank Group, however, was initially named the International Bank for Reconstruction and Development (IBRD), signifying the original intention upon creation as an institution for economic development. The first set of loans issued by the bank was for the reconstruction of a war-ravaged Europe. Following the rebuilding of Europe, the bank began to turn its attention to more developing economies, fostering enterprise and encouraging projects with the potential of having a direct positive impact on national populations. While the IMF has no agencies or subsidiaries, the World Bank Group is divided into two major organisations: The International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). Other agencies of the World Bank include the International Finance Corporation (IFC), the International Center for the Settlement of Investment Disputes (ICSID), and the Multilateral Guarantee Agency.
Both the IMF and the World Bank have seen tremendous success and achievements in the discharge of their mandates and have averted regional and potential global crises. Some examples of this include the IMF intervention in Greece in 2010 in the first Greek Bailout with loans of over 100 billion Euros, the IMF intervention in the Uruguay Banking Crisis, and the 1998-2002 Argentine Great Depression.
Renewed Responsibilities in New Global Development: A Restructuring of the Global Financial Architecture
The Bretton Woods institutions on most scorecards would rank favourably well for executing their mission statement, so much so that the phrase “The IMF puts out fires” is used to depict the notion of a responsible caretaker for the global economic and financial system. However, with the emergence of the Asian Tigers, BRICS, the rising regional markets in Africa and the rise of China as a noteworthy global superpower with ambitions of trade expansion through the Belt and Road initiative, the call for a remodelling of the global financial system has never been louder.
The current system has been critiqued for being too “Western-centric” and concentrating critical decisions in the hands of a few powerful member states. An example of this is exhibited in what has been tagged as the “Nixon Shock” in global economic history. The Nixon Shock was promulgated in 1971 by American President Richard Nixon. For description, before 1971, gold was mutually agreed amongst the comity of nations to be used as the global reserve currency due to the stability and predictability of the commodity. Local fiat currencies were thus pegged to the current value of gold in the market. However, as one of the world’s primary lenders and trustworthy borrowers, the United States had acted as a custodian of gold for nations in exchange for American dollars. When these nations had asked for their gold to be returned in exchange for the American dollars given as security, this request was declined. It was viewed as a unilateral cancellation of the direct international convertibility of the US dollar to gold. This had, in effect, rendered the Bretton Woods system of pegging currencies to the dollar ineffective, and both institutions were deemed either complicit or powerless in addressing this material change to the global financial system. For this reason, the Bretton Woods system has notoriously been referred to in France as privilège exorbitant or “America’s Exorbitant Privilege”, being the privilege that accrues to the United States due to the US dollar being the global reserve currency.
Table 1: World Bank Lending Interest rates for select West and Central African Nations (2023)
Source: The World Bank
What Could A Remodelling of the Bretton Woods System Look Like?
The world was quite a different place in 1944. At least not as similar to 2024. The issues of the day were also quite different, as Europe, the primary theatre of WW2, was intentioned on a rebuild. Most countries in Africa were still plagued with colonialism, and the current thriving markets in Southeast Asia, like Singapore, did not have the mandate to determine their future. In 1944, the only African representatives at the Bretton Woods Conference were Ethiopia, Liberia, Egypt and an apartheid-sympathetic South Africa.
A remodelling must represent not just a cross-section of nations but accurate national representation for a workable formula to ensure fairness and mutuality in the new era of global development. While there are apparent gaps in the system due to some nations' lopsided funding of the Bretton Woods institutions, there should be a “hard cap” on the percentage of the total sum that can be contributed by one nation. This must be done to ensure that these institutions act as independently as possible without consideration for donor favourability.
Lastly, as the Bretton Woods institutions gear up to commemorate its 80th anniversary, it must ensure it adapts to the times and shows itself ready for a future considerably more different than previous times. The rise of blockchain technology and cryptocurrency must be a core part of the institutions' research and development efforts to understand potential areas for development and possible adoption where necessary. The IMF and the World Bank must show that it is ready to serve the world's fast-growing youthful populace and that, as an institution, it is not a relic of the past. New global development should be centred on a humanitarian-based approach to securing the future of the next generation.
References
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