Russia’s invasion of Ukraine in the winter of 2022 brought to light once more the shortcomings of the World Bank and the International Monetary Fund (IMF), two international organisations tasked with coordinating strategies to address the ensuing economic crisis.
Following the attack, US Treasury Secretary Janet Yellen, a former chair of the US Federal Reserve, issued a warning.
Janet Yellen said, “We will need to modernise our existing institutions—the IMF and the multilateral development banks—so that they are fit for the 21st century, where challenges and risks are increasingly global.”
She added that the defeat of Russia calls for actions that the World Bank and IMF might not be able to implement.
Yellen, a pivotal figure in the previous Joe Biden administration, was referring to a wide range of issues, including trade disputes that are getting worse, sanctions against Russia, big-power rivalry that is causing geopolitical tensions, and—perhaps most worrying of all—the deterioration of the 80-year-old Bretton Woods institutions that were initially created for this very reason.
Bretton Woods had a crucial role in saving a globe ravaged by conflicts, poor leadership, and geopolitical uncertainty.
Earlier this year, IMF Managing Director Kristalina Georgieva said, “The IMF was formed in 1944 from the wreckage of two world wars. The old-world order was in ruins, and populism had taken over most of the world in the decades before we were born. The IMF was crucial to the world’s remarkable advances in global integration and well-being following Bretton Woods.”
When representatives from 44 countries, led by the United States and the United Kingdom, convened in New Hampshire for the so-called United Nations Monetary and Financial Conference in July 1944, Bretton Woods was established. From the wreckage, they established a new, globally coordinated economic system aimed at growth and restoration. Thus, they established the World Bank and IMF.
“Eighty years later, the global economy is once again in a moment of significant turmoil as countries recover from the pandemic and conflict has flared across Europe, the Middle East, and Africa,” Georgieva continued, “but here we are again. The question that remains in the midst of all of this is whether the Bretton Woods Institutions (BWIs) can handle the demands of a much larger and more intricate global economy. If not, what other options are there?”
Georgieva summarised, “We still face many of the same challenges as when we first started. A military force has once again invaded a neighbour in Europe, and regional conflicts are escalating, increasing the risks to the entire world. Once more, protectionism and populism are growing. In addition, we are battling disruptive technologies like artificial intelligence (AI) and virtual currencies, as well as global megatrends like climate change and the demographic shift.”
Fragmentation of the world economy
The majority of economists concur that, just when the world needs to avoid it, it is breaking apart into Global Economic Fragmentation (GEF).
GEF is seen as a policy-driven reversal of global economic integration that makes it less likely for countries to work together to solve global crises, stops new ideas from spreading in emerging markets, and risks sending money to countries with low incomes. In other words, by concentrating on ourselves, we are regressing.
The IMF, which is facing the possibility of becoming obsolete, explains that “in our increasingly fragmented world, nations have focused on reshoring essential goods and supply chains, including minerals crucial for green technologies, semiconductors, and military hardware due to concerns over national security and geopolitical motives.”
Higher import prices, divided markets, limited access to labour and technology, decreased productivity, and a decline in living standards are the direct consequences, according to the IMF.
Bretton Woods had a crucial role in saving a globe ravaged by conflicts, poor leadership, and geopolitical uncertainty.
Tariffs, subsidies, currency wars, protectionism, industrial policies, and penalties are the causes of this fragmentation. Together, they are suppressing the international trade that may help turn things around. In summary, nations are choosing their own paths and taking opposing positions. This generally undermines Bretton Woods’ primary goal of global financial stability.
Many nations are therefore at risk of experiencing a decline in their wealth. According to recent studies, developing markets and mature economies may suffer long-term losses of up to 4% of GDP. The repercussions? Food insecurity, social unrest, and debt problems, with the most vulnerable countries suffering the most.
A new IMF report estimates that the spread of GEF might result in a long-term drop in global economic production of up to 7%. That would come at a disastrous cost, estimated at over $7.4 trillion.
A situation at a crossroads
Although the phrase is frequently used, economists are certain that we are at a crossroads once again and are not even close to reaching a consensus on a Bretton Woods-style solution.
“We can choose to pursue a path of instability and conflict in the future. Or we can decide on the route of collaboration and mutual gain,” Georgieva said.
However, is it feasible to reform the BWIs? The IMF and the World Bank are facing “existential challenges,” according to macroeconomist Amin Mohseni-Cheraghlou of American University in Washington, DC, who is also the head of the Atlantic Council’s Bretton Woods 2.0 Project.
He provides a long list of examples to support his claims, including the rise of new competitors, revolutionary new technologies like artificial intelligence, and two decades of social and economic upheavals like the Great Financial Crisis, the destruction caused by COVID, and the severe issues brought on by climate change, especially in Sub-Saharan Africa. Furthermore, as non-Western economists frequently note, the GFC and climate change are two of these ills that originated in the West.
Mohseni-Cheraghlou asserts that a significant problem in BWIs is the concentration of power in the wrong hands. In other words, at a time when “economies that are not part of the high-income club are playing an increasingly large role in global trade and finance,” the leadership is firmly rooted in the US, Group of Seven (G7), and European Union (EU).
The United States and the European Union hold almost 40% of the votes, even though “their relative prominence in the global economy has eroded.” Chinese scholars concur, pointing out that Beijing has been denied a position in the BWIs that, in their opinion, is appropriate given its undeniable economic power.
Professor Qin Yaqing, a political scientist at Shandong University, is adamant that a global governance structure that is “multi-level, multi-issue, and multi-organisational” must take the place of what he refers to as “US hegemony” over these institutions. In fact, he shares Beijing’s belief that economic fragmentation is best for China.
It would enable China to “choose allies to achieve various objectives and operate nimbly across regions, issues, and organisations.”
He contends that the disintegration of global governing organisations would ultimately contribute to the collapse of the former hegemonic system.
The belt and road initiative
The majority of Western nations, along with several Asian ones, are undoubtedly concerned about China assuming a more aggressive leadership role in a post-Bretton world. They’re halfway there already. China’s Belt and Road Initiative (BRI) has drawn other nations into Beijing’s web, as noted by American political scientists.
As could be predicted, two of the 24 United Nations members that voted not to denounce Russia’s invasion of Ukraine were North Korea and Russia, while the other 22 are all Belt and Road beneficiaries. The fact that 49 out of the 58 countries that did not cast ballots are also involved in the Belt and Road is maybe more indicative of China’s own predominance among the more disgruntled countries.
We have the option of going down the route of instability and conflict. Or we might decide to follow the route of mutual prosperity and cooperation.
Since their own coffers are far from deep enough, the IMF and World Bank now have to deal with a far more complicated world of international financing.
According to Yellen, “We have been working in billions so far, and experts put the funding needs in the trillions.”
Positively, there are many new lenders available, including sovereign wealth funds, pension funds, regional multilateral development banks, and state-led development finance organisations.
For example, there were more than 40 multilateral development banks and financial institutions at the time of the previous count, but there are now at least 50 solely national development banks. Additionally, a total of 130 sovereign wealth funds are investing $12 trillion. While private pension funds have $42 trillion in assets in their treasuries, public pension funds have $24 trillion worldwide.
Furthermore, the number and financial clout of multinational firms has skyrocketed in the past eight decades.
They “command economic and technological might larger than many countries,” according to Mohseni-Cheraghlou.
Multinational corporations account for a quarter of all jobs worldwide and nearly one-third of the global GDP, based on solid data. In fact, Walmart alone generated more income in 2023 than the GDP of over 170 countries.
To sum up, Bretton Woods was built for a different time period and urgently has to be updated to meet the demands of this new, far more complicated one. The Nixon administration’s 1971 removal of the gold standard, a significant disruption to the system, exemplifies how the institutions have adeptly navigated past challenges.
Despite the challenges posed by “intractable geopolitical tensions,” the Bretton Woods table presents numerous benefits. Some of these, according to economists, include an unjust global tax system, a role in responding to crises like COVID (Yellen thinks the GFC response was “too timid and short-lived”), the quick mobilisation of capital to aid developing nations, and World Trade Organisation reform (China prefers regional trading blocs that allow it to get around WTO regulations). All things considered; this massive package is poised to challenge the foundations of Bretton Woods.
While the Bretton Woods institutions were pivotal in rebuilding the global economy after WWII, their current structure and mechanisms appear outdated in addressing the complexities of today’s interconnected and fragmented world.
The rise of new economic powers, shifting geopolitical dynamics, and evolving global challenges require a radical overhaul of these institutions to ensure they remain effective. This is no small task, but the alternative—a more fragmented world without coordinated economic governance—could be far more destabilising. As the global landscape continues to evolve, the question remains whether the BWIs can adapt in time or if we will see the rise of new structures altogether.