The Bretton Woods Institutions and the second crisis of multilateralism by Luke Fletcher, Jubilee Australia Research Centre

July 2019

After 75 contentious years supporting expansion of the interests AUTHOR PIC of the Global North with the support of elites from the Global South, the World Bank and IMF now face a crisis of multilateralism in no small part of their own making, as failed economic policies have resulted in wide-spread skepticism of the effectiveness and equity of the international order they helped to shape.

The first crisis of multilateralism own sterling currency area.i By the Dr Luke Fletcher is the time of the 1941 Pearl Harbour executive director of the Exactly 75 years ago, on 1 July 1944, attack, the US Treasury Department Jubilee Australia delegates of 44 nations gathered was already making plans for the Research Centre and a together at an old hotel in New new economic world order that it visiting scholar at the Hampshire to negotiate the blueprint sought to impose on the world, and it University of South for a post-war economic order. For would be a resounding endorsement Wales School of Social the next three weeks, with the war in of multilateralism in economic Sciences. He has been Europe and Asia still raging, the affairs. The chief architect was Harry involved with Jubilee delegates debated and negotiated Dexter White. Australia since 2005, whether to endorse plans drawn up where he has authored by Harry Dexter White, a relatively White’s new economic order, based and co-authored many obscure US Treasury economist, to around his IMF, would have three reports about Australia's establish the International Monetary outstanding features: first, it would impact on Papua New Fund (IMF) and the World Bank. allow countries to temporarily borrow Guinea and the Pacific currencies from each other, in the region. Luke has a PhD The previous world order, already hope that doing so would prevent from Cambridge in rocked by World War I, had not been competitive currency devaluations. Politics and able to survive the two great This feature arose from White’s International Studies disruptions of the 1930s: the Great conviction that the major cause of (2015). His other major Depression and rise of militant the Great Depression was the research interest is mid- fascism. The depression, and the competitive currency devaluations twentieth century chaos that followed – the departure implemented by raw materials political economy and of key countries from the gold exporting economies in South US foreign policy. standard, a retreat of countries America and elsewhere. Second, the behind tariff walls and the so-called IMF would discourage the ‘beggar-thy-neighbour’ policies – saw continuation of trade and currency a reduction in world trade, which blocs of enemies and allies alike and further exacerbated the US economic promote economic multilateralism in crisis initiated by the 1929 stock trade. Third, it would make the US market crash. The world was dollar, along with gold, the de facto fragmenting into regional economic international reserve currency. blocs: not only those led by the Axis Although the IMF was very much the powers, Germany and Japan, but centrepiece of his proposal, White even Britain, which established its also recommended an International

brettonwoodsproject.org The Bretton Woods Institutions and the Second Crisis of Multilateralism

Bank of Reconstruction and Agreement was passed by increasing number of now- Development (IBRD, or World Congress in the spring of 1945.ii independent former colonies, Bank) to give loans to aid post-war especially in Asia, looked at the reconstruction and aid The transformation of the Bank beneficent handouts that the US development in the so-called ‘third and Fund had given to its European allies for areas’. reconstruction and asked why they White’s Fund got started in 1946 could not receive similar gifts for John Maynard Keynes, who also and it set about determining the their economic development. The believed that the time had come to rules by which countries in balance US was not disposed, however, to end trade and currency blocs and of payments difficulties could give grants to this admittedly larger re-establish multilateralism, had borrow currencies from other Fund group of nations, except in the case developed an alternative proposal members. Given that so many of military hand-outs to those few at the same time as White’s. countries were reliant on goods allies deemed important in the Keynes had developed an from the US and Latin America (the emerging Cold War against International Clearing Union, ‘dollar area’) to kick-start their communist Soviet Union and which, unlike White’s creation, was reconstruction, everyone wanted China. a truly radical proposal because it dollars. But White’s critics had been put as much pressure on creditor right. The way the Fund was set up Through the 1950s, the US made a nations (like the US) to reduce their was too limited to get enough number of important reforms that balance of payments surpluses as it dollars to all the countries that would address this tension, and at did on debtor countries to reduce needed them. The World Bank the same time place the Bretton their balance of payments deficits. could lend only to particular Woods Institutions (BWIs) at the projects and was soon under the front and centre of the relationship To be sure, Keynes was worried control of conservative Wall Street between the industrialised and about White’s IMF amassing too bankers. By 1947, most European wealthy Global North and what much power and policy control over countries were facing a balance of was seen as the poor, dependent, debtor countries, one of which was payments crisis even as the US Global South. First, it relaxed the likely to be Britain. But Keynes, and economy was experiencing record IMF’s borrowing rules to encourage even some American experts, balance of payments surpluses. countries in balance of payments particularly at the Federal Reserve, distress to come to it for temporary also feared that neither the Fund Yet, instead of using the Fund or assistance, while at the same time nor the Bank would be able to the Bank to deliver the much- pioneering a new type of generate enough liquidity to deal needed dollars to European arrangement called Stand-By with needs of post-war economic countries, the American Agreements (SBAs). These construction. Nevertheless, at the Government chose to step in and agreements set out the criteria that Bretton Woods Conference itself, in buy the surpluses itself, then give nations would have to fulfil in order July 1944, the US was able to them to the Europeans, gratis. This to be eligible to borrow currency convince enough of its allies initiative, popularly known as the from the Fund. (mainly European, Commonwealth Marshall Plan, worked a treat: By and Latin American countries) to 1951 the major European Second, it created new bilateral and sign on to the plan; while many of economies were back on their feet multilateral facilities with which to them would have preferred Keynes’ and were less dependent on US disperse loans to Third World Clearing Union, they had long imports. countries. Some of these new before determined that it was not facilities would become part of the in their interests to obstruct an all- However, while this rather strange growing World Bank system, such powerful America from its preferred state of affairs had solved one as the International Finance solution. A huge public relations major problem when it came to Corporation (IFC), the Bank’s campaign in the US saw off Europe, it created a serious public private sector investment arm, challenges from isolationist forces relations problem when it came to established in 1956, and the in the US, and the Bretton Woods the emerging “Third World”. Latin International Development American nations and an Association (IDA), the Bank’s

2 At issue

concessional lending arm, disciplinary headmaster. All the these theories were not able to established in 1960. In 1957, the MDBs and, increasingly, the confront certain realities that US also created the world’s first bilateral aid agencies, would insist undercut their policy logic: for loan-giving economic development on a country concluding an SBA example, industrialised countries agency, the Development Loan with the IMF before loans could be who produced the majority of high- Fund, which the Kennedy disbursed. The process of end products would always Administration would re-christen as conditionality – whereby endeavour to make it the US Agency for International countries would be more profitable to Development (USAID) three years required to make produce these later. Throughout the 1960s, as a reforms to earn In the meantime, products rather second wave of decolonisation these loans in than to sell swept the world bringing order to access the Bretton Woods either the raw independence to dozens of African official credits – Institutions materials that countries, most members of the had by now continue to do went into rich country club, the Organisation become well pretty much what making them for Economic Cooperation and established.iv or basic Development (OECD), developed they have always agricultural their own loan-giving aid agencies The first debt done commodities. A in imitation of the American crisis and the population example. This era also saw the neoliberal era explosion in the initiation of the regional Global South that was development banks, with the The BWIs had thus established partly due to advances in medical founding first of the Inter- themselves as the gatekeepers of science also undercut the capacity American Development Bank the relationship between the of the development project to (1959), followed by the African Global North (the US, Western produce the sort of quick results Development Bank (1964), and Europe, Japan and the former that the entire theory rested on.v then the Asian Development Bank settler nations of the British (1966).iii empire) and the Global South Some countries identified a (everywhere else): first, on the basis loophole in the system and stepped Another big change came in the of their undoubted technocratic up the ladder of development late 1960s with Robert and administrative skills and through exploiting it: if they could McNamara’s departure from second, on their usefulness to the just establish themselves as an prosecuting the war in Vietnam to major powers. They could control exporter back to the Global North become the president of the World access to the disbursement of loans of these high-end industrial Bank. McNamara revolutionised desired by the developing nations, products, loans could be repaid and the institution, increasing its loan while at the same time imposing the country could soon modernise portfolio seven-fold and policy constraints and conditions and eventually end up in the rich inaugurating its transition into the on nations that would have often club as an OECD nation. First Korea self-styled knowledge leader in been awkward or uncomfortable and Taiwan and then, in more international development, a for the wealthy nations to insist recent years, China followed this position which it continues to enjoy upon. path out of the development trap to this day. (by more often than not ignoring The lending itself was buttressed by the advice of the BWIs).vi By this time, the new aid regime the emergence of certain had taken shape; and regardless of intellectual theories now in vogue, Indeed, the Bank’s record of whether these new aid such as the modernisation theory fighting poverty, especially rural programmes were the province of (particularly W.W. Rostow’s stages poverty, including through the individual countries or overseen by of growth theory) and the ‘green revolution’ which it backed, the multilateral development banks simultaneous emergence of was largely unsuccessful: its (MDBs), the IMF further secured its development economics as an programmess, more often than not, position in this regime as academic discipline. Unfortunately, helped mainly wealthy farmers and

brettonwoodsproject.org 3 The Bretton Woods Institutions and the Second Crisis of Multilateralism

increased inequality.vii The World 1980s, the 1990s and the 2000s. by the early 2000s as a result of Bank and the IMF also developed a The entire project received a boost challenges to their judgement, the tendency to support authoritarian in the years after 1989, when the power of social movements and regimes in the Philippines, term ‘Washington Consensus’ was from authoritative policy and Indonesia, Zaire, Brazil, Chile and first coined, and when the Soviet academic experts.xii But the BWIs’ South Africa, as well as an empire crumbled, further power has always, ultimately, come unfortunate habit of endorsing the entrenching the conviction that from the support given to them by accessions of right-wing but US- capitalist globalisation was now the their most powerful nation- friendly dictators by offering them inevitable.x state members. And this big loans as soon as they stepped institutional support did not really in to power.viii They facilitated, in Nevertheless, the 1980s and early waver during this period. collaboration with local elites, the 1990s were the zenith of the two extraction of natural resources and institutions’ power and influence. Nevertheless, the rise of China and agricultural commodities from The lost decade of development the continued fallout from the resource-rich nations. that followed when structural 2008 global financial crisis have adjustment failed to lead to wealth ushered in a second crisis of As a result, by the early 1970s, and riches, the growing multilateralism. President Trump’s most countries were in a virtually consciousness that the debt recent tariff war with China, constant state of indebtedness, problem was a continuing sore for whatever the real motivations needing a regular injection of new many nations of the Global South, behind it, has further weakened loans in order to repay the principal as well as increasing concerns one of the fundamental tenets of and the interest of previous about the social and environmental multilateralism. However, the borrowings. This debt bubble impact of large development potential impact of China’s rise on expanded even further, when an projects favoured by the Bank, saw the BWIs is complicated. Although excess of liquidity, due partly to the cachet of the institutions start success of the Chinese model and Nixon’s de-coupling of the US to decline. The IMF’s ideologically the power of China as a global dollar from gold, signalled an end driven role in worsening the impact player in development, most clearly to the Bretton Woods monetary of the 1997 Asian Financial Crisis demonstrated by the order, leading to a frenzy of made it a further reckless private lending, especially target of critique. to Latin American countries.ix Social movements in the Global North and Despite being complicit in the the South protested in practices that led to inflation of the the streets, winning bubble, when the bubble burst in some institutional 1982, it was the Fund and the Bank reforms to the Bank’s that were asked to step in to lending practices and manage the fallout. This was the to their management era of structural adjustment, where of the debt crisis in the BWIs became the global the late 1990s and proselytisers of the free market early 2000s.xi philosophy now in vogue in Washington and elsewhere: the The second crisis of liberalisation of trade and multilateralism investment and the privatisation of government services became the The BWIs’ hegemonic mantra and a feature of all power to set the terms conditionality agreements. It of the debate about ushered in the era of neoliberal international globalisation that would reign development was

Photo:Elvert by Disruptthe IMF/World April2009 Bank Meetings, 25 Spring supreme for the decades of the definitely weakened BarnesProtest Photography

4 At issue

establishment of the Asian In the meantime, the BWIs hegemony, appears to be in Infrastructure and Investment continue to do pretty much what gradual decline, the institutions Bank (AIIB), might be interpreted they have always done. The Bank is have shown themselves up till now as a challenge to the hegemony of still primarily a lending institution, to have an uncanny ability to the BWIs, it could also be argued favouring large, capital-intensive, survive. It would be a bold observer that there is more than unites the often extractivist development indeed to predict that their 75th two models than separates them. projects with loans that must be anniversary will be the last major China may decide that its interests repaid. It continues to push a landmark that they reach. lie in working through them rather model of development whose than against them. success in bringing nations out of Comparisons between the 1930s poverty has long been in question. and the 2010s are common, The consequences of the global The Fund continues to be primarily because both decades saw a financial crisis have probably been a crisis manager and gatekeeper of financial crisis at the end of the more profound: years of stagnation access to finance for countries in preceding decade followed by and imposed austerity have finally balance of payments trouble. Its years of sluggish growth and the made populations in the US and policy ‘advice’ to wealthy countries rise of nationalist and fascist Europe question whether the elite- is a choice, but the story is very movements. But the current crisis of led project of neoliberal different for poorer countries multilateralism differs from that of globalisation was really experiencing a balance of the 1930s in a number of ways, not contributing to a more just and payments crisis. A recent analysis of least in that it is much more of a peaceful world. More and more the impact of the Bank’s policies in global crisis, where the model(s) of people are increasingly conscious South Africa suggests that it has development being adopted have that inequality is not only a not learned a great deal: it is still more often than not led to problem between the Global North pushing an agenda favourable to disappointment and frustration. and the Global South, but within corporations and the wealthier The tragedy is that there are countries of the North and South as members of the population and different policies and models out well. The rise of the environment has hampered South Africa’s there that could lead to a new movement in reaction to the attempt to address systemic multilateralism, such as those climate crisis has also brought the inequality.xiii Similar ‘lessons not outlined in the Geneva Principles.xiv contradiction between Bank and learned’ also apply to the Middle The question is, do we have the Fund policies and the requirements East and North Africa region, and wisdom and the courage to pursue of ecologically sustainable Argentina, among others. them—and do the World Bank and development to the fore. As the the Fund have the capacity to BWIs were two of the major With the Fund’s mixed record on admit their failures and to adapt champions of the neoliberal economic management, and the themselves and their philosophy to project, their brand has been Bank’s patchy results addressing a new century? tainted. Even the IMF, the most poverty and development, one rigid apologist for free market might have hoped by now to see policies, has started to talk about more fundamental change coming inequality and capital controls. out of the organisations. This has Nevertheless, the IMF’s backing of not occurred. Constrained by their As the World Bank and IMF austerity across Europe through its mandates and their institutional celebrate their 75th Anniversary surveillance function was influential forms, they appear incapable of this year, the Bretton Woods Project and arguably responsibly for questioning the basic assumptions will be publishing a compendium of unnecessarily deepening the of their approach or their purpose. essays in October 2019 analysing crisis—and its role in the Greek They have nevertheless proved the heritage and forecast of both crisis as a member of the infamous themselves rhetorically and institutions under the lenses of democratic governance, human ‘Troika’ has further undermined its practically adaptable enough to rights, and the environment. Keep legitimacy. ride out several storms, usually of an eye out for this publication on their own making. Although their www.brettonwoodsproject.org influence, along with US

brettonwoodsproject.org 5 ENDNOTES i For how US policymakers understood the breakdown of the post-war order, see Jeffrey Frieden, Global Capitalism: Its Fall and Rise in the Twentieth Century (New York: W. W. Norton & Company, 2006), Chapter 8 & Chapter 9; Lloyd C. Gardner, Economic Aspects of New Deal Diplomacy (Boston: Beacon Press, 1964). ii There are too many works of the Bretton Woods negotiations and outcomes to list here. Many of the classic studies, such as Richard Gardener’s Sterling-Dollar Diplomacy: The Origins and Prospects of Our International Economic Order (New York: Columbia University Press, 1980) and Alfred E. Eckes, Jr, A Search for Solvency: Bretton Woods and the International Monetary System, 1941-1971 (Austin and London: University of Texas Press, 1975) are valuable but falsely imply the agreement as a compromise between Keynes and White. Ben Steil’s recent The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White and the Making of a New World Order (Princeton and Oxford: Princeton University Press, 2013) is much more accurate. iii See B.I. Kaffman, Trade and Aid: Eisenhower’s Foreign Economic Policy, 1953-1961 (Baltimore and London: Johns Hopkins University Press, 1982). iv The idea of the ‘aid regime’ is taken from Robert E. Woods, From Marshall Plan to Debt Crisis: Foreign Aid and Debt Choices in the World Economy (Berkeley: University of California Press, 1987). v On development economics see Albert O. Hirschman, ‘The rise and decline of development economics’, in The Essential Hirschman (Princeton: Princeton University Press, 2013) and Stuart Corbridge, ‘The (im)possibility of development studies’, Economy and Society, 36(2) 2007, 179-211. On modernisation theory see Nils Gilman, Mandarins of the Future: Modernization Theory in Cold War America (Baltimore and London: Baltimore University Press, 2003). vi On the bias of the system and exploiting its loopholes towards see Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism (London: Bloomsbury, 2007). On China’s success in spite of Bank and Fund advice, see ‘Chinese growth’s contribution to poverty reduction challenges IMF and World Bank neoliberal policies,’ Bretton Woods Observer, 6 December 2017, https://www.brettonwoodsproject.org/2017/12/chinese-growths-contribution-poverty-reduction-challenges- world-bank-imf-neoliberal-policies/ vii See Robert L Ayres, Banking on the Poor: The World Bank and World Poverty, The MIT Press, Cambridge, MA, 1983, 102-109, 226-227; Susan George, How the Other Half Dies: The Real Reasons for World Hunger, Allanheld, Osman and Co., Montclair, NJ, 1977, 104-105; viii See for example, Eric Toussaint, ‘The World Bank and IMF Support to Dictatorships,’ Committee for the Abolition of Illegitimate Debt (CADTM), 6 May 2019. http://www.cadtm.org/World-Bank-and-IMF-support-to-dictatorships; Bello, Walden ‘Development and Dictatorship: Marcos and the World Bank’ in Walden Bello and Severina Rivera (eds) Essays (Washington DC: Friends of the Filipino People, 1977, 91-133). ix See Cheryl Payer, The Debt Trap: The International Monetary Fund and the Third World (New York and London: Monthly Review Press, 1974). x For an insider analysis of the Bank’s role in this era see Devesh Kapur, John P. Lewis, and Richard Webb, The World Bank: Its First Half Century, The Brookings Institution Press, Washington DC, 1997. For a critical analysis see Susan George and Fabrizio Sabelli, Faith & Credit: The World Bank’s Secular Empire (Boulder, Co.: Westview Pres, 1994). xi See Stuart Corbridge, Debt and Development (Blackwell, 1993) and Michael Goldman, The Wold Bank and Struggles for Social Justice in the Age of Globalisation (New Haven: Yale University Press, 2005); see especially Joseph Stiglitz, Globalization and its Discontents (New York: W.W. Norton, 2002). xii On the 9/11 attacks’ impact on the global justice movement see David McNally, ‘From the Mountains of Chiapas to the Streets of Seattle: This is What Democracy Looks like,’ in Jai San (ed), The Movement of Movements, Part 1: What Makes Us Move? (Oakland and New Delhi: Open World, 2017, 47-68). xiii Patrick Bond, ‘World Bank Punches South Africa’s Poor and Coddles the Rich, ’ Committee for the Abolition of Illegitimate Debt (CADTM), 12 February 2016, http://www.cadtm.org/World-Bank-punches-South-Africa-s. xiv Kevin P. Gallagher & Richard Kozul Wright, A New Multilateralism for Shared Prosperity: Geneva Principles for a Global Green New Deal, Boston University Global Development Policy Centre & United Nations Trade and Development Conference on Trade and Development, April 2019.

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