Brics Bank and Bretton Woods

6 August 2014 05:30 am - 0     - {{hitsCtrl.values.hits}}


The Bretton Woods conference aimed to reshape the international financial system and end the protectionism that, in the view of the US and UK, had contributed to the drift towards the Second World War. Seventy years on, does the recently formed Brics Bank – set up by a group of emerging economies – threaten the legacy of Bretton Woods?

The Brics Bank is actually two institutions launched by Brazil, Russia, India, China and South Africa. The New Development Bank will finance infrastructure and sustainable development projects, with US $ 50 billion in capital to get started and the US $ 100 billion Contingent Reserve Arrangement will provide assistance to members in financial difficulty.

The Brics Bank bears more than a passing resemblance to the World Bank and the International Monetary Fund (IMF), two institutions set up under the auspices of Bretton Woods. The IMF was intended to mediate crises, while the World Bank would lend to poor countries. Both institutions still largely perform their original functions.

Taking a cold, hard look at the global financial system today, the protectionism Bretton Woods set out to eliminate is arguably still very much present, while the goal of a fully integrated global economy remains a distant one. Trade barriers – explicit or implicit – seem to remain stubbornly in place in spite of Bretton Woods and subsequent attempts to free up trade. The World Bank recently reported that emerging economies have borne the brunt of protectionism since the financial crisis, with 6.4 percent of China’s exports hit by anti-dumping measures and other trade barriers erected by G20 countries at the end of 2013 – more than five times as many as for the United States (at 1.2 percent).

Creation of the Brics Bank points to a particular dissatisfaction among the major developing economies with the legacy of Bretton Woods. They have long protested at the conditions placed by the IMF on the finance it provides. At the same time, the World Bank has received criticism for funding projects such as hydro-electric dams, which have displaced indigenous communities. In Asia, the IMF was found wanting during the run on currencies that was a feature of the 1997-98 crisis; and China’s enormous currency reserves mean it can probably deal with any troubles of its own without recourse to the IMF.

The records of the IMF and World Bank may not be exemplary, but all is surely not lost. We need look no further than the recent eurozone crisis for evidence of the continued relevance of what Bretton Woods set in motion. The IMF was central to the multiple bail-outs of European countries. The debt crises of the 1980s and Asian crisis of the 1990s similarly saw the IMF taking a leading role (alongside the most economically powerful states). The World Bank’s remit was originally partly to fund the rebuilding of war-blighted Europe, and it has now moved on to be a key provider of finance to emerging markets.

Perhaps the biggest challenge to the Brics Bank comes from the Brics themselves. The new institutions may give more representation and identity to the issues of concern to the founder members, but not necessarily much more than that. The interests binding the Brics together are arguably as disparate – geographically, politically and economically – as those that bind the IMF and World Bank’s key members.

Another hindrance to the Brics Bank is that it is ultimately a bloc, rather than having a role of global scope. The motivations for establishing the IMF and World Bank were more widely shared, and this still lends the institutions legitimacy and durability. There was a common belief that lessons should be learned from the Great Depression and two world wars. The Brics do have an affinity, but it is different and less compelling.

The big challenge for the Bretton Woods institutions today is remaining relevant as the emerging economies grow in power and influence. Bretton Woods’ original legacy reflected a belief that politicians would lose their legitimacy if markets were allowed to operate unchecked; this sentiment still rings true, regardless of where global power resides. However, the priorities of countries such as China cannot be assumed to be identical to those of the countries that convened the Bretton Woods institutions – as the establishment of the Brics Bank shows. The IMF and World Bank can remain relevant, but will have to adapt as the world changes around them.

(Lucy O’Carroll is chief economist for Investment Solutions, Aberdeen Asset Management)

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