Reforming Bretton Woods Institutions

Reformed Bretton Woods institutions– the International Monetary Fund (IMF), the World Bank Group (WBG) and the World Trade Organisation (WTO) – a Bretton Woods 2.0 is what the world needs for the 21st century, said Ajay Chhibber, a visiting scholar at George Washington University's Institute of International Economics. 

In an interview with BW Businesworld, Chhibber said that while these institutions performed well over their first 50 years – they have been struggling in more recent times as problems of rising inequality, financial instability and protectionism have re-emerged. Edited excerpts:

Why reform the Bretton Woods Institutions?  

Reformed Bretton Woods institutions– the International Monetary Fund (IMF), the World Bank Group (WBG) and the World Trade Organisation (WTO) – a Bretton Woods 2.0 is what the world needs for the 21st century. 

While these institutions performed well over their first 50 years – they have been struggling in more recent times as problems of rising inequality, financial instability and protectionism have re-emerged. 

The threat of climate change and ecological stress, rising disasters and a more interconnected world with new threats like cyber-security and pandemics require a new international financial architecture.

A modernised and reshaped set of Bretton Woods institutions to help address and mitigate these challenges, with three R’s - a revised global remit and the mandate to monitor agreed global rules and enhanced resources not only to help individual countries but also to address global problems. If this is a bridge too far in today’s fractured world a Bretton Woods 1.5 with enhanced remit and resources is proposed. 

 What is the proposed reform?  

First, at its centre will sit three reshaped and revitalised global institutions -the IMF, WBG and the WTO. The IMF will be tasked with macroeconomic policy and financial stability. This will include much stricter and enhanced surveillance of the advanced economies and the spillover effects of their policies to better understand and hopefully predict the global crisis and help less advanced economies. 

It is beginning to drift into areas of support – for poverty, gender and climate change which are better addressed by other agencies. 

A restructured WBG will make sustainability and shared prosperity (to address rising inequality) its major goals and it will need to use its capital base to leverage private capital more effectively. It must also be able to help within the country but be better able to address global good and bad by working closely with others. It should be a wholesaler not a retailer of finance. For example, the WHO on better-coordinated pandemic response to give an example. 

Finally, we need a strengthened WTO which stands not just for genuinely fair trade with speedier processes for dispute resolution and flexibility and authority to respond to emergencies more expeditiously. Progress made at the 12th MC in Geneva on several issues opens the path towards progress on a strengthened WTO. 

Second, the system also needs more automatic and rule-based agreed financing mechanisms. The current system of ex-post and discretionary response has delayed the ability to help and made it more politicised. 

I suggest some automatic financing mechanisms – more regularly calibrated SDR issues, global pollution taxes on air and shipping and even taxes on financial transactions. Once agreed these mechanisms can become less politicised and less dependent on political changes and whims. 

Third, a suitably structured G-20 may be able to provide such over-arching guidance to the work of the BW system and its interactions with other institutions and agencies. 

After WWII, US dominance helped create the Bretton Woods system and subsequently, the G-7 provided some overall guidance to it. But with the GFC, the G20 has assumed that role. Geo-political fractures now threaten that system. 

Nevertheless, some supra-political body is needed to set priorities and provide a framework under which this system will operate in addition to the governance structure of these institutions which include the International Monetary and Finance Committee (IMFC) for the IMF, the Development Committee (DC) mainly for the WBG and the ministerial conference at the WTO. 

Within the current context, how feasible is this?  

This is a very bold agenda and in today’s fractured world maybe a bridge too far. At a minimum under a Bretton Woods 1.5, a focus on resources and remit of the three institutions is necessary even if global rules may not be achievable. 

On resources even if automatic financing mechanisms may be difficult to get agreement on especially through domestic legislative bodies the resources of the IMF and the World Bank must see a one-time increase. On remit, the IMF should refocus on its main functions – macroeconomic policies and financial stability and help prepare a debt restructuring framework. 

It must work on understanding the macroeconomic implications of climate change but leave financing to the WBG and other bodies. 

The WBG must be tasked to focus much more on sustainability and be able to use its instruments to leverage private financial flows to a much larger extent than it has so far. The WTO must push ahead on the success of its 12th MC to reform its Appellate Body and push ahead on other internal reforms. 

The time to act on it has come. The Global Financial Crises (GFC), the global pandemic and the Russia-Ukraine war risk becoming a larger conflict and the looming threat of climate change, where tipping points are being breached and rising natural disasters require a much-enhanced system of organised global cooperation and a reformed Bretton Woods system fit for the 21st century. 

Archimedes said it best: Give me a lever long enough and a fulcrum to move the world. The new Bretton Woods Institutions must become Archimedes’ lever to change the world into a more prosperous, inclusive and sustainable planet.