Rabah Arezki is the former vice president and chief economist at the African Development Bank and former chief economist for the World Bank’s Middle East and North Africa region. He is currently a director of research at the French National Center for Scientific Research, and a senior fellow at the Foundation for Studies and Research on International Development and Harvard’s Kennedy School of Government.
The Bretton Woods system arose out of the ashes of World War II.
Emerging from the famous Bretton Woods Conference in 1944, the agreement set out rules and institutions to govern the modern monetary system, including the International Monetary Fund (IMF) and what is now known as the World Bank Group — two institutions that have become mainstays of the global system of economic governance.
Historically, this system has been centered on the United States and Europe giving weight to economic power. An informal and enduring arrangement between them ensures the head of the IMF is European, while the head of the World Bank is a U.S. national, and the U.S. retains veto power on both. This status quo was all well and good until China burst onto the global scene after joining the World Trade Organization in 2001. And ever since, there have been many discussions about reforming voting power to reflect this shift in economic weight, but progress has remained largely elusive.
However, the push for better representation — not just for China but also the rest of the global south — has quieted over the past years. Indeed, China has formed its own multilateral development bank — the Asia Infrastructure Investment Bank (AIIB) — and launched the Belt and Road Initiative as a tool for geostrategic influence, especially in the developing world. Moreover, 40 or so emerging and developing economies are knocking at the door of the BRICS bloc, with six of them — Iran, Saudi Arabia, Egypt, Argentina, the UAE and Ethiopia— invited to join at the latest summit in Johannesburg.
Such an expansion would effectively double the size of BRICS to about 30 percent of world GDP, 46 percent of the world population and, incidentally, 43 percent of global oil production. The choice of countries seems to consecrate China’s dominance over the bloc, as well as a China-centered global south. Crucially, however, the broader appeal of BRICS is not that it offers a well-defined model of economic and political governance to these countries, rather it is more of an anti-Western drive — and that’s worrisome.
This wave of anti-Western sentiment now poses a major threat to the legitimacy of Bretton Woods, and the fragmentation of the very institutions that underpin the global economy is at stake — as well as that of the global community.
To be sure, it is not the credibility of these institutions that’s in doubt. Over the past 80 years, they have accumulated vast experience in macroeconomic management and economic development, while also cultivating the art of multilateral governance. And as China and BRICS-led institutions are about to find out, this will be hard to replicate. In fact, the ramping up of loans by the AIIB has already been slow, and it has engaged with the World Bank in cofinancing projects.
Discussions on reforming the World Bank, meanwhile, have thus far focused on how to boost lending volumes, and on the need for embracing the fight against climate change. In this regard, a proposal relating to the capital adequacy framework of multilateral development banks (MDBs) has caught attention, as it focuses on further leveraging the balance sheet of these institutions, while retaining their triple A ratings.
Yet, this approach would only release a few dozen billions of dollars in lending at best, falling short of the trillions required to address development needs and the energy transition in developing nations. Former U.S. Treasury Secretary Larry Summers and his co-author N.K. Singh have, however, issued a call for a major capital increase for MDBs with the ambition of reaching much larger numbers in terms of lending volumes.
Still, Western countries have reached debt levels that prevent them from driving such capital increases, therefore, China and other emerging markets should step into the Bretton Woods institutions at a rate commensurate to their relative shares in the global economy. Such a move would, in effect, recognize the massive change in economic weight — as well as their growing share of greenhouse gas emissions. Bigger shares of capital for emerging markets will obviously mean a bigger voice for the global south, but it will also mean more responsibility, including when it comes to climate change.
Thus, a grand bargain for Bretton Woods is in order.
Indeed, this bargain could help decisively stop the fragmentation of the global community and, with it, not only fight climate change effectively but also avert the ongoing debt catastrophe in low-income countries.
Given the emergence of China as a major creditor for these nations, not having a prominent place for Beijing inside the tent of Bretton Woods has made the IMF’s and the World Bank’s debt restructuring efforts difficult. Against this backdrop of a looming debt crisis, low-income countries — and especially African countries, which are home to over 70 percent of the world’s poor — are facing socioeconomic instability, wars and coups. The fragility of these nations has only been exacerbated by climate change, with a reversal of earlier gains in health, education and wealth. And in an interconnected world, this situation will spill over to neighboring countries and beyond.
Alongside these worrying trends, the discussions regarding the Bretton Woods institutions to date appear rather naive. Granted, poor countries are disproportionately affected by climate change — which they have incidentally not created — yet anticipated World Bank reforms to extend related lending across the board could crowd out these countries. The priority should instead be for these institutions to avoid the economic divergence of low-income countries — something that should unite superpowers, China, the U.S. and Europe alike.
Critics will, of course, argue that this is not politically feasible. And, indeed, parliaments in Western countries are unlikely to approve changes to the representation of the Bretton Woods institutions —especially European countries, which (individually) stand to lose the most from such realignment in voting power. Yet, Europe has major stake in averting catastrophe in Africa, and it has been a leading voice in tackling climate change. It is now time to match words with actions before it is too late.
What is more, there has been an acceleration in anti-Western sentiment ever since onset of the war in Ukraine, and there is a real risk that this sentiment will further engulf the legitimacy of the Bretton Woods institutions by isolating them from the global south — the very countries they are supposed to operate in. Stopping the ongoing economic and social disaster in low-income countries is a noble cause that needs the coordination of the whole international community — not more bilateral initiatives tainted with self-interest.
The Bretton Woods system was born of a dream of prosperity and peace for the world. And considering the mounting existential threats facing humanity today, it is arguably even more important to resurrect the dream now. But to do so, we must use the full potential of truly inclusive institutions as shields to protect the world’s poorest countries — and to curb climate change.
