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The author is a contributing editor for the FT and writes the Chartbook newsletter.
This summer marks the 80th anniversary of the Bretton Woods conference, in which the Allied powers during World War II envisioned a postwar monetary system and the structure of the international financial institutions (IMF and World Bank) that would oversee it. At the same time, the security structure of the United Nations was decided. In the decades since then, this global architecture has endured. And it did so by reinventing itself.
IMF Managing Director Kristalina Georgieva recently praised the fund's track record of expanding and evolving its role within its mandate. But the IMF, like any other world structure, is flexible, and its evolution has followed the lines of Western powers. And what defines the global economy at this moment is the recognition that this line no longer encompasses the future. In the case of funds, this contradiction is particularly clear.
In its early decades, the IMF was the house bank of the advanced economies of the Bretton Woods system. Very little lending was made to developing countries. Then, in the 1970s and his '80s, as Bretton Woods collapsed and global capital flows surged, it became the firefighting organization dealing with debt crises in Latin America and the developing world. Money flowed from north to south, but it was common knowledge that what was at stake was the wealth of the systemically important northern banks.
If there was a consensus in Washington in the 1980s, this fund was the embodiment of it. But as far as the IMF was concerned, the end of history promised by American political scientist Francis Fukuyama never came. As we look back now, the quiet decades of globalization since 1989 were far from smooth sailing. The crisis has flared up again in Mexico, East and Southeast Asia, Russia, and in Argentina and Brazil. The fund's strict terms faced opposition from prominent Western economists.
Globalization progressed, but by the early 2000s the IMF was in trouble. Only the most desperate people will voluntarily succumb under the yoke of the IMF program. As the client list dried up, the fund's budget shrank. Staff were laid off. What saved it was the 2008 global financial crisis and its aftermath, a global shock that originated in the North Atlantic banking system.
Not only was the IMF under siege by eager borrowers, but the fund's fight against the crisis received political support from the G20, which elevated it to a summit of governments in the midst of the crisis in November 2008.
Once again, power and money are aligned. However, such high-level political support came with conditions. Citing economic expansion, China joined the IMF by promising to adjust its voting share. Meanwhile, the IMF's European leadership worked with the government of former German chancellor Angela Merkel and the Obama administration to put the fund's money behind a flurry of eurozone bailouts.
In an unusual reversal, some of the largest programs in the Fund's history were mobilized in Greece, Ireland and Portugal. The embarrassment was compounded by the fact that voting share adjustments promised to China and other emerging market countries were held up in Congress by “America First” Republicans. Only in 2016 did China's quota increase to just over 6%, a fraction of the 16.5% held by the United States. During this period, China's economy, measured by purchasing power parity, overtook the US economy.
Over the past decade, under the leadership of Dominique Strauss-Kahn, Christine Lagarde and Georgieva, the Fund's staff has been actively working to revise long-held assumptions about austerity and absolute freedom of capital movement. did it. Relaxed conditions for large and politically sensitive loans. The Fund is also expanding its monitoring to include women's labor market participation, inequality and climate issues. Since 2020, the company has been particularly proactive in responding to the COVID-19 pandemic.
But while the fund's plans may be up-to-date, the question of who the Bretton Woods institutions represent can no longer be avoided. As Martin Wolf has argued, one thing we know for sure about the direction of the global economy is that the balance is shifting from West to East. However, when the G20 met in New Delhi in September 2023, 59.1 percent of the IMF's voting power was held by countries representing 13.7 percent of the world's population. On the other hand, India and China had a combined vote share of about 9%.
It is clear that this is a grotesque departure from future trends in the global economy. What is also clear is that absent a political revolution, the U.S. Senate will never accept an adjustment that would substantively correct this imbalance. Furthermore, the same is true for Europeans, who make up an even larger number of people.
We therefore seem destined to live in a world in which the international financial institutions we rely on to underpin the global financial safety net face unanswerable questions about their legitimacy. It seems to me. Despite the ingenuity and adaptability that the company's professional staff have displayed recently, they face an uphill battle.
