For historians of the postwar economic era, 2024 marks an important anniversary. Eighty years ago, in July 1944, a small town called Bretton Woods in New Hampshire, America, hosted a conference. Its purpose was to establish a new set of rules and institutions that could keep order over global capitalism after the disasters of the Great Depression and the second world war. It is not too much to say that Bretton Woods established the infrastructure of the modern global economy.
Eight decades later, the world is a very different place. But once again the global economy – post-Covid, post-energy price shock, experiencing rapid climate change – is in crisis. Calls for a new Bretton Woods have been growing louder.
Forty-four nations sent delegates to the Bretton Woods conference, but in practice it was dominated by the US and UK. Its presiding intellect was the brilliant British economist John Maynard Keynes.
Keynes’s theories had already revolutionised economists’ thinking about domestic policy. If economies fell into recession, Keynes argued, it was the job of the state to raise public spending in order to maintain full employment. As the second world war was ending, Keynes turned his attention to the international sphere.
Under Keynes’s guidance, the Bretton Woods conference created two new institutions: the International Bank for Reconstruction and Development, later known as the World Bank; and the International Monetary Fund, or IMF. The World Bank’s task was to invest in countries’ postwar economic development, through both commercial and concessional (low-interest-rate) loans. The IMF’s role was to support countries that got into financial trouble, to avoid the beggar-thy-neighbour currency devaluations that had contributed to the Great Depression of the 1930s.
Along with the Marshall plan, which between 1948 and 1952 saw the US lend European countries today’s equivalent of $173bn (£135bn) for their postwar recovery, the Bretton Woods conference shaped the “golden era” of global economic growth from 1945 until the mid-1970s. But in the free market era that followed – after the elections of Margaret Thatcher and Ronald Reagan in 1979-80 – the World Bank and IMF changed. They started applying restrictive conditions to their loans, forcing recipient countries to make “structural adjustments” to their economic policies, in practice meaning public spending cuts, deregulation and privatisation. Keynes’s creations became, in effect, instruments of the anti-Keynesian counter-revolution.
Today, the World Bank and IMF are not quite as free market-oriented, having committed to acting on the climate crisis and promoting green and “inclusive” (less unequal) growth. But they are still run by the developed country shareholders that first funded them 80 years ago, dominated by the US, EU, UK and Japan. And meantime the global economy has changed utterly.
In 1944 the US produced more than half of the world’s manufactured output. Today it is around a sixth. International trade represented less than a quarter of global GDP; today it is more than half. China has grown from a largely feudal rural economy to an industrial powerhouse.
Today, five major challenges face the emerging and developing countries of the global south. First, they need better access to public capital to invest in poverty-reducing growth. This requires the World Bank and its sister multilateral development banks (MDBs) in Africa, Asia and Latin America, to increase the amount, quality and speed of their lending. They need to focus more of their money on social welfare programmes that lift the poor out of hunger and contribute to the emancipation of women and girls; and on environmentally sustainable and climate-resilient development, including a just transition to renewable energy systems. In turn, this requires developed countries to make larger financial contributions to the World Bank and other MDBs, both in terms of overseas aid spending and in new capital.
Second, the global south needs better access to private finance. The world’s capital markets are awash with money; but it costs three or four times as much to get hold of it if you are a developing country than if you’re a rich one. Changing this will require MDBs to share some of the risks, and for reform of financial regulations in developed countries that prevent pension funds and insurers investing in good-quality projects in the developing world.
Third, a looming debt crisis must be averted. Sixty per cent of low-income countries, and around a quarter of middle-income countries, are now defined by the IMF as in, or at high risk of, “debt distress”, meaning that their debt burdens have become unsustainable. As the value of the dollar has followed US interest rates upwards over the last two years in response to US inflation, countries that borrow in dollars have seen their debt repayments soar. Many are now spending far more on their creditors than on health or education. These debts need restructuring, and new debt must be designed to be both environmentally and fiscally sustainable.
Fourth, developing countries need to be brought into western supply chains through new trade and investment relationships. The US and the EU have embarked on bold industrial strategies to decarbonise their economies and reduce their manufacturing dependence on China. Many countries in Africa, Asia and Latin America have the critical minerals they need, along with the capacity to supply materials such as green hydrogen and steel. New partnerships would bring benefits to geopolitical as well as economic security.
Fifth, multinational corporations are still getting away with tax avoidance and evasion on a grand scale. Western efforts to harmonise corporation tax regimes must now ensure that multinationals pay their fair share of taxes in developing countries too. New international taxes, such as levies on shipping and aviation emissions, are needed to raise vital funds for climate adaptation and loss and damage.
The 80th anniversary of the Bretton Woods conference would be an appropriate time to reshape the global economic order in these ways. And there is an appropriate place, too. The presidency of the G20 group of the world’s largest economies is held this year by Brazil. Its leader, President Lula, has already declared that it is no longer appropriate for the world’s major economic institutions to be governed by the dominant economic powers of 1944. He wants reform. And he intends to use the G20 leaders’ summit, to be held in Rio de Janeiro in November, to kickstart the process. Keynes would approve.
