issue 257 - July 1994
Bretton Woods reordered
ILLUSTRATION: GAIL GELTNER
1 The Bretton Woods Conference
In July 1944, as World War Two was drawing to a close, the world's leading politicians - mostly from Northern countries - gathered to set forth notions of how to reorganize the world economy. For the first time in human history almost universal institutions - the International Monetary Fund (IMF), the World Bank and the General Agreement on Tariffs and Trade (GATT) - were established to solve global economic problems. The common view at the Conference was that the depression of the 1930s and the rise of fascism could be traced to the collapse of international trade and isolationist economic policies.
The Conference rejected proposals by the eminent British economist John Maynard Keynes that would have established a world reserve currency administered by a central bank and created a more stable and fair world economy by automatically recycling trade surpluses to finance trade deficits. Keynes' notion did not fit the interests of a US eager to take on the role of the world's economic powerhouse. Instead the Conference opted for a system based on the free movement of capital and goods with the US dollar as the international currency. The Fund and the Bank were limited to managing problems related to deficits and to currency and capital shortages.
2 Rebuilding Europe
One of the first tasks assigned to these new institutions was to provide the capital to help put the war-ravaged European economies back on their feet. Not only did they lack the resources for such a massive undertaking but European finance ministries balked at the harsh 'conditionalities' that accompanied support from the IMF as too great an infringement of their sovereign right to shape their domestic economies. So the much looser Marshall Plan was set up to provide US finance to rebuild Europe largely through grants rather than loans. Southern countries now emerging into independence did not fare so well - from the very beginning any loan was accompanied by pressure to keep their economies completely 'open' to foreign goods and capital. In the late 1950s the World Bank was pressured into setting up the International Development Association (IDA) - this would provide 'soft loans' and so head off attempts by the new countries of the Third World to set up an independent funding agency under UN auspices.
3 New International Economic Order
By the early 1960s the South had started demanding a better deal. Rallying in such organizations as the Non-Aligned Movement and the Group of 77, they created the United Nations Conference on Trade and Development (UNCTAD) where they argued for fairer terms of trade and more liberal terms for financing development. The North responded with pious declarations of its good intentions - but also with a hard-nosed insistence that the proper forum for any economic changes continued to be the Bretton Woods institutions where they held the balance of power.
By the late 1960s, however, the Bretton Woods dream of a stable monetary system of fixed exchange rates with the US dollar as the only international currency was collapsing under the strain of US trade and budgetary deficits. A guarded optimism took hold in the South fuelled by moderately high growth rates and a boom in the price of Third World-produced primary commodities, particularly oil. This came to a head in 1974 with the declaration of principles for a New International Economic Order. The response to these sweeping demands for change was a few tinkering, inconsequential reforms.
4 The Debt Crisis
The windfall surpluses accruing to the oil-producing countries of OPEC during the 1970s - $310 billion for the period of 1972-1977 alone - created a massive recycling problem. Much of this money went into Northern commercial banks who turned around and loaned it to non-oil producing Third World governments desperate to pay escalating fuel bills and fund their development goals. The debt of the non-oil producing Third World increased five-fold between 1973 and 1982, reaching a staggering $612 billion, and the high interest rates of the mid-1980s further exacerbated the problem. Much of this loan money was squandered on ill-considered projects or simply siphoned off by Third World élites into personal accounts in the same Northern banks that had made the original loans. Cash-strapped countries like Peru and Mexico were unable even to pay the interest due on their debts. Northern politicians and bankers began to get nervous that the sheer volume of unpayable loans would undermine the world financial system. They turned to the World Bank and the IMF, who were to restructure Third World economies so they could meet their debt obligations.
The Bank and the Fund have made full use of the new leverage over Third World economies that accrued to them during the debt crisis. The right-wing economic views made popular by the Reagan- and Thatcherites became the reigning economic orthodoxy at the Bank and the IMF. They launched a policy to 'structurally adjust' the Third World by deflating economies and demanding a withdrawal of government not only from public enterprise but also from compassionate support of the basic health and welfare of the most vulnerable. Exports to earn foreign exchange were privileged over almost all production of food and other goods for domestic use. This restructuring was highly successful from the point of view of the private banks who got $178 billion out of the South between 1984 and 1990 alone. Yet Third World debt continued to grow, reaching $1,300 billion by 1992. Much of this debt has shifted - particularly in the case of Africa - from private banks to the IMF and the World Bank themselves.
6 The Resistance
The stark fact that the Fund and the Bank now operate with reverse capital flows - in other words they take more money out of the Third World than they put back in - is sobering for those who believed these institutions were there to help. Peoples of the Third World are resisting structural adjustment either through street riots or less confrontational politics. Protest too is coming from the four million people uprooted or to be uprooted by World Bank mega-projects, particularly the building of large dams. Rejection of all things Western is on the rise. Fundamentalism and the politics of ethnic exclusion (from Somalia to India) are turning political costs into military ones. And the Bretton Woods institutions themselves are coming under direct pressure from community activists and environmentalists calling for either their reform or outright abolition. After 50 years the decisions reached at Bretton Woods need some fundamental rethinking.