On the 70th anniversary of the Bretton Woods Conference, have the World Bank and co finally met their match? Finbarr Bermingham reports.
On July 1, 1944 730 delegates from 44 nations ensconced themselves within the stucco masonry of the Mount Washington Hotel in Bretton Woods, rural New Hampshire, in an effort to patch together a world economy which had been torn to shreds by war. Three weeks later, they signed an agreement that laid the foundations for much of the economic policy that has held dominion over the world in the generations since.
“The economic health of every country is a proper matter of concern to all its neighbours, near and distant,” said US President Franklin D Roosevelt at the time, and right enough: the establishment of the World Bank Group when the treaty was ratified a year later ushered in a time of extreme financial and commercial nosiness. Post-1944, your economy was everybody else’s business, as the world hurtled headlong towards an unprecedented period of trade barrier removal and globalisation.
The foundations of the conference were based on the Atlantic Charter, a World War II policy agreement designed to align the Allied nations politically and economically. In terms of trade, the aim set out in the charter was clear: “To further the enjoyment by
all states, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity.”
Few could argue with the efficacy of what followed. Global trade growth outstripped that of GDP almost every year from 1960 to the onset of the financial crisis in 2008, with exporters the world over dancing to a beat first hammered out in the plush surrounds of Bretton Woods.
Fans of decorum may find it slightly boorish that as those inside the World Bank et al pop the corks on their 70th birthday champagne, people are beginning to call time on their existence and their relevance. But the view from some quarters is that it’s time they stepped aside and made space for the next generation. After all, back in the ‘40s, wasn’t the age of 70 considered a pretty good innings?
With the establishment of the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB – also commonly referred to as the BRICS Bank), there are, for the first time in memory, organisations which could ostensibly rival the multilateral institutions of our age. Emerging market economies – dominated by China – are aggrieved at being left out in the cold by the EU, US and Japan, which have set the trade agenda since WWII. Simultaneously, western interest in development finance for trade is waning. Are we in the eye of a perfect storm?
“Clearly this is what is taking place,” said a senior source at the Asian Development Bank (ADB), who wished not to be named, when asked if the balance of power is shifting. “We see this natural pressure and stress in all international organisations as emerging countries gradually exert more influence. It’s a natural evolution that needs to be accepted and managed harmoniously and collaboratively. This sharing of influence should not be looked on as a zero sum game. To do otherwise will be detrimental to the
There is also the sense that this is a situation of the old powers’ making. For years, because of the initial structure of the Bretton Woods institutions, they were able to decide the rules of world trade – and did, to huge effect. The General Agreement on Trade and Tariffs (Gatt) was signed in 1947, with the rules being drawn up by a select few dominant trading nations, which subsequently reaped the benefit.
By the time Brazil, Russia, India, China et al were eating at the top table, the rules of the game had changed. The opportunity for a single country or bloc to set the agenda (at least in official terms) was not quite so apparent. The inception of the World Trade Organisation (WTO) after the Uruguay round of free trade negotiations in 1986 led to more relative democracy and, alas, bureaucracy.
“The Gatt was successful as far as it went,” Dr Robert Shapiro, the former economic advisor to President Clinton and current chairman of Sonecon, a consultancy, tells GTR. “The great trade agreements of the Gatt, ending in the Uruguay round, really depended on the fact that the negotiations were dominated by a handful of countries and the developing world went along. The developing world gained an awful lot from those agreements, but most of the countries in the developing world weren’t
active participants in the negotiations in the way they are today.”
WORLD TRADE IS DEAD
The fact that each WTO member, from Antigua and Barbuda to China, gets the chance to veto any complete agreement, means that it is an organisation, hamstrung by its own inclusiveness. Nobody throws a loaf of bread into a pond full of hungry ducks and expects them to divide it evenly among themselves. Equally, it’s impossible to get an agreement across scores of countries when each is aggressively promoting its own agenda. For this reason, we are witnessing the decline of multilateral agreements. The WTO has, rather ironically, cannibalised world trade and this must be viewed as a rather unintended legacy of the Bretton Woods Conference.
It’s why we’re seeing the proliferation of plurilateral and regional trade agreements. Ceta, TTIP, Tafta, TPP – followers of the trade space have been treated to a hundred variations on alphabet soup in recent years. And it’s also come at a time when emerging markets – in particular China – really want to start leading, rather than following.
“In China, there’s a desire to create new global institutions. For countries such as China, India and Brazil they look at the IMF, the World Bank and the International Energy Agency (IEA) and want to have a say in how things are run. You only have to look at the lending activities of the China Development Bank (CDB) and China Exim (Cexim) to see that China is keen to push out on trade,” says Erica Downs, a senior analyst at the Eurasia Group, focusing on Chinese economics and politics.
Which brings us to the establishment of the AIIB and the NDB: are they ready to challenge the traditional bodies in setting the agenda for trade? First, it’s worth exploring what role the established bodies actually play in the sector.
FRIEND OR FOE?
“I think it’s fair to say the Bretton Woods institutes are viewed as outdated,” Frank Samolis, trade policy partner at law firm Squire Patton Boggs in Washington DC tells GTR. “They have served their purpose.”
But it’s impossible to ignore the direct and indirect role such organisations still play in trade and project finance. There’s the International Finance Corporation (IFC)’s Global Trade Finance Programme (GTFP) – which offers finance and guarantees totalling US$5bn for banks funding trade in emerging markets.
In July, Angolan bank Banco de Negócios Internacional signed up on a US$25mn agreement to expand its trade finance activities to support Angolan SMEs, using GTFP. In February, Myanmar Oriental Bank (MOB) became the first bank in the country to participate in the scheme, signing a deal worth US$5m to support Burmese trade. Likewise, Siddartha Bank of Nepal signed a similar agreement this June.
Away from the GTFP, the IFC teamed up with Natixis and Standard Bank to support petroleum imports to Ethiopia to the tune of US$500mn in July. This is without even mentioning the countless renewable energy projects the development bank helps finance on the continent.
The IMF’s role in trade is more indirect. But the very presence of the fund in Ghana earlier this Autumn – where it was unveiling a bailout package to help arrest the decline of the erstwhile poster boy for Africa’s emerging middle class – helped the government sell a sovereign bond at a much better rate than expected and is likely to have assuaged lenders entering the annual Cocobod transaction, which was signed a week earlier.
The raison d’être of both the AIIB and the NDB – to support infrastructure projects – means that if they develop accordingly, there will naturally be some overlap with existing DFIs. As to whether they compete with or complement each other, that depends partly on the effectiveness of the new banks.
“The market gap for infrastructure finance [in Asia] is huge,” said our insider in the ADB, an organisation many are predicting will lose out to the AIIB. “Closing the gap, meeting the region’s need, requires partnerships. So there’s more than enough space for another institution dedicated to closing that gap. Presumably the institutions will work closely, share information and co-finance projects.”
For the NDB, the picture is fuzzier still, given the economic travails of some of those that are supposed to be funding it. Russia, for instance, is set to pump US$50bn into its domestic banking sector through 12 months of foreign currency auctions in an effort to stave off the impact of the EU ban on state-owned companies raising capital on the European markets. Whether the Kremlin’s bean-counters will find enough change down the back of the sofa to help fulfil the NBD’s ambitious US$50bn annual lending targets (rising to US$100bn) remains to be seen.
“The success of these institutions depends virtually exclusively on the willingness of its members to fund them. In that respect, I don’t see much prospect for the BRICS Bank,” says Shapiro. “I can’t see funds coming from any of those countries at the levels that would require for them to be affective – with the exception of China.”
Some are more disparaging still. Ben Steil – director of international economics at the Council on Foreign Relations in New York – tells GTR: “China is second only to India as a beneficiary of World Bank lending, so it is clearly no enemy of the World Bank, in spite of its unhappiness with the level of its influence over policy.”
One of the criticisms often angled at the World Bank and IMF is the conditionality of their lending. Privatise this, we’ll lend you that. Cut government spending here, we’ll bail you out there. As China has grown onto the world stage, its policy has been even less subtle – funding countless projects in Africa and the Middle East in exchange for commodities concessions and infrastructural access.
Shapiro argues that China’s interest in international lending is wholly political: “They’ve done this all around the world; provided aid in exchange for explicit concessions to the agenda of China. We see this particularly in the energy area. This would be a very different bank, it wouldn’t be like the IMF or World Bank, it would be an instrument of Chinese state policy.” But is it really that different to a model enjoyed by the dominant economies of the 20th century?
For decades, Japan was the biggest provider of loans and aid to the military dictatorship in Myanmar. It’s difficult to look at the raft of Japanese contractors sealing lucrative infrastructural projects in the country now and not draw any correlation.
Shapiro says the IMF’s insistence on austerity in late-90s Southeast Asia, following the regional financial crisis, was “economic rather than political”. Many would disagree. But either way, the emerging picture is clear. The strings of the western institutions have always been pulled most forcefully by the US. Those emanating from the emerging markets look set to be governed from Beijing.
The impact and implications of the China-sponsored development banks is likely to depend on how soon and how far they put the US nose out of joint. The NDB and AIIB have been established at a time when US appetite for publicly-backed trade lending is at an all-time low – as evidenced by the tooth and nail fight US Exim had to keep its mandate (albeit temporarily).
But should any of these new lenders act to damage US interests overseas, Washington’s interest will no doubt be piqued.
“In terms of visibility among members of Congress, it hasn’t even made the radar screen. Wait until after the [mid-term] election, if then,” says Samolis at Squire Patton Boggs. “There won’t be a huge hue and cry against these banks until – if ever – they start securing transactions and deals to the detriment of US interests. You may then see calls for trade sanctions. Something that cartelises trade, or financial or commercial benefits to the seclusion of the US.”
Trade is the most basic form of commerce there can be. Which is why, with all the greatest will in the world, the very term “development”, when applied to trade, is a misnomer. Game theorists and evolutionists debate the existence of altruism in general. But you can be sure as hell there’s little room for it in trade.
Multilaterals such as the World Bank fulfil as much of a purpose at home as they do abroad. In Beijing, the same may be said in the future for the AIIB and the NDB. They represent the shifting dynamics in international trade, the power play from the east gathering pace. And that is why it’s clear that even as those in the west lose interest, reports of the death of “development” trade and infrastructure finance have been greatly exaggerated.