The Importance of Bretton Woods, 80 Years Later

Eighty years ago, as World War II (WWII) raged into its fifth year, 730 delegates from 44 countries convened in Bretton Woods, New Hampshire, to discuss and agree upon an economic order and international monetary system that would assist countries ravaged by the war and stimulate future economic growth. From July 1 to July 22, 1944, the delegates gathered for discussions at what would later be dubbed the Bretton Woods Conference.

At the conclusion of the conference, delegates agreed to establish two intergovernmental entities: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development, which would later become the World Bank Group. The creation of these "Bretton Woods twins" established the post-WWII economic world order and developed a system for international economic cooperation. The IMF and World Bank would formally come into existence on December 27, 1945, when representatives from 21 countries convened in DC to ratify the Articles of Agreement.

To better understand the importance of the Bretton Woods Conference and the function of the IMF and World Bank Group 80 years after their establishment, we asked SIS professors Tamar Gutner and Randall Henning a few questions.

Delegates from 44 countries met in July 1944 as WWII raged in Europe and the Pacific to agree on an economic system that would ultimately help countries recover from the devastation of the war. Prior to WWII, what did the international monetary system look like? Did a framework exist at all?Henning: Prior to WWII, and indeed over the course of the second half of the 19th century, the international monetary system revolved around the gold standard. That system emerged under the leadership, or "hegemony," of the United Kingdom and its central bank, the Bank of England. Countries resurrected that system after WWI, but the international pecking order and domestic politics had profoundly changed in the meantime. Domestic social groups such as labor unions and left-leaning political parties no longer tolerated the austerity that was required to keep countries that ran balance-of-payments deficits on the gold standard. It thus collapsed spectacularly during the first half of the 1930s. The Bretton Woods Conference applied the lessons of that collapse to the design of the new, postwar international monetary system-the first such global system to be deliberately designed and embodied in a formal charter.Since their founding at the Bretton Woods Conference 80 years ago, how have the IMF and World Bank fulfilled their original purposes?Henning: In a nutshell, the IMF's mission is to underpin international financial stability while supporting economic growth and open trade, while the World Bank's is to support the economic and social development of, principally, low-income and lower middle-income countries. How well they have done so is the subject of endless debate. One could point to many failures-countries that have failed to develop and financial crises that were not foreseen. But a balanced assessment would acknowledge that these institutions should share some of the credit for the historically unprecedented, broad-based growth in income and social well-being across the globe over the last 80 years. Their roles-the provision of balance-of-payments and crisis financing in the case of the IMF, and project and sometimes policy financing in the case of the World Bank-are extraordinarily difficult. Success depends, among other things, on their effective use by borrowing governments and global economic circumstances, factors that are substantially outside the control of these institutions. We cannot always expect financial stability to be preserved and economic development achieved, given the vagaries of domestic politics and capacities within borrowers, even when the Bank and Fund might be performing well. It has been said that if these institutions did not exist, we would have to create them. And this is true notwithstanding multiple criticisms. One measure of their success is the fact that member states around the world have created regional and subregional versions of them. The IMF has been replicated in the form of the Chiang Mai Initiative Multilateralization in East Asia and the European Stability Mechanism, for example. The World Bank-or more accurately the World Bank Group as it now comprises five development-oriented organizations-has been replicated in the African Development Bank and more recently the Asian Infrastructure Investment Bank. How have their purposes shifted or changed over the past 80 years? What major role do the World Bank and IMF play today?Henning: The Fund and Bank have changed greatly over the eight decades of existence as the world economy and international relations evolved. For one thing, the size of their memberships more than tripled in the early decades with the proliferation of new, independent countries after decolonization. Another new set of countries joined after the dissolution of the Soviet Union and the end of the Cold War. For another, these institutions' priorities evolved as so many countries succeeded in developing and raising living standards and with economic globalization. The fixed exchange rate system under Bretton Woods gave way to flexible exchange rates over the course of the 1970s. As international financial markets developed, countries found that private lenders were willing to finance many development projects, reducing reliance on loans from multilateral development banks such as the World Bank; but at the same time, markets became more volatile, which necessitated access to the IMF as insurance against crises. The Fund has thus become the last-resort lender of crisis finance for emerging-market and developing countries.What challenges do the World Bank and IMF face today?Gutner: There is no shortage of challenges facing the World Bank and IMF as the world is tackling numerous, connected crises, and rising geopolitical tensions. There is also a cottage industry constantly calling for the institutions to reform themselves on a range of issues that includes how the institutions should address debt, climate change, inequality, gender, the digital divide, AI, and governance issues such as how voting power is allocated.I'd like to focus on one major, ongoing challenge that is deeply connected to the other ones and that is how the World Bank and IMF can better work with each other. The two institutions were designed 80 years ago with the expectation that they would work closely together in pursuing their different purposes-short-term stabilization for the IMF and long-term development for the World Bank. Certainly, if any two international organizations should be expected to figure out how to work closely together, it is these two. The Bretton Woods twins had the same language of cooperation with other international organizations built into their respective articles of agreement. Membership in the IMF is a prerequisite for membership in the World Bank. Their first offices were in a shared building. Over the years they have shared members of the Boards of Governors and sometimes executive directors have served on both boards. A number of senior staff have moved from one institution to the other, most famously Kristalina Georgieva, the IMF's managing director and former chief executive of the World Bank. Located across the street from one another, with a shared underground tunnel linking them, they have also shared at some point in their history, health services, telephone services, interpreter services, computer services, a library, and a chorus. Yet the many formal efforts by the IMF and World Bank to work together over the decades have not been smooth. From the moment the two institutions opened their doors, it was evident that drawing a line between the shorter-term IMF focus and longer-term Bank focus would not always be straightforward as the sets of issues they were addressing were entangled. Institutional overlap was unavoidable and could produce conflicting advice, disagreement, and duplication, as one institution encroached on the turf traditionally occupied by the other. Another important reason why collaboration has been challenging for the Bank and Fund over the decades, and for a variety of other international organizations as well, is collaboration can mean a wide range of actions. These are often not specified with sufficient precision, and it is common for people to use the terms collaboration, cooperation, and coordination interchangeably. Yet there is a difference between asking a colleague for advice (which fits under the IMF's current definition of collaboration), sharing a work program and budget, and operating as a formal partnership, as these are vastly different undertakings. If we see collaboration as two institutions pursuing shared goals they could not achieve alone (such as through a partnership), cooperation as one actor or institution helping another pursue the latter's goals (such as information sharing), and coordination as facilitating work (such as joint planning), the varied nature of working together becomes clearer. This is not just academic. Institutional leaders can easily call for collaboration with other actors, but it can still be difficult for staff to translate exhortations into institutional practices that work well. A focus on turf delineation versus complementary and synergy is an example of different emphases by the Fund and Bank over the years, all under the heading of "collaboration." There have been many formal efforts to improve Bank-Fund collaboration since the 1940s, coming from the joint memoranda, staff follow-up reports, and evaluations undertaken by the twins' independent evaluation offices. This is no surprise as "working together" occurs at so many levels-from more engagement between Bank and Fund missions on the ground to formal joint efforts, to more regular engagement between the institutions' leaders or boards, to policies for sharing information, and other efforts to work together on a variety of individual issues. The evaluation offices of both institutions regularly offer evidence that some efforts do produce synergy or reduce overlap but also continued evidence of areas of tension and structural obstacles such as different budgets and timelines, and the Fund staff's tendency toward self-reliance. A major lesson of these efforts is that calls for "more collaboration" across international organizations does not always produce easy-to-accomplish quick fixes. The twins need to be more realistic that efforts to work across institutions require more clarity of what exactly staff are being asked to do and awareness that effective efforts are more a set of ingredients and best practices than a simple recipe. Different types of engagement make sense for different types of issues. Best practices include attention and interest from senior management, appropriate incentives, accountability, and opportunities for evaluation, learning, and flexibility so that different areas of working together are less piecemeal and more thoughtful. There is widespread acknowledgement that staff regularly work together informally, and those efforts should continue to be encouraged and supported. Today, effective modes of working together are not just important for how these two institutions engage with each other, because together and separately they also engage with a host of other actors, including the United Nations and other development banks. Collaboration, partnership, and other mechanisms of working together are in high demand today. Amid global concerns about economic fragmentation-the flip side, collaboration-still not well understood, is more important than ever. Henning: As octogenarians, these institutions face a new set of challenges. Large unmet social and economic development needs remain to be addressed in low-income countries. Because they sit at the nexus of the process for organizing the restructuring of sovereign debt, the Fund and Bank must organize assistance to countries whose debts are not sustainable. Both the Bank and the Fund are mandated to assist in the fight against climate change and provide financial support for member countries' adaptation to global warming. They are receiving quota and capital increases in order to do so, but the scale of the effort will require more resources in the future. They must address these pressing problems in the face of a populist backlash against multilateral institutions within many countries and geopolitical fragmentation that impedes consensus building within their governing bodies. Those challenges are formidable. But these "Bretton Woods twins" have been adept at reinventing themselves as the world political economy has evolved and are likely to prove resilient once again.

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