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Daily Update: February 8, 2022

Listen: The Essential Podcast, Episode 71 Bretton Woods 2.0 – A New Model for a Changing World

About this Episode

Dr. Ajay Chhibber returns to S&P Global's Essential Podcast to discuss the current state of Bretton Woods institutions like the IMF, the World Bank, and GATT. He covers the ways in which each of these institutions can be re-directed and re-conceived for a post-colonial order.

The Essential Podcast from S&P Global is dedicated to sharing essential intelligence with those working in and affected by financial markets. Host Nathan Hunt focuses on those issues of immediate importance to global financial markets—macroeconomic trends, the credit cycle, climate risk, ESG, global trade, and more—in interviews with subject matter experts from around the world.

Listen and subscribe to this podcast on Apple Podcasts, Spotify, Google Podcasts, and Deezer.

The Essential Podcast is edited and produced by Patrick Moroney.

Transcript provided by Kensho.


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Nathan Hunt: This is the essential podcast from S&P Global. My name is Nathan Hunt. In July 1944, delegates from 44 countries convened in the Mount Washington Hotel in Bretton Woods, New Hampshire to build a better world. The D-Day landings in Normandy had taken place just a month before, and the delegates were beginning to look forward to a global society unburdened by World War and economic depression.

The conference at Bretton Woods birth a new economic order designed as a rule-based international financial architecture and open trading system. The World Bank, the International Monetary Fund and the general agreement on tariffs and trade, where the institutions set up to help to build this rule-based architecture. But the world has changed in the last 80 years. Increasingly, the agreements driven by a small group of colonial powers during wartime look like a bad match for the world in which we live.

I'm joined today by Dr. Ajay Chhibber. Dr. Chhibber is a distinguished visiting scholar at the Institute for International Economic Policy, senior visiting Professor at the Indian Council for Research on India's economic relations and nonresident senior fellow at the Economic Council Dr. Chhibber has previously been a guest on the podcast to discuss his book, unshackling India, hard truths and clear choices for economic revival. But today, we are discussing a recent article he wrote for the Atlantic Council entitled "Modernizing the Bretton Woods institutions for the 21st century." Ajay, welcome back to the essential podcast.

Ajay Chhibber: Thank you so much, Nathan. It's a pleasure to be here with you again.

Nathan Hunt: Bretton Woods happened nearly 80 years ago. We might expect some senescence at this point, but what did the original Bretton Woods do well?

Ajay Chhibber: So as you said in your introduction, Nathan, the Bretton Woods Conference in July 1944 officially actually called the United Nations Monetary and Financial Conference set up reached agreements on this international financial architecture, which with some modifications, exists more or less still today. That agreement created a rule-based international financial system, but also an open trading system that would reduce protectionism, rampant nationalism, growing inequalities and beggar-thy-bigger neighbor policies that led to the financial crash of 1929, the depression and eventually to World War II.

But for the next 70 years or so, despite hiccups, that project succeeded. The world has seen not only reconstruction and recovery from World War II, but also rising incomes and lower poverty in large parts of the world, especially where they have been drawn into the global economy. And as you mentioned, the institutions that were created at that conference, the IMF, the World Bank and GATT managed to adapt to a changing world and try to remain relevant.

They were broadly successful in contributing to reduce poverty and faster growth in large parts of the developing world, and they helped many low and middle-income countries deal with global shocks. Many emerging economies that liberalized and participated in the global trading system converged towards the advanced economies, especially after 1990 and in the years before the global financial crisis. But since then, even they have run out of steam and need a fresh momentum.

Nathan Hunt: Ajay, you say in your answers that the institutions, the frameworks created at Bretton Woods worked effectively for 70 years. I am thinking about, as you say, post great financial crisis. What are the circumstances that have changed that makes it important to reexamine the assumptions upon which Bretton Woods was based?

Ajay Chhibber: So I think 2008 global financial crisis marked a turning point in many ways. There was a brief period of heightened global coordination to deal with that crisis. But today, that coordination and cooperation is badly [ frayed ] and rising protectionism and lack of global coordination on the COVID pandemic has exposed huge differences in disparities in the world. And now, of course, the Russia-Ukraine war, the resulting sanctions and food and energy price distortions have created even further divisions and disparities as countries struggle to cope with rising inflation and access to food and energy.

And these divisions come at a time when even more dangerous challenges have emerged that threaten the globe and need serious global collective action. And the most serious of these, of course, being climate change and leading to greater frequency of natural disasters. But the Bretton Woods institutions are no longer fit for purpose to meet today's global challenges because as you said, the governance structure remain more or less what was created at the end of World War II, and their size and mandate have made them less able to address today's challenges.

They are now seen as mainly institutions to help deal with problems in the developing world, and they are struggling even to do that. But what is needed today, especially after the global financial crisis and today's crises, what is needed today is genuinely global institutions, which address global problems. So this is where I think the big challenge lies.

Nathan Hunt: When it comes to these specific institutions that are no longer fit for purpose, let's talk about the IMF. What is the current remit of the International Monetary Fund? And what do you believe it should become in the future?

Ajay Chhibber: So I think the IMF, as I said, adapted to focus largely on problems in the developing world and in the emerging markets. But it is now accused of having missed one of its major functions, which is to on the world of an impending global crisis. and do adequate severance of the global monetary and financial system. At its creation, the IMF's primary role was supervising exchange rate arrangements agreed at Bretton Woods.

But once the U.S. abandoned the dollar gold peg, it began to change that role, and it has spent much of its energy trying to develop new instruments to help emerging market economies deal with growing financial and debt crisis and low-income countries reduce poverty, but with very mixed outcomes. And now it has done its focus to issues such as climate finance, gender equity and human development, that many other agencies are better suited to address. According to some critics, it's beginning to act like an ad agency.

The IMF is also criticized in other aspects of this programs of which key ones are is excessive focus on capital account liberalization which increase in equality and foster instability. Its programs are also accused of imposing excessive austerity and are procyclical with arbitrary program size. So finally, it's also accused of very weak surveillance in advanced economies which, in turn, may have contributed to its inability to predict global crisis.

Some of this is because its advice is ignored in the advanced economies and some of it is self-censorship in the way it carries out surveillance. So I believe that a strengthened IMF must be a core pillar of the system, the new system, but it should see its primary role as a monitor and arbiter rules, not a lender.

Success should not be judged by the size of the programs or how much it has lent. It should be really seen as a lender of the last resort. So it should really become a more global institution focusing on what's happening in the global system rather than just an ad agency for developing countries.

Nathan Hunt: Ajay, sort of a topical question. During the crisis brought on by the mini budget introduced under former Prime Minister Liz Truss, the IMF actually did come out and issue a statement that was critical of the policies outlined in that budget. Did you take that as a good sign? Is that an example of what the IMF should be doing more actively?

Ajay Chhibber: Yes, I believe so. And I think it was very rare for the IMF to have done that, but it was a good step. But there was a very strong reaction, including from the then U.K. government saying it's none of its business. And I wrote a letter to the FT in the Financial Times letter to the editor saying, this is a very good step that the IMF has taken and that it should be encouraged, not told that this is not its remit. This is exactly what it should be doing and doing more of in the future.

Nathan Hunt: Let's talk about size and leverage. What are the current funds and leverage available to the IMF and what should it be?

Ajay Chhibber: I mean with the global financial crisis, I think and now with the pandemic, it's become clear that the IMF remains too small and its resources much too constrained to help the world address these challenges. Today, bilateral swap lines and regional safety nets are twice as large as the IMF's resources. Along with unused SDR issues, IMF resources are now roughly about $1 trillion, roughly 1% of global GDP, barely enough to deal with crisis in a few countries, but certainly not enough to manage a global prices.

And of the $1 trillion that it has, half of it is actually its own capital and the other half comes from borrowings, which can -- which are very discretionary and can be shut off at any time. So I think what the world needs is that the IMF should be at least doubled in size from its -- its capital base should be doubled. And it should be allowed to use its callable capital to borrow in international markets and in that sense, also be able to leverage more money to address global problems.

Nathan Hunt: What about the World Bank? When you think about Bretton Woods 2.0, what would you like the remit of the World Bank to be under that structure?

Ajay Chhibber: So I think the former Vice President, Al Gore is largely correct in saying that the World Bank is missing in the fight on climate change. It adapted earlier, as I said, it adapted well to address global poverty at the time when it shifted its attention from reconstruction after the Second World War to address problems of global parity. But now it's seen as a multipurpose development bank as to provide support to countries for their perceived needs without much overall strategic vision.

So it really should become the global institution to address the green transformation of the global economy, not just focused on developing countries. And the other big -- so that's one big change that it has to do. I mean, it shouldn't be just saying, okay, I have set up a sustainability and environment department, and I'm lending $20 billion, $30 billion for climate change. It produced a report in 2015, which was not just the World Bank, but all the regional banks together with it at the Addis Ababa conference on financing of the [ SDGs ], where it said we would take our billions and make them into trillions.

But none of that has happened so far. So that's the other big criticism of the World Bank Group is that it has focused too much and very conservatively on its own lending targets, but it has not done enough to capitalize major -- large amounts of trillions of dollars that are needed in blended finance for the green transformation of the global economy and especially to the developing world. It's been very overly conservative in its use of its capital.

It has a vast array of instruments other than loans such as guarantees and insurance products, which it has barely ever utilized. And this critique goes not just to the World Bank, but also to the 506 regional development banks like the Asian Development Bank and the Inter-American Bank and the African Development Bank, it applies equally to them as well. So it needs a major overhaul in its strategic direction and in the very overly conservative way in which it has been using its capital base.

Nathan Hunt: Ajay, you talked about the circumstances under which Bretton Woods originally happened, circumstances under which there was protectionism. There were beggar-thy-neighbor policies, we've seen a return of those policies. The World Trade Association and its remit is, in some ways, the most politically controversial of the institutions that grew out of Bretton Woods, what do you think needs to change for the WTO to achieve free and especially fair trade?

Ajay Chhibber: So trade expanded hugely. Originally, the GATT was set up. And then in 1995, GATT was transformed into the WTO. GATT mainly dealt with trades in goods, but WTO deals with goods and services and issues that cover investment and intellectual property. And the dispute resolution mechanisms that were part of the sort of rule enforcement mechanisms that were established worked well for a while.

But in more recent years, they have not worked so well, partly because China, which has emerged as the world's largest trading economy has used the procedure that of self-attestation as a developing country to try and continue to use the softer rules that are applied to developing countries despite being now the world's largest trading country. China was also was -- when it entered the WTO was meant to shift towards more of a market-based economy, but its use of its state-owned enterprises and state-controlled banks to continue to provide support to its exporters at -- who are in competition with other countries has created a very opaque system of addressing how China can be [ reined ] in to play more fairly by the rules.

At the same time, growing political backlash in the developed world and certainly in the United States, has turned people -- the political systems away from this very open trading system. And so you see this huge increase in tariffs that President Trump introduced and which President Biden has not removed going forward. And the U.S. has also attacked this mechanism, the dispute resolution mechanism at the WTO by not allowing it to function, not allowing new members to be established, et cetera.

So there, the global tensions that you have seen on trade are playing themselves out within the WTO. The WTO is also, in a way, constrained, but I mean, it's supposed to be a good thing that they have a consensual system to reach agreements. But what that has meant is that there has been no global trading agreement since the Doha Round -- failure to reach agreement on the Doha round has been -- there's been a major setback for the WTO.

So you have this effort now to have more pluralistic agreements, which are favored by some countries, but opposed by many others. So there's a massive issues in the WTO, which need resolution going forward, there was at least at the 12th Ministerial Conference recently, there was a kind of a mini agreement on a [ slew ] of issues which gives hope that oil is not yet lost in that institution, but it will be a big struggle, I think, going forward, especially the way geopolitical fractures are developing in the global economy to have a good resolution on this, but it is very badly needed.

Nathan Hunt: Ajay, when you look at a system, a new system, a new Bretton Woods to be put in place to replace the old system, how would you want to see that structured? Is it enough to just invite a few more countries to the table? Or does more need to be done?

Ajay Chhibber: So I think on voting shares and -- so at the WTO right now, you have a consensual system, right, which is also not working. At the World Bank and the IMF, you have voting, which is where there have been some adjustments, but it still very much broadly reflects what was there when the institutions were set up, in which case, you have a very large share of the [ worlds ] in the hands of the United States and the European countries.

And I think the United States' share is pretty much where it should be. But Europe is clearly -- the EU countries collectively together have much greater voting share than they should have under -- if you looked at today's global economic output. And certainly, if you want to build up these institutions as sort of functioning institutions in the 20th century where the world is projected to be, let's say, in 2040 or even 2050. So clearly, there's a shift needed in IMF World Bank and voting shares from the EU countries towards China, India and other emerging economies, especially in Africa.

But that's just one part of the reform that I propose. What proposed now is 3 genuinely global institutions, which deal not just with developing country issues, but deal with global issues, IMF focused on global financial and monetary stability. The World Bank group tasked with, I call it, planetary sustainability and shared prosperity and the WTO charged with orderly trade and cross-border transactions, so including all the service-related transactions as well.

And parallel to these -- but these will be at the center, but there will be a cascading system, which will support and work with each other. So parallel to these and working will be a series of regional specialized organizations with well-defined mandates, mechanisms for collaboration which will enhance -- the scaffolding as it were, will enhance each other.

And these would work with -- so for example, specialized agencies such as the FSB and the OECD can work with the IMF, World Bank with relevant UN agencies, private philanthropic institutions and bilateral agencies. And the WTO with regional customs and trade and investment facilitation arrangements with relevant business and industry chamber. So this is the kind of architecture that is needed.

Nathan Hunt: Ajay, beyond funding which we talked about, what resources do you think this new system would require?

Ajay Chhibber: So I think the main issue today is -- how do you -- there's trillions of dollars sitting in pension funds in all kinds of looking for a return not able to get that return. So there is capital available, but it's not moving to the areas that is needed. And I think particularly for the Bretton Woods institutions, this can be -- so they could be the, what I call the Archimedean lever. Archimedes said, "Give me a lever long enough and I can move the world." And so these have to be transformed into that kind of an Archimedean lever.

So for example, the IMF could be -- so you can increase its capital base, but unless it uses that base to lever in 10, 15x more resources, it's still going to be a very small amount. The same for the World Bank. And what my paper does is try to propose different ways in which this could be done. So the IMF could be borrowing in the markets based on callable capital, which the World Bank currently does. But similarly, the IMF could help set up a debt restructuring payments.

Today, about 40, 50 countries are going to be in huge debt distress like Sri Lanka just went into and like that, there are at least 40, 50 other countries that are on the edge. And since some of the debt now is owed to countries which are outside the current frameworks for debt restructuring like China, the IMF could be tasked to prepare a proper debt restructuring framework. The one that we have now is not working very effectively.

And that thereby release a lot of resources in the form of fact that countries would need this money to build the climate-resilient infrastructure have lowered their debt service payments. The World Bank is -- and the regional development banks have been so overly conservative. Their equity capital ratios are more conservative than any commercial bank. And while they have sovereign paid in capital, they are behaving even more conservatively than commercial banks in the way they use their resources.

They have also not touched the callable capital that they have. Their guarantee instruments, insurance instruments are largely lying underutilized. So they could play a very big role in sort of the blended finance architecture that is needed going forward. So in addition to their own capital base, it's the way they are judged, they shouldn't be judged by lending targets, but by using the Archimedean principle, what multiple of resources can you catalyze with the capital base that we provide you? I think that's a key issue today.

Nathan Hunt: Ajay, any time you talk about a global system having rules there will be and there are complaints about a loss of local sovereignty. We saw that with the IMF and the U.K. recently, but no global financial order can function with, as they say, all carrot and no stick. What do you think the rules should be for Bretton Woods 2.0?

Ajay Chhibber: So obviously, I think -- and just to use the U.K. example, the -- especially the advanced countries, what they do has an effect on their people on their own citizens, of course, and their own economies. But because of their size, it has global effects, and we've seen that time and again. And for example, the Fed monetary policy has massive global effects, right, strengthens the dollar, makes debt servicing far more difficult for countries, capital moves out of these countries.

So these are -- so you need an institution, which is looking at this dispassionately and at least being able to provide technically an analysis of what is happening. And then, of course, it's up to the G7 or the G20 or whatever to try to take action against those issues. But you need a system that defines certain rules and then has institutions that can play the role of a monitor, if you like, or at least some sort of an evaluator of what is happening. So this is where I think these institutions must play a global role.

And on the list of topics, there could be many, but one would like to keep them contained to some extent. And so trade would certainly be there, monetary financial policies, debt-debt sustainability, the governance and taxation rules because here, they could be working in concert with others like the OECD, et cetera. or the World Bank works with the extractive industries transparency initiative. Then we could say, okay, one of the reasons why capital is not moving is that investment opportunities are not very -- are quite opaque and not very clear.

So there could be some bundling of climate resilient infrastructure and regulatory standards that will allow capital to move. So these are the kind of rules I think that there could be an agreement on. I mean, I don't want to run through the whole list with you, but I'm just giving you a sense of a set of examples of issues. Certainly, trade would have to be in the and debt sustainability, monetary financial policy, et cetera.

Nathan Hunt: Ajay, you are an eminent economist, another eminent economist, John Maynard Keynes attended the original Bretton Woods Conference as a delegate for the United Kingdom. He believed that the conference failed to achieve an important objective when they didn't set up a global reserve currency and instead let the U.S. dollar become the default global reserve currency.

There are some inherent problems with having a global reserve currency that is also the currency of a sovereign nation. I noticed you don't address this in your paper. Do you have any thoughts on this? Do you think a global reserve currency should be reexamined?

Ajay Chhibber: Well, I mean, thank you for comparing me to John Maynard Keynes, I mean that's a stretch for me, certainly. I mean he was such a great man. But I do believe he -- see, if you look at the changes in global reserve currencies, certainly Mr. Keynes was not complaining when the British pound was the dominant currency, which, by the way, it was well through the second world war.

I mean the U.S. dollar had gone up and down. And after the great depression, that's certainly gone down in terms of being a reserve currency. So -- but I think Maynard Keynes could see that the direction in which the global economy was going, the pound was certainly going to lose out, and the dollar will emerge. And as -- and so I think his interest was more to avoid allowing the United States to have complete -- such complete dominance which it would have by becoming the world's largest reserve currency.

And then things have fluctuated over the years with -- for a while, the French franc was also an important currency, but then decline and in the German mark came, the Japanese yen, which was nowhere emerged as another currency. And then, of course, now you have the EU, the euro, I mean. And the reason and why the Chinese currency is not a reserve currency is because they don't have an open capital account. And while they may be the world's second largest economy and a major -- the largest trading economy.

You can't have a currency unless you open your capital account, and people can move money in and out as well. So I think that's where we are. I really don't see how you can manufacture -- so reserve currency is built on the basis of demand for people wanting to hold that currency either because they want -- need it for trade or they needed to as a stable source of reserves. And I don't see how one could manufacture a currency and what would back that currency is not clear to me. I mean, the dollar is the preferred currency because of the strength of the U.S. economy and its dominance in global trade.

I really don't see how one could -- so I didn't address this issue somewhat consciously because I feel this discussion about a manufacture -- I mean, so you have the SDR, which is a manufactured currency, which could become a global currency, but then how would you decide how much to issue, when to issue it, who would decide that. I mean, it's just too complicated for me to see how that could happen. So I think we are stuck with the system we have and the dollar share will certainly decline over time, but that will only happen if other currencies emerge that people prefer to hold.

Nathan Hunt: Dr. Ajay Chhibber, the eminent economist, I'm sticking with that. It is always a pleasure to have you on the podcast. Thank you.

Ajay Chhibber: Thank you, Nathan. My pleasure, as always, to speak with you.

Nathan Hunt: The essential podcast is produced by Patrick Moroney with assistance from Kurt Burger and Kyle May. At S&P Global, we accelerate progress in the world by providing intelligence that is essential for companies, governments and individuals to make decisions with conviction from the Majestic Heights of 55 Water Street in Manhattan, I'm Nathan Hunt. Thank you for listening.