The crisis at Bretton Woods

Mohamed Shadi
Tuesday 19 Oct 2021

Allegations of changes to China’s international business rankings by the World Bank have led to a crisis of confidence in the Bretton Woods Institutions, writes Mohamed Shadi

In the aftermath of World War II, amidst the massive destruction and loss of life it had caused, the victorious powers gathered together to create a world forum tasked with the preservation of international peace and security. The United Nations was born. 

Realising that economic factors were the main drivers of international relations and conflicts, these same powers also founded a world financial system that aimed to enable international cooperation to prevail over friction, and free trade to prevail over protectionism. The result was the three organisations that would become known as the Bretton Woods Institutions: the World Bank, the International Monetary Fund (IMF) and the World Trade Organisation (WTO).

Influence over these organisations has always been determined by two factors: the relative contributions of member states to global gross domestic product and the membership dues they pay. Accordingly, the US has had the greatest say in the World Bank and the IMF, controlling about 15 per cent of the votes in the former and 16.5 per cent in the latter. 

For much of the post-WWII period, the state of the world economy ensured that the US remained unrivalled at the helm of the international political and economic orders. The same can no longer be said today, owing to the rise of China and of emergent economic blocs such as BRICS. These new forces have begun to demand changes to the rules governing voting rights in these organisations commensurate with changes in the two aforementioned factors.

Today, China has the second-largest economy in the world, with a GDP of $16.6 trillion in 2020, according to IMF figures. US GDP stood at $22.6 billion last year. China has closed the gap considerably since 1970, when its GDP was $91 billion compared to the US’s $1 trillion. This has lent weight to mounting demands for reform, but these have always run up against the wall of the Western bloc. The resentment this has caused among the developing nations has been accompanied by a diminishing confidence in these institutions and their right to steer the global economy, at least in their current form. 

Not only have the Western countries ignored the demands of the developing nations, they have also not increased their membership dues enough to meet the Bretton Woods Institutions’ growing burdens. Consequently, the organisations’ management boards have turned to the developing nations to increase their contributions to their budgets. This has given the emergent nations, China above all, unprecedented influence in these organisations, and has in turn caused the Western countries to lose some of their once absolute confidence in them.

The most salient expression of this diminished confidence was former US president Donald Trump’s wrangle with the WTO during his term in office. If he had acted on his threat to withdraw the US from this organisation, it would have deprived it of a large chunk of its budget, not to mention the largest market in the world, equivalent to a fifth of the global economy. The WTO would have effectively collapsed. Why would other countries want to adhere to free-market rules when the largest and most advanced economy in the world refused to do so?

Trump went beyond threats to action when, for example, the US kept the WTO from performing its role in safeguarding free trade by exercising its adjudication rights and its right to penalise those breaking market rules. The Trump administration obstructed the appointment of judges to the WTO Appellate Body, the highest instance of that organisation’s dispute-settlement process. Without that body’s rulings, there can no enforcement, leaving the rules of the free-trade system without a crucial safeguard since countries could feel free to violate them with impunity. 

The latest crisis of mistrust has hit both the World Bank and the IMF. It has taken the form of the World Bank’s allegation that its former CEO, Kristelina Georgieva, pressured staff working on the World Bank’s “Doing Business” report to inflate China’s rankings in its indexes. The report’s “Ease of Doing Business” rankings have become one of the most important guides for investors planning to do business in any country and helps them to direct their investments. Both the IMF and the World Bank have initiated a review of the rankings and an investigation into the allegations.

One might think that this would ultimately count in Georgieva’s favour, if she acted in a way that got China to increase its contribution to the World Bank. However, not only has she adamantly denied the allegation, but she has also countered that her predecessor as World Bank president, Jim Yong Kim, tried to persuade her to include Hong Kong data into China’s in order to up China’s ratings, but she refused, she said.

To developing nations, the allegations against Georgieva, who went on to become the managing director of the IMF, were not aimed at her personally but at developing nations as a whole. Firstly, as a Bulgarian, she is the first IMF chief from this category. Secondly, she has dedicated much of her energies in office to serving the developing nations. She fought to secure $30 billion in facilitated loans to help them overcome the impacts of the Covid-19 pandemic, and she pressured wealthy nations to reduce, reschedule and write off the debts of the poorest nations. 

It is therefore little wonder that 16 African nations, most notably Egypt, Nigeria and Ethiopia, wrote to the IMF board of governors to voice their support for Georgieva, express their appreciation for her efforts, and urge fairness and precision in the investigations. 

Unfortunately, rather than subside, this crisis in confidence in the Bretton Woods Institutions grew worse when the World Bank and IMF came to conflicting conclusions in their investigations on Georgieva. Whereas the former found that she had indeed pressured staff to fudge China’s ratings, the IMF executive board released a statement expressing its full confidence in her, saying that the IMF investigation could find no evidence of wrongdoing on her part. 

The situation has reached a stage where reform is essential before it is too late. From the developments described above, it is clear that the Bretton Woods Institutions have lost their autonomy and integrity. Unless trust is restored to the guardians of the world economy, international tensions will rise, especially now that the WTO Appellate Body has resumed its work.

What will happen if the parties to a dispute refuse to recognise and abide by its rulings and the penalties it imposes? One can only begin to imagine the consequences in the case of a transatlantic dispute or, worse, one between the West and China.

*The writer is a senior researcher at the Egyptian Centre for Strategic Studies (ECSS).

*A version of this article appears in print in the 21 October, 2021 edition of Al-Ahram Weekly

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