IMF and BRICS: no return to Bretton Woods

By Michael Roberts

This week the IMF-World Bank semi-annual meeting takes place in Washington, US. At the same time, the BRICS+ group meets in Kazan, Russia. The coincidence of these two meetings sums up how the world economy is going in 2024.

After WW2, the IMF and the World Bank became the leading agencies for international cooperation and action on the world economy. They were institutions that sprang out of the Bretton Woods agreement of 1944, that set the future world economic order to be established at the end of WW2. At the time, the then US president Franklin Roosevelt offered these prophetic words: “The point in history at which we stand is full of promise and of danger. The world will either move toward unity and widely shared prosperity or it will move apart into necessarily competing economic blocs.”

A new era of competing economic blocs

Roosevelt was referring to the division between the US and its allies and the Soviet Union. That ‘cold war’ came to an end with the collapse of the latter in 1990. But now 35 years later, Roosevelt’s words have a new context: between the US and its allies and an emerging bloc of ‘Global South’ nations.

The world economic order agreed at Bretton Woods established the US as the hegemonic economic power in the world. In 1945, it was the largest manufacturing nation in the world, it had the most important financial sector, the most potent military forces – and it dominated world trade and investment through the international use of the dollar.

John Maynard Keynes was heavily involved in the Bretton Woods deal. He commented that his “foresighted idea for a new institution to more equitably balance the interests of creditor and debtor countries was rejected”. Keynes’ biographer, Robert Skidelsky summed up the outcome. “Naturally, the Americans got their way because of their economic power. Britain gave up its right to control the currencies of its former empire, whose economies now came under the control of the dollar, not sterling.” In return, “the Brits got credit to survive – but with interest charged. Keynes told the British parliament that the deal was not “an assertion of American power but a reasonable compromise between two great nations with the same goals; to restore a liberal world economy. “The other nations were ignored, of course.

The US and its allies in Europe have have dominated the IMF and the World Bank ever since, both in personnel and in policies. Despite some very minor reforms to its voting and decision-making over the past 80 years, the IMF continues to be run by the G7, giving almost no voice to other countries. There are a total of 24 seats on the IMF board, with the UK, US, France, Germany, Saudi Arabia, Japan and China each having individual seats – and the US having the power to veto any big decisions.

IMF conditions for receiving loans

As for economic policy, the IMF is perhaps most notorious for the imposition of ‘Structural Adjustment Programmes’. IMF loans were ‘given’ to countries in economic distress on the condition that they agreed to balance their deficits, squeeze public spending, open their markets and privatise key sectors of the economy. The single most widely recommended IMF policy is still to cut or freeze public sector wage bills. And the IMF still refuses to call for progressive taxes on the income and wealth of the richest individuals and corporations. As of 2024, 54 countries are now in a debt crisis and many are spending more on servicing their debt than on financing education or health. Some of the worst cases have been highlighted on this blog.

The World Bank’s criteria for loans and aid to the poorest nations also remains within the mainstream economic view that public investment is made merely to encourage the private sector to take up the task of investment and development. The World Bank economists ignore the role of state investment and planning. Instead, the Bank wants to create “markets globally contestable, reduce factor and product market regulations, let go of unproductive firms, strengthen competition, deepen capital markets”.

Kristalina Georgieva has just been endorsed for a second term as IMF chief. And she now talks of ‘inclusive’ economic policies. She says she wants to increase ‘global collaboration and reduce economic inequality’. The IMF claims it now cares about the negative consequences of fiscal austerity, often citing how social spending should be protected from cuts through conditions that stipulate spending floors. Yet, an Oxfam analysis of seventeen recent IMF programs found that for every $1 the IMF encouraged these countries to spend on social protection, it told them to cut $4 through austerity measures. The analysis concluded that social spending floors were “deeply inadequate, inconsistent, opaque, and ultimately failing.”

The world economy is suffering from ‘anemic growth’

Until recently, the IMF reckoned faster growth depended on higher productivity, free flows of capital, globalization of international trade and ‘liberalisation’ of markets, including labour markets (meaning weakening labour rights and unions). Inequality did not come into it. This was the neo-liberal formula for economic growth. But the experience of the Great Recession on 2008-9 and pandemic slump of 2020 seems to have delivered a sobering lesson to the IMF’s economic hierarchy. Now the world economy is suffering from “anemic growth”.

So the IMF is worried. Georgieva said the reason that the major economies are experiencing slowing and low real GDP growth is soaring inequality of wealth and income:“We have an obligation to correct what has been most seriously wrong over the last 100 years – the persistence of high economic inequality. IMF research shows that lower income inequality can be associated with higher and more durable growth.” Climate change, rising inequality and increased geopolitical ‘fragmentation’ also threaten the world economic order and the stability of the social fabric of capitalism. So something must be done.

During the Long Depression of the 2010s, globalisation has fragmented along geopolitical lines—around 3,000 trade-restricting measures were imposed in 2023, nearly three times the number in 2019. Georgieva is worried: “Geoeconomic fragmentation is deepening as countries shift trade and capital flows. Climate risks are increasing and already affecting economic performance, from agricultural productivity to the reliability of transportation and the availability and cost of insurance. These risks may hold back regions with the most demographic potential, such as sub-Saharan Africa.”

Mounting debt

Meanwhile, higher interest rates and debt-servicing costs are straining government budgets—leaving less room for countries to provide essential services and invest in people and infrastructure.

So Georgieva wants a new approach for her new five-year term. The previous neoliberal model for growth and prosperity must be replaced with ‘inclusive growth’ that aims to reduce inequalities and not just boost real GDP. The key issues now should “inclusion, sustainability, and global governance, with a welcome emphasis on eradicating poverty and hunger.”

Can the IMF and World Ban really change?

But can the IMF or the World Bank really change anything, even if Georgieva wants to, when the US and its allies control these institutions? IMF loan conditionalities have hardly altered. There’s some debt relief maybe (ie some restructuring of existing loans), but no cancellations of onerous debt. As for interest rates on these loans, the IMF actually imposes hidden extra penalty rates on very poor countries unable to meet their repayment obligations! After a growing outcry against these penalties, these rates have recently been reduced (not abolished), thus lowering costs for debtors by (only) $1.2bn annually.

Christine Lagarde, the head of the European Central bank (ECB), was the previous IMF chief. She made an important ‘keynote’ speech last spring to the US Council of Foreign Relations in New York. Lagarde talked nostalgically of the post-1990s period after the collapse of the Soviet Union, supposedly heralding a new prosperous period of global dominance by the US and its ‘alliance of the willing’. “In the time after the Cold War, the world benefited from a remarkably favourable geopolitical environment. Under the hegemonic leadership of the United States, rules-based international institutions flourished and global trade expanded. This led to a deepening of global value chains and, as China joined the world economy, a massive increase in the global labour supply.”

These were the days of the globalization wave of rising trade and capital flows; the domination of Bretton Woods institutions like the IMF and the World Bank dictating the terms of credit; and above all, the expectation that China would be brought under the imperialist bloc after it joined the World Trade Organisation (WTO) in 2001.

However, it did not work out as expected. The globalization wave came to an abrupt end after the Great Recession and China did not play ball in opening up its economy to the West’s multi-nationals. That forced the US to switch its policy on China from ‘engagement’ to ‘containment’ – and with increasing intensity in the last few years. And then came the renewed determination of the US and its European satellites to expand its control eastwards and so ensure that Russia fails in its attempt to exert control over its border countries and permanently weaken Russia as an opposition force to the imperialist bloc. This led to the Russian invasion of Ukraine.

The emergence of the BRICS grouping

This brings us to the rise of the BRICS bloc of countries. BRICS is the acronym for Brazil, Russia, India, China and South Africa, the original members. Now in Kazan, there will be the first meeting of BRICS-plus with its new members: Iran, Egypt, Ethiopia, the UAE (and maybe Saudi Arabia).

There is much optimistic talk among the left that the emergence of the BRICS grouping will change the balance of economic and political forces globally. It’s true that the five BRICS nations now have a combined GDP larger than that of the G7 in purchasing power parity terms (a measure of what GDP can buy domestically in goods and services). And if you add in the new members that makes the gap even larger.

Caveats about the state of the BRICS group

But there are caveats. First, within the BRICS, it is China that provides the bulk of the BRICS GDP (accounting for 17.6 per cent of global GDP), followed by India at a distant second (7 per cent); while Russia (3.1 per cent), Brazil (2.4 per cent), and South Africa (0.6 per cent) together made up just 6.1 per cent of world GDP. So this is no equally shared economic power within the BRICS. And when we measure GDP per person, the BRICS are nowhere. Even using PPP-adjusted international dollars, the United States’ per-capita GDP amounts to $80,035, more than three times that of China, which amounts to $23,382.

The BRICS+ group will remain a much smaller and weaker economic force than the G7 imperialist bloc. Moreover, the BRICS are very diverse in population, GDP per head, geographically and in trade composition. And the ruling elites in these countries are often at loggerheads (China v India; Brazil v Russia, Iran v Saudi). Unlike the G7, which has increasingly homogenous economic objectives under the firm hegemonic control of the US, the BRICS group is disparate in wealth and income and without any unified economic objectives – except maybe to try and move away from the economic dominance of the US and in particular, the US dollar.

The dominance of the dollar

And even that objective is going to be difficult to achieve. As I have pointed out in previous posts, even though there has been a relative decline in US economic dominance globally and in the dollar, the latter remains the most important currency by far for trade, investment and national reserves. Approximately half of all global trade is invoiced in dollars and this share has hardly changed. The USD was involved in nearly 90% of global FX transactions, making it the single most traded currency in the FX market. Approximately half of all cross-border loans, international debt securities, and trade invoices are denominated in US dollars, while roughly 40 percent of SWIFT messages and 60 percent of global foreign exchange reserves are in dollars.

The Chinese yuan continues to make gradual gains and the renminbi’s share in global FX turnover has increased from less than 1% 20 years ago to more than 7% now. But the Chinese currency still only represents 3 percent of global FX reserves, up from 1 percent in 2017. And China doesn’t appear to have changed the dollar share of its reserves in the last ten years.

John Ross made similar points in his excellent analysis of ‘de-dollarisation’. “In short countries/companies/institutions engaging in de-dollarisation either suffer, or run the risk of suffering, significant costs and risks. In contrast, there are no equivalent immediate upside gains from abandoning the dollar. Therefore, the great majority of countries/ companies/ institutions will not de-dollarize unless forced to. The dollar, therefore, cannot be replaced as the international currency unit without an entire change in the global international situation for which the objective international conditions do not yet exist.”

The BRICS New Development Bank was set up in 2015

Moreover, multilateral institutions that could be an alternative to the existing IMF and World Bank (controlled by the imperialist economies) are still tiny and weak. For example, there is the BRICS’ New Development Bank set up in 2015 in Shanghai. The NDB is headed up by Brazil’s former leftist President Dilma. There is much noise that the NDB can provide an opposite pole of credit to the imperialist institutions of the IMF and World Bank. But there is a long way to go in doing that. One ex-official of South African Reserve Bank (SARB) commented: “the idea that Brics initiatives, of which the most prominent thus far has been the NDB, will supplant Western-dominated multilateral financial institutions is a pipe dream”.

And as Patrick Bond put it recently: “The “talk left, walk right” of BRICS’ role in global finance is seen not only in its vigorous financial support for the International Monetary Fund during the 2010s, but more recently in the decision by the BRICS New Development Bank – supposedly an alternative to the World Bank – to declare a freeze on its Russian portfolio in early March, since otherwise it would not have retained its Western credit rating of AA+. ” And Russia is a 20% equity holder in NDB.

The BRICS is a motley group of nations with governments that have no internationalist perspective, certainly not one based on working-class internationalism, led as many are by autocratic regimes where working people have little or no say; or by governments still tied heavily to the interests of the imperialist bloc.

Looking back on the Bretton Woods agreement

Let’s go back to Bretton Woods and Roosevelt’s prophecy. Many modern Keynesians hold up the Bretton Woods agreement as one of the great successes of Keynesian policy in delivering the sort of global cooperation that the world economy needs to get out of its current depression. What is needed, you see, is for all the world’s major economies to get together to work out a new agreement on trade and currencies with rules to ensure that all countries work for the global good. Two Keynesians from the Democrat party in the US recently reckoned that “a different kind of worldview has never been clearer. This is revealed by a look at any of the problems of our age, from climate to inequality to social exclusion… Designing a new global economic framework requires a global-scale conversation.”

Indeed, but is it really possible in a world controlled by an imperialist bloc led by an increasingly protectionist and militarist regime (with Trump on the horizon) that it can be resisted by a loose amalgam of governments which are often exploiting and suppressing their own people? In such a situation, hopes for a new coordinated world order in global money, trade and finance is ruled out. A new and fair ‘Bretton Woods’ is not going to happen in the 21st century – on the contrary.

A recipe for global fragmentation and conflict

Back to Lagarde: “the single most important factor influencing international currency usage is the “strength of fundamentals.” In other words, on the one hand, the trend of weakening economies in the imperialist bloc facing very slow growth and slumps during the rest of his decade; and on the other, continued expansion of China and even India. This means that the heavy military and financial dominance of the US and its allies stands on the chicken legs of relatively poor productivity, investment and profitability. That’s a recipe for global fragmentation and conflict.

From the blog of Michael Roberts. The original, with all charts and hyperlinks, can be found here.