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The writer is an FT contributing editor and writes the Chartbook newsletter
This summer will mark the 80th anniversary of the Bretton Woods conference at which the Allied coalition in the second world war conceived the postwar currency system and the architecture of international financial institutions — the IMF and the World Bank — that would oversee it. At the same time, they also decided the security architecture of the UN. Over the decades since, this global architecture has perdured. And it has done so by reinventing itself.
Kristalina Georgieva, the IMF’s managing director, recently celebrated the fund’s record of widening and evolving its role within a constant mandate. But as flexible as the IMF has been, like the rest of the global architecture, its evolution has followed the line of western power. And what defines the world economy at this moment is the realisation that this line no longer encompasses the future. In the case of the fund, this discrepancy is particularly clear.
In its early decades, the IMF was the house bank of advanced economy members of the Bretton Woods system. It largely did not lend to developing countries. Then, in the 1970s and 80s, as Bretton Woods collapsed and global capital flows surged, it became a firefighting organisation dealing with debt crises in Latin America and the developing world. Money flowed from north to south, but it was no secret that what was at stake were the fortunes of systemically important banks in the north.
If the 1980s gave birth to the Washington consensus, the fund embodied it. But, as far as the IMF was concerned, the US political scientist Francis Fukuyama’s promised end of history never arrived. What we now look back on as the halcyon decades of globalisation after 1989 were far from plain sailing. Crises flared in Mexico, east and south-east Asia, Russia and again in Argentina and Brazil. The fund’s harsh conditionality faced a backlash, including from high-profile economists in the west.
Though globalisation marched on, by the early 2000s the IMF was in a parlous state. Only the most desperate would voluntarily bend under the yoke of an IMF programme. As the client list dried up, the fund’s budget shrank. Staff were laid off. What saved it was the global financial crisis of 2008 and its aftermath — a worldwide shock originating in the north Atlantic banking system.
Not only was the IMF besieged by eager borrowers, but the fund’s crisis-fighting was given the political backing of the G20, promoted to an assembly of heads of government in the thick of the crisis in November 2008.
Once again, power and money were aligned. But such high-level political backing came with strings. On account of its expanding economy, China was brought into the fold with promises of an adjustment to the IMF’s voting share. Meanwhile, the IMF’s European leadership fell in with former German chancellor Angela Merkel’s government and the Obama administration to place the resources of the fund behind successive eurozone bailouts.
In an extraordinary throwback, some of the largest programmes in the fund’s history were mobilised for Greece, Ireland and Portugal. The embarrassment was compounded by the fact that the adjustment in voting shares promised to China and other emerging markets was held up in Congress by “America first” Republicans. Not until 2016 was China’s quota raised to just over 6 per cent, a fraction of the 16.5 per cent held by the US. While in the interim, China’s economy, measured in purchasing power parity terms, overtook that of the US.
Over the past decade, under the leadership of Dominique Strauss-Kahn, Christine Lagarde and Georgieva, the fund’s staff have been active in revising long-held assumptions about fiscal austerity and the absolute freedom of capital flows. They have loosened conditionality on large and politically sensitive loans. The fund has also broadened its surveillance to include issues of female labour market participation, inequality and climate. From 2020 onwards, it was notably proactive in its response to the Covid-19 pandemic.
But although the fund’s agenda may be up to date, the question can no longer be avoided — who do the Bretton Woods institutions represent? As Martin Wolf has argued, one thing we know for sure about the direction of the world economy is that the balance is shifting from west to east. And yet, as the G20 met in New Delhi in September 2023, 59.1 per cent of the voting shares in the IMF were held by countries accounting for 13.7 per cent of the world’s population. Meanwhile, India and China’s voting share together came to around 9 per cent.
That this is grotesquely out of line with the future trends of the world economy is clear. What is also clear is that, short of a political revolution, the US Senate will never countenance an adjustment that substantially redresses this imbalance. Nor, for that matter, will the Europeans, who are even more heavily over-represented.
We seem condemned to live, therefore, in a world in which the international financial institutions on which we rely to anchor the global financial safety net face unanswerable questions about their legitimacy. For all the inventiveness and adaptability that their expert staff have recently displayed, they face an uphill battle.
Source: Economy - ft.com
