The IMF and World Bank must evolve to remain relevant

IMF & World Bank Spring Meeting 2018

It is hard to square a US President bent on protectionism with two institutions that have been a bulwark for free trade for over 70 years.

The Bretton Woods institutions, as the World Bank and International Monetary Fund (IMF) are known collectively, were created during the Second World War to support the post-war economic and financial order.

Their global ambitions were no accident. The founders knew that the war had its roots partly in economics, and that the future of capitalism depended on avoiding another Great Depression.

The World Bank initially loaned money to war-ravaged countries in western Europe, before switching to promoting economic development and social progress in developing nations. The IMF, meanwhile, set out to resolve the financial imbalances that partly lay behind the Great Depression in the 1930s.

Their purpose now is to try to ensure an orderly financial system, and encourage trade, healthy labour markets, and economic activity.

In many ways, the institutions have had tremendous success. Billions of people have been lifted out of poverty since their creation. The global economy is largely a product of the free markets that the US – and Bretton Woods institutions – have promoted.

Two major threats

But the world is changing, and these institutions face two major threats. One is protectionism. President Trump is, of course, the poster child for this, but the US is not alone in turning inwards. In countries such as the UK and Hungary, politicians who promote protectionism are prospering.

The other major challenge is China. It does not share the same economic philosophy underlying the Bretton Woods institutions, which it sees as extensions of US foreign policy, and is pursuing its own economic interests.

America’s protectionist turn has allowed China to present itself as a champion of the liberal economic order.

The irony is that America’s protectionist turn has allowed China to present itself as a champion of the liberal economic order. One element of its strategy is projecting soft power through development in the region, via the Asian Infrastructure Investment Bank. This is akin to the World Bank and IMF, and provides financing for development, but on distinctly Chinese terms.

China’s funding of infrastructure projects in Africa far outstrips any other country. China’s Eximbank, for example, funded the majority of the first standard gauge international railway in Sub-Saharan Africa.

Meanwhile, China’s plan to better connect Asian countries (to China) through infrastructure development (the Belt and Road initiative) has set off a competition with other countries, particularly Japan, to build infrastructure – and buy influence – in developing Asian economies. In the north of Vietnam, China is building Hanoi’s metro system, while Japan races to complete a comparable one in Ho Chi Minh in the south.

The problem for the Bretton Woods institutions boils down to the fact that they are the standard bearers for a particular model of free markets, just as faith in that model is being questioned.

The IMF and World Bank have stayed relevant for so long because they have evolved over time. They may have to do so again. It could be enough to hold fast and hope that the arguments against protectionism win out. But China’s influence isn’t going anywhere, and countering that is going to be much harder.

 


The article above was previously published on Aberdeen Asset Management’s ‘Thinking Aloud’ blog on 24th April 2018