‘New normal’: There’s need for reformed Bretton Woods institutions

‘But rich countries also have considerable power over the lives of billions of people through their control over institutions of global governance. One of these is the International Monetary Fund. It has 189 member countries, but the US and its rich-country allies have a solid majority of the votes. The head of the IMF is by custom a European, and the US has enough votes to veto many major decisions by itself – although the rich countries almost never vote against each other.’ – ‘The IMF is hurting countries it claims to help’ by Mark Weisbrot

While the IMF (International Monetary Fund) makes efforts to estimate the lost output due to the pandemic, whereby its chief economist, Gita Gopinath, in a blog put the figure at $28 trillion over 2020-25 – with $11 trillion over 2020-21 – and as IMF’s managing director, Kristalina Georgieva, pointed out that the fiscal stimulus injected by governments so far stood at around $12 trillion, what has continued to allude the IMF is the need to reform itself away from the neoclassical/neoliberal/Washington consensus fundamentals of its programmes, so that the world could have been in a lot better place in avoiding crises in the first place.

At the same time, there is emphasis being placed on fighting the climate crisis; for instance, the UN chief urging rich countries to come true on their $100 billion support a year in climate funding to poor countries, or the IMF chief calling for greater focus on the fight against climate crisis, but the focus here too is not on the elephant in the room— the neoliberal policies that have underlined policy prescription of the Bretton Woods institutions, and which is the reason why the world is facing one crisis after another, including the current pandemic, the fastening of pace of the coming of climate crisis, and the global financial crisis of 2007-08.

Larry Elliott of the Guardian, writing in October 2016 in an article ‘The World Bank and IMF won’t admit their policies are the problem’ pointed out: ‘We hear you, poor people. That was the message that blared out from Washington last week. It came from Christine Lagarde of the International Monetary Fund. It came from Jim Kim of the World Bank. It came from Roberto Azevêdo of the World Trade Organisation. It came from every finance minister and central bank governor… . The next big one could come from anywhere and it is good that the World Bank and IMF are aware of the risks. Even so, there was an air of unreality about the discussions in Washington last week. The reason was simple: there was not the slightest hint from the IMF or World Bank that the policies they advocated during the heyday of the so-called Washington consensus – austerity, privatisation and financial liberalisation – have contributed to weak and unequal growth, with all the political discontent that this has caused. Even worse, Lagarde and Kim seemed oblivious to the fact that the Washington consensus approach is alive and well within their organisations.’

That was 2016, and ‘the next big one’ crisis in the shape of pandemic did happen, because reform of Capitalism away from Neoliberalism has continued to allude these major multilateral institutions in any meaningful manner, along within many of its member countries, including those with greater influence in multilateral institutions, at the back of collusion of politico-economic elites in these countries to perpetuate extractive institutional designs to the advantage of this small section of the society, through continued adoption of neoliberal policies; and as witnessed in rising income inequalities over the years, whereby according to Larry Elliot (January 18, 2016 article), for instance, in which he pointed out that one study of Oxfam indicated ‘that the 62 richest billionaires own as much wealth as the poorer half of the world’s population’.

And how poor the state of economic affairs was when the pandemic hit, even though ‘we hear you’ had happened a few years ago, could be understood through Larry Elliott’s article, for instance, ‘IMF and World Bank must act fast after Covid caught policymakers napping’, where he pointed out: ‘Clearly, there is never a good time for a pandemic but the brutal reality is that the world was ill-prepared for the arrival of Covid-19 at the start of the year. Policymakers had turned a blind eye to problems that had been getting steadily worse for years. Weaknesses that ought to have been tackled were left unaddressed. Here’s how things stood when the first news of an outbreak of a deadly strain of the coronavirus emerged from China at the end of 2019. Financial markets had enjoyed a spectacularly good year, supported by the cheap money provided by central banks for more than a decade. Elsewhere, though, things were much less frothy. The 2010s had been a decade of weak investment, stagnant productivity, nugatory increases in living standards – and growing voter discontent.’

This has caused withering of faith in multilateralism and even democracy over the years; where in the case of latter, political parties in many countries, otherwise on the fringes of political spectrum, misused Neoliberalism-induced-economic disparities, and a significant voter disenfranchisement over policy over the years, and have whipped-up populism in turn to capture greater political space. Consequently, what the world is living through in the wake of the pandemic is a rise of protectionism, may that be, reportedly, in the shape of ‘vaccine nationalism’, ‘food nationalism’, or ‘oil nationalism’. How long will it take for understanding that there is no way around Neoliberalism.

The rich countries, which have a significant voting share in the IMF, for instance, should take the lead on such reforms. But that may be hard to do, given many rich countries have themselves seen the hold of Neoliberalism in their domestic policies. The widening gap between the rich and poor in individual countries across the spectrum in general means that meaningful activism is needed to undo neoliberal policies. Greater parity in voting share of member countries in multilateral institutions, for instance, will also help bring greater inclusion and ownership in decisions reached and give birth to an opportunity to deal with neoliberal policies in an effective and meaningful manner.

Moreover, in the case of IMF, for instance, it would make sense to align the thought process of its research department – with a hand on the pulse of shifting research consensus away from neoliberal solutions for the last two decades, especially after the global financial crisis and unsuccessful austerity policies overall – with those who formulate and oversee programmes with recipient countries so that programmes are in line with the research department’s findings and thinking. In a 2016 article ‘Voting share reform at the IMF: will it make a difference?’ Mark Weisbrot and Jake Johnston argued, among other things, that ‘…it should in principle be possible to give more voice to the majority of the world’s governments, and by extension their people, by increasing voting shares of low- and middle-income countries; and in this way to possibly make IMF policy better reflect and serve the interests of the majority of the world’s population, especially in low- and middle-income countries… . Without a voice for the overwhelming majority of the world within the IMF, it is not surprising that many of the Fund’s policy decisions are not in their interests. For example, a review of 41 countries with IMF agreements during the world recession of 2009 found that 31 of the agreements contained pro-cyclical fiscal policy, monetary policy, or both.’ Lack of similar understanding of ground realities in Pakistan, for instance, over the years, including the current programme with the IMF, explains that pro-cyclical neoliberal policies have meant greater growth sacrifice ratio for short-lived macroeconomic stability achieved.

The World Bank, which although is said to have tried to incorporate heterodox thought-process like New Institutional Economics (NIE) over many years now, also falls short in challenging enough the neoliberal basis of its policy prescription. In the same October 2016 article, Larry Elliott, points out: ‘The IMF is effectively two institutions. It has a research department that has broken with the Washington consensus and programme teams that operate in the field as if we were still in the 1990s… As for the World Bank, research by Oxfam has shown that 51 of the 68 companies lent money in 2015 by its private finance arm, the International Finance Corporation, to fund investments in sub-Saharan Africa, use tax havens. That doesn’t square with the idea of inclusive capitalism. It is not immediately obvious why the World Bank is supporting private schools in low-income countries when the evidence is that they exclude the poorest and, in particular, girls.’

Without such a reform that dismantles Neoliberalism, calls for greater focus on dealing with climate crisis by managing director of the IMF, with commendable similar enthusiasm of hers while working at the World Bank, may likely fall well short of the actual success achieved. The Bretton Woods institutions, including the WTO, will have to understand this. A post-pandemic ‘new normal’ needs such understanding, for which some meaningful activism will remain key.

Copyright Business Recorder, 2021