Bretton Woods: Still Relevant Fifty-One

Bretton Woods: Still Relevant Fifty-One Years Later?

Are the Bretton Woods institutions still relevant and viable fifty-one years after they went into effect? There are scholars and internationally respected political leaders who believe that in fact some of the institutions created at Bretton Woods are in need of adjustment or abandonment.

This paper will examine research available in the literature that touches on the relevance -- or lack of relevance -- of today's Bretton Woods institutions.

The International Monetary Fund: Issues, Criticisms

Walden Bello and Shalmali Guttal make the point in the peer-reviewed journal Multinational Monitor (Bello, et al., 2005, p. 19) that while the International Monetary Fund (IMF) and the World Bank (WB) stood "at the pinnacle of their power" in 1985, twenty years later (2005) the "…credibility of the IMF was in shreds." The downturn in credibility for the IMF, according to Bello, can be traced to the late 1990s. The economies of the East Asia were averaging 6 to 8% growth rates until the summer of 1997, when things drastically changed for the worse.

Because the IMF had imposed "structural adjustment" on funds it had provided to the East Asian nations -- along with a total of 70 developing and post-socialist economies worldwide -- "poverty and inequality in most adjusted economies had increased" (Bello, 2005, p. 20). Moreover, a study by the Center for Economic and Policy Research reflected, "…77% of countries [loan clients of IMF] for which data is available saw their per capita rate of growth fall significantly during…1980-2000," Bello explains. The culprit for this freefall of economic growth is the IMF's structural adjustment policies, Bello insists. He refers to structural adjustment as a "massive disaster" in South Asia, in Latin American and in Africa (p. 21).

A closer look at the policy of structural adjustment seems appropriate at this point in the research. William Easterly writes in the Journal of Development Economics that former U.S. Secretary of Defense Robert McNamara -- who became president of the World Bank -- received the go-ahead from the WB in 1980 to launch the structural adjustment loan (SAL) program. Easterly explains that an SAL offered to a third world economy was intended to "…reduce their current account deficit to more manageable proportions by supporting programs of adjustment…to strengthen their balance of payments…" while at the same time allowing them to continue gaining momentum in their growth and development spheres (Easterly, 2005, p. 2).

The "adjustment" that the IMF / WB imposed on recipients of loans was actually a kind of stern stipulation: we will give you these millions of dollars, but we expect you to "restructure" your agricultural system, restructure the management of your public enterprise and to restructure "incentives, to promote efficient export-oriented industrial investments" (Easterly, 2005, pp. 2-3). In other words, countries that accept IMF loans must adhere to the policies that are dictated, including fiscal adjustments, liberalizing their trade policies and moving towards "free markets" and away from "state intervention," according to Easterly (p. 3).

Too often the economic changes that the IMF demanded did not take into consideration the history, the culture and the political dynamics of the nations receiving the money. This caused huge problems and led to a perception that the IMF was "Distant, feared, and arrogant…" in the 1990s, according to Bello's research article (p. 19). When the IMF loans money to a nation and insists that the nation change its "controlled economy" into a "market economy" -- as the IMF often did -- the result is "avoidable hardship" (Collier, et al., 1999, p. F634). Collier explains that the IMF adjustment programs "…have often been flawed by a lack of distributional analysis and by poor sequencing of reforms"; indeed, the lack of investigation into precisely what a particular nation's economy really needs and requires stands out as one of the major flaws in IMF loans. How can a powerful funding source require that the nations receiving the loans create mandatory policies that are "virtually identical across countries" and expect them to work? (Collier, 1999, p. F634).

Meanwhile, Bello asserts that during the crisis in Asia the IMF insisted that their client nations engage in "…fiscal tightening to stabilize exchange rates and restore investor confidence"; however, the assumption that led to the IMF demands was "drastically wrong" and in fact what should have taken place was not fiscal tightening but fiscal expansion (p. 20). Moreover, during the Asian financial crisis the IMF was further discredited because it was seen as a "tool of the United States," Bello goes on (p. 20).

The Japanese government had proposed an "Asian Monetary Fund" (AMF) -- of up to $100 billion -- as an alternative to the IMF that would be more flexible. The AMF would be a multi-purpose funding mechanism that would not be as stringent as the IMF funding and there would be less demands made on how the loans would be used by individual Asian governments, Bellow continued on page 20. But there was "strong opposition" from the IMF and the United States; the IMF's Managing Director and his U.S. deputy Stanley Fischer argued that the AMF would "…subvert the IMF's ability to secure tough economic reforms" from those Asian nations in deep fiscal trouble.

The bottom line: the U.S. helped to kill Japan's proposal for an AMF; apparently the U.S. believed the AMF would have posed "a threat to America's influence in Asia" and ultimately Japan dumped the idea, Bello writes (p. 20). That episode created a bitter taste in the mouths of many Asians towards the U.S. And the IMF, Bello explains on page 20.

An article in the Ecologist (Chossudovsky, 2000, p. 1) by Michel Chossudovsky -- Professor of Economics at the University of Ottawa -- asserts that the 1998-2000 Ethiopian famine "in large part" was a product of "…the economic reforms imposed to the advantage of large corporations by the IMF, World Bank, and the U.S. Government." What Chossudovsky uses as backup for his bold accusations is that by imposing structural adjustment demands on Ethiopia, the IMF weakened the system of traditional exchange and "replenished" the village level seed banks with "commercial hi-bred and GMO seeds" (p. 3). These emergency programs were targeted to agribusiness-biotech companies, leaving the village farmer to be dependent upon GMO seeds -- and hence "setting the stage for the outbreak of future famines" (Chossudovsky, 2000, p. 3).

More serious perhaps than disrupting a developing nation's economy, the IMF's structural adjustment programs tended to "undermine the democratic process" itself, according to former World Bank Chief Economist, Joseph Stiglitz (Stiglitz, 2000, p. 1). Stiglitz writes that in theory the WB and IMF "support democratic institutions" but in practice the IMF does not allow sufficient time for "broad consensus-building" of consultations with parliaments or communities prior to imposing its demands. The IMF also has a habit of dispensing with "…the pretense of openness altogether and negotiates secret covenants," Stiglitz reports (p. 1).

Multilateral Investment Guarantee Agency (MIGA)

The Fordham International Law Journal (Masser, 2009, p. 1710) delves into the MIGA, which is actually not a direct funding source but rather MIGA "mitigates risk exposure" through a kind of insurance program. Established in 1988, MIGA is designed to insure against: a) "politically motivated war and civil disturbance"; b) "transfer restriction and inconvertibility of currency"; c) "expropriation"; and d) breach of a contract by the host government that is receiving the funds from the IMF (Masser, 2009, p. 1710). According to Masser's peer-reviewed article the MIGA also offers "…a suite of technical assistance services to help governments and other intermediaries respond to investor needs" (p. 1711). Masser quotes from MIGA's fiscal year annual report, which defines its focus as "…encouraging [foreign direct investment] FDI into the poorest countries" (p. 1711).

Both the International Finance Corporation (IFC) and MIGA must be environmentally responsible and socially responsible in their dealings with client nations, as per the guidelines and standards of the World Bank / IMF. The Bretton Woods' components, IFC and MIGA, apparently do not pay that much attention to alleviating poverty in Africa, Masser writes (p. 1715). Keeping in mind the standards that MIGA and IFC are supposed to live up to (helping the "poorest countries"), one cannot but be startled to learn (via Masser) that "Neither IFC nor MIGA devotes more than 18% of its total portfolio to sub-Saharan Africa" (p. 1715).

The non-Bretton Woods agency, the Overseas Private Investment Corporation (OPIC), performs "significantly better" than IFC and MIGA in Africa; indeed, OPIC dedicates 27% of its resources in Africa and the Middle East, Masser continues. MIGA does commit substantial sums to Europe and Central Asia, though, contributing 36% of its funding in that region (also known as Eurasia), Masser explains.

The paradox here is obvious and unjust: while Eurasia has only .9% of its population earning less than $1 a day, sub-Saharan Africa has 41.1% of its population living under $1 a day -- and yet neither IFC nor MIGA kick in more than 18% of their resources to Africa while lavishing Eurasia with up to 36% of MIGA's resources. As to Latin America and the Caribbean, those nations receive 27% of the committed portfolio for both IFC and MIGA; Latin American and the Caribbean have 8.6% of their populations living under $1 a day. The reason that those two regions are given such a large sum of money is that they have "…larger economies [that are] presumed to have lower overall risk" (Masser, 2009, p. 1716).

Masser approaches that argument to a fuller extent on page 1718: there are "clear reasons for investing such large amounts in relatively well-off regions" like Central Asia, Latin America and Europe, the author states. When the MIGA / IFC pour money into "more prosperous regions" it helps provide a more "diversified portfolio that protects investments in riskier regions by ensuring returns" (Masser, 2009, p. 1718). On the other hand, while money managers would agree that investing in a sure thing can provide cash to cover losses in a less-than-sure thing, Masser (p. 1719) asserts that investing less in "least developed regions" is a "major shortcoming of MIGA and IFC.

Lending to "Small and Medium Enterprises" (SMEs) is very important when it comes to development in a struggling economy, Masser writes (p. 1721). The author backs up this assertion; SMEs "by their nature tend to be more responsive to market conditions" he insists, and frequently SMEs are the first to "respond to economic opportunities" (Masser, 2009, p. 1721). That said, SMEs are often lacking in "sufficient access to financial markets" and hence, there are signs, Masser explains (p 1722) that MIGA, IFC and OPIC are "strengthening the necessary financial infrastructure."