Muddling Through: The World Bank & IMF Annual Meetings Confront a Leaderless World

October 16, 2017
Muddling Through: The World Bank & IMF Annual Meetings Confront a Leaderless World
Richard Woodward
Richard Woodward Non-Resident Fellow - International Economics

Representatives from almost 190 countries have met in Washington DC for the annual meetings of the International Monetary Fund (IMF) and the World Bank. These events, the pinnacle of the IMF/World Bank calendar, bring the world’s finance ministers and central bank governors together with representatives of business, civil society and other international organisations to discuss matters of common global concern. The meeting is urgently needed. As previous TRENDS contributions have discussed, the World Bank and the IMF are embodiments of a global economic order that is under siege. Already struggling to recover from the damage to its reputation inflicted by the global financial crisis, the liberal order is being further destabilised by the withering of US leadership. Like other recent summits, this jamboree is unlikely to alleviate these problems because of the inability or the unwillingness to address their underlying causes.

Our present plight owes much to the fact that the lessons that compelled the creation of the IMF and the World Bank at the Bretton Woods conference in 1944 have largely been forgotten. The Bretton Woods conference sought to devise a system capable of reconciling international economic integration with national political stability. The upshot was a compromise that permitted economic liberalisation but only to the extent that it was compatible with the state’s ability to ability to appease domestic demands for social welfare and full employment. Fixed exchange rates and controls on short term capital movements for instance allowed states to pursue monetary policies suited to the needs of their national economy. The IMF and the World Bank were institutional expressions of this vision. As well as overseeing the fixed exchange rate system, the IMF also provided short to medium term funding to countries suffering balance of payments problems to mitigate the adverse effects of domestic deflation and austerity. The World Bank meanwhile lent money to promote development.

The responses to the collapse of the Bretton Woods fixed exchange rate system in 1971 accelerated the reintegration of the world’s financial markets and unstitched the postwar settlement. The state intervention that previously had been celebrated as a means of shielding national economies and societies from the privations of unfettered financial markets was now derided by enthusiasts of the emergent neo-liberal ideology as a hindrance to economic growth and an unwarranted imposition on individual liberty. To this end, leading states and the Bretton Woods institutions began to champion economic policy prescriptions, later dubbed the Washington Consensus, designed to remove impediments to the free operation of the market. Faced with the risk, real or imagined, of capital flight many countries adjusted their macroeconomic policies to deliver the low inflation and balanced budgets preferred by international investors irrespective of the impact on economic growth, full employment and social cohesion. Likewise, by making them conditions of their lending facilities, the Bretton Woods institutions have foisted an equivalent package of austerity, privatisation and financial liberalisation on many developing countries.

The growing sense that governments viewed domestic concerns as subordinate to those of international investors has contributed to a rising disenchantment with democratic institutions and dwindling support for globalisation. The economic and social dislocations that followed the global financial crisis further swelled the ranks of the discontented and the marginalised that have flocked to support populist candidates professing their hostility to globalism. The insensitive response of the Bretton Woods institutions to the crisis has done little to allay these concerns. Despite growing evidence to the contrary, they have clung dogmatically to the view that the global financial crisis and the problems afflicting individual countries did not derive from pathologies inherent in markets but from the failure to allow those markets to operate freely. In Greece for example, the IMF applied its usual medicine demanding cuts in public expenditure, reductions in benefits, the privatisation of state-owned enterprises and more flexible labour markets in exchange for its bailout package. While the private banks that had lent to Greece recouped their money the Greek economy endured a prolonged recession that saw its GDP shrink by a third, left one in every four workers unemployed, devastated public services, while its debts continued to rise.

Perhaps because of the anxiety over populism, exemplified by the election of President Donald Trump and the British referendum result in favour of exiting the European Union, the annual meetings of the IMF and World Bank along with the wider ensemble in international economic organisations, have started to consider what might be done to mitigate what they increasingly acknowledge as the downsides of globalisation. In 2014, the theme of the IMF and World Bank Annual meeting was sharing prosperity with the related notion of inequality becoming a staple part of the agenda of the OECD, the G20 and the World Economic Forum. This has now morphed into an agenda for inclusive growth which, in the words of the OECD, “is economic growth that creates opportunity for all segments of the population and distributes the dividends of increased prosperity … fairly across society”. Unfortunately none of this amounts to the radical rethinking of the intellectual framework required to move us beyond the present impasse. Moreover, the momentum behind even less radical change is dissipating.

In the immediate term the apparent recovery of the global economy has relieved some of the pressure for drastic change. The IMF’s latest World Economic Outlook, published at the start of the annual meetings, suggests the global economy is enjoying its briskest and most widespread growth spurt since the recession of 2010. Already this is being used as evidence to support the argument that the overall economic model is fundamentally sound and to urge states to “fine-tune the macro-economic policy mix” and undertake “ambitious structural reforms” (a euphemism for further deregulation and liberalisation) necessary to make growth sprightlier, more robust and inclusive. The IMF’s Managing Director, Christine Lagarde who has pointed out that such reforms are easier to undertake when economies are healthier, has echoed this message.

The current void in global political leadership is also problematic. Since 1945 the world has witnessed international economic coordination on an unprecedented scale. This has been underpinned by institutions established under the auspices of United States power and sustained by its willingness to assume the costs of global leadership. Donald Trump’s installation in the Oval Office is bringing the curtain down on this era of US leadership. The new President’s America First rhetoric reflects his view that the United States’ primacy has been eroded by the costs of international leadership, not least because rival countries can free ride on the global public goods it provides. This promise also presages an abdication of US global leadership at a moment when no single country or group of countries possesses the inclination and the wherewithal to drive the global agenda. In this G-Zero world, characterised by states holding wildly differing economic and political philosophies and priorities, the prospects for a new global economic settlement are remote.

Finally there are question marks over whether a meeting of the Bretton Woods institutions constitutes a legitimate environment for these discussions. Despite the drastic realignment of global economic power in recent decades, the decision making structures of the IMF and the World Bank still reflect the economic realities of the 1940s. The long-standing, if unwritten, convention that ensures the World Bank President is an American and the IMF Managing Director is a European typifies the dominance of Western countries, something that recent piecemeal reforms have done little to alter. The failure to adequately recognise the evolution of global economic power is prompting the rising powers to pursue their agendas elsewhere. The emergence of institutions such as the Asia Infrastructure Investment Bank (AIIB) is not necessarily a repudiation of the dominant liberal ideology. Indeed the AIIB has largely emulated the rules, norms and principles that constitute the framework for development lending.  Similarly the World Bank and the AIIB are cooperating extensively. As well as co-financing a series of projects in the Asian region, in April 2017 the two organisations signed a Memorandum of Understanding, related to staff exchanges and analytical work. Nevertheless, the emergence of the AIIB points to a potential fracturing of global governance at a time when coordination is badly needed, a theme which will animate the 2018 Annual Meeting of the World Economic Forum.

Reforming the architecture of global economic governance has been a recurring theme of the Annual Meetings of the IMF and the World Bank throughout the 2010s. Yet a decade on from the global financial crisis the institutions of global economic governance and the ideas they propagate have barely altered. The IMF and World Bank remain in thrall to a free market philosophy that contributed to the crisis. Ahead of the 2017 meeting Christine Lagarde has urged governments “not to let a good recovery go to waste”. Arguably however, the world’s leading players have already allowed the preceding crisis go to waste by missing an opportunity to, at the very least, seriously debate and challenge the status quo. The absence of international leadership and seemingly benign economic circumstances now make such a debate all but impossible. As the IMF’s submission to the Annual Meeting observes however, the current economic expansion may well be stimulating an enthusiasm for risk that foreshadows another financial crisis.