Why the world needs a new Bretton Woods moment

The global economy faces its greatest upheaval since the Second World War as coronavirus trashes businesses and jobs across the planet.

Billions of workers are under threat, debts are exploding and the full scale and timeline of the crisis are as yet unknown.

But there is something of a blueprint on how to respond. Seventy-five years ago the Allied powers came to victory with a plan already in place to rebuild the shattered economy.

Their Bretton Woods system, devised at a conference in 1944, paved the way for decades of globalisation and growing prosperity.

Not all of the system survives - fixed exchange rates went out in the 1970s, for example.

After all, this was a different era, when the UK delegation could sit between the USSR and Yugoslavia.

But large chunks of its work remains in place. It founded the International Monetary Fund and the World Bank, and the system led on eventually to the World Trade Organization.

If the Bretton Woods gathering helped the global economy get back on its feet after the war, could something like it be required again today?

Finance

At least a degree of reform is not a new idea - the emergence of the G20 in the financial crisis was an acknowledgement of emerging markets’ significance as the world is no longer dominated by western economies.

What makes change pressing is the unprecedented scale and form of this crisis.

“None of these [global] institutions, with the exception of the World Health Organisation, is focused on globally systemic issues,” says Randy Kroszner, a former Governor of the Federal Reserve and now a professor at Chicago Booth.

“The World Bank and the IMF are more for one-offs or for regional difficulties. It is much more challenging for them to deal with global problems.”

Unlike the financial crisis this is a ‘real economy’ shock that cannot be fixed with usual economic measures.

“The response to the global financial crisis at G20 was to provide dollar liquidity around the globe. Here in some sense the response is going in the opposite direction - we need to impose quarantines and restrictions on the flow of people. It is a very different kind of shock,” says Kroszner.

“Maybe what the international institutions could do here is set the conditions by which it is easier to reopen.”

So much for the role. What about the structure?

Hector Torres, a former executive director of the IMF and now at the Centre for International Governance Innovation, says the institutions need re-casting away from their “fossilised” 20th century format.

“Despite how much we feel for the multilateral architecture which allowed the world to prosper quite successfully since the Second World War, that architecture needs serious reforms,” he says.

At the IMF that could mean an increase in quotas paid in by member countries, potentially with a re-weighting of contributions to give major emerging markets more say.

It also requires fair and even-handed monitoring of economies. Countries’ votes on financial packages are weighted by their contributions, but they are not supposed to have an influence on economic monitoring of each nation.

Torres says they are influenced heavily. “That has undermined its credibility, particularly with the developing world,” he says, as has the tradition of placing a European at the helm.

Failing to modernise risks allowing China’s alternative financial authority to go unchecked, ultimately splitting the world into Cold War-style spheres of influence around Washington and Beijing.

A crunch moment could come when a country with big debts to China requests help from the IMF.

“Will the Bretton Woods institutions provide the traditional support if one of the key beneficiaries would be China?” asks Kroszner.

“This is really a pivotal point in China versus the West in the economic and geopolitical relations, because so much is at stake. Potentially this period will be just as important for China’s relationship with the rest of the world as the opening in the 1970s.”

The institutions do not all have to be expanded.

Mike O’Sullivan, former chief investment officer at Credit Suisse, has warned the institutions are too bureaucratic and unrepresentative of the modern world to perform effectively.

“The World Bank should be drastically reduced in size and relocated to Africa, which is the one part of the world that still needs an institution like it,” he wrote in his book The Levelling.

“Being closer to the economies and societies it is supposed to serve, rather than being cosseted in Washington, will make the work of the World Bank more impactful.”

Trade

Similarly the global trade system is imbalanced, says Torres.

The same emerging markets that cite their size and clout as a reason to gain more authority at the IMF claim the opposite at the WTO, seeking to retain their developing market status that lets them protect markets and coddle industries.

In contrast, the rich nations blocking change at the IMF promote it at the WTO, arguing that big emerging markets have unfair exemption from the level playing field on trade.

“The IMF has to accommodate Asia - it cannot remain a North Atlantic organisation and be as effective as we want it to be,” says Torres.

“And the WTO has to accommodate reality - it is totally nuts that countries like China or India or Brazil can go to the WTO and say, ‘I cannot compete on an equal footing so I need special treatment forever’ while not committing to do anything on domestic policies.”

Ideally he would want all of these issues addressed in one go, to ensure all countries are consistent on trade and finance.

“A new Bretton Woods would have to deal with a lot of these problems. As Churchill said, we should not let a good crisis go to waste,” says Torres.

Inequality and the climate

“This crisis must serve as a wake-up call and a call to action for business and government to think, act and invest for the common good and confront the structural obstacles that have inhibited inclusive economic growth for years,” wrote Jamie Dimon, chief executive of JP Morgan in his most recent update to shareholders.

One such obstacle is the imbalanced trade system that has left industries in rich countries unable to compete with imports from developing economies, leading to inequality and anger at globalisation in the West.

Uncoordinated environmental rules could be on the new Bretton Woods agenda for similar reasons.

Tough rules on emissions in nations such as the UK add significantly to manufacturers’ costs. It means they struggle to compete with dirtier production elsewhere in the world.

Imported goods win out, destroying domestic industry while failing to have any impact on the global emissions that matter for climate change.

Leadership

Seeking accord when the two biggest economies are at each other's throats is hardly simple.

“It is a difficult time to do that reordering. It may be necessary, and maybe eventually it will come out of the current crisis. But unlike in the post-World War Two period when it was very clear who won, we don't have that yet,” says Kroszner.

“If you don't have that clarity, it is then very difficult to set up an order for the globe.”

Torres’s hopes lie with the world’s mid-sized powers.

“I believe that there is the possibility the ‘middle powers’ could take this seriously, and call for a dialogue, after the US elections,” he says. “But we cannot wait until the US elections to start thinking about this - we have to do something now.”