Renew the Bretton Woods System

The gradual disintegration of the global rules-based economic order requires a new ‘Bretton Woods’ conference to reaffirm the benefit for all countries of internationally accepted, treaty-based economic relationships – and to reinvent the institutions to manage those rules.

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A billboard in Beijing features US dollars. Photo: Getty Images.

A billboard in Beijing features US dollars. Photo: Getty Images.

Towards the end of the Second World War, the Allied powers came together in 1944 to plan a new economic order for the post-war world which would avoid a repeat of the disastrous policy mistakes of the 1920s and 1930s.

At the conference[1] in Bretton Woods, New Hampshire, 44 Allied countries met under the intellectual leadership of Harry Dexter White (a senior US Treasury official) and John Maynard Keynes. The conference envisaged new rules of the game to prevent countries following the ‘beggar-thy-neighbour’ policies that had led to the Great Depression. It also established the International Monetary Fund (IMF) and World Bank[2] as the key institutions to manage this new world order.

This new structure was initially successful[3] in allowing the world to recover after the war. The IMF put in place fixed exchange rates based around the dollar, and provided finance to allow countries to make necessary adjustments to their balance of payments provided that they followed sound domestic economic policies. The World Bank provided long-term loans to allow post-war reconstruction, including in support of the Marshall Plan.

Over the subsequent 50 years the structure of the global economy changed rapidly. The IMF and World Bank reinvented themselves over that period to adapt to these changes. The IMF responded to the move to a largely floating exchange rate system (precipitated by the US decision in 1971 to end convertibility of the dollar to gold) by extending its surveillance, and its conditions for loans, to all major aspects of economic and financial policy. It also played a major role in developing and implementing the ‘Washington consensus’.[4]

The World Bank shifted its focus from post-war reconstruction in Europe (financed by borrowing from capital markets) to playing a key role in development. With the creation of its International Development Association (IDA) arm in 1960, the bank became a major channel for development grants and concessional loans from rich countries to the new emerging economies and the developing world, and it played a large role in setting the agenda for development policies.

But these institutions, and the rules that they manage, have not adapted quickly enough over the last decade to the changing world order, and to the growth of popular discontent with globalization and internationalism.

Emerging markets and developing countries have been the major engine for global growth for many years. Over the past decade they have grown as a group by around 5 per cent a year on average,[5] compared with growth of less than 2 per cent a year for advanced economies. And China has now overtaken the US as the world’s largest economy.[6]

However, governance changes at the IMF and World Bank have not kept pace with economic reality. At the IMF, the US has over 16 per cent of the voting power while China has only 6 per cent; and the G7 group of advanced economies, accounting for 30 per cent of world output, have over 40 per cent of the voting power.

The World Bank has similar disparities, and within IDA the donor countries (the ‘Part I’ countries) control 55 per cent of the voting power. Moreover, since the creation of the two institutions, the convention has been maintained that the US appoints the head of the World Bank,[7] and that the head of the IMF is a European.

While small steps have been taken to reduce the degree of control that the advanced economies exercise, emerging markets and developing countries have been increasingly frustrated at the lack of progress. This has had two consequences. First, the larger emerging markets feel less constrained by the rules and norms of the institutions. For example, China has in place significant capital controls; and emerging markets have challenged the IMF’s policies on international capital movements.

Second, emerging markets have responded by setting up institutions to rival the IMF and World Bank. Examples include the so-called ‘BRICS Bank’,[8] the Chiang Mai Initiative (CMI)[9] and, most recently, the Asian Infrastructure Investment Bank (AIIB).[10]

At the same time many advanced countries have seen the rise of populism, and dissatisfaction with what many consider the damaging effects of globalization. This is most marked in the area of trade, where many countries (led by the US) are reintroducing trade controls. But it has also had an impact on monetary cooperation and development. Countries are accused of starting ‘currency wars’.[11] And governments have become more reluctant to commit funds for aid.

As organizations set up by international treaty, the Bretton Woods institutions are reliant on international economic cooperation, support for which is the bedrock of the system. To tackle this erosion of support, a new ‘Bretton Woods’ conference is needed. As with its predecessor in 1944, its aim would be to reaffirm the benefits for all countries of international cooperation rather than unilateralism. Specifically, its tasks would be the following:

1. Renew the intellectual basis for the institutions

For the IMF, the challenge would be to review and amend Article 1 of its founding Articles. This sets out the purpose of the IMF: to promote international monetary cooperation; to facilitate international trade and contribute to economic growth and employment; to avoid competitive exchange rate depreciation; and to provide loans to countries to allow them to adjust their economic policies.

Article 1 embodies assumptions about good economic management. But the erosion of the ‘Washington consensus’, the support for the ‘Occupy’ movement, questioning of the capitalist system, and the challenge from climate change to the primacy of economic growth as an objective all point to the need for a broad debate on different economic models.

For the World Bank, the challenge is for donor countries to put IDA on to a permanent statutory basis, instead of the current three-year replenishment cycle. But also the ‘division of labour’ between the World Bank and the regional development banks is unclear. The lack of precision is inefficient and a waste of aid resources. The conference would be a valuable opportunity to redesign the overall aid architecture.

2. Achieve fundamental reform of institutional governance

For both the IMF and World Bank, three fundamental aspects of governance should be reviewed. First, the financial basis of each institution needs to be addressed, as this determines voting power. A sustainable financial system needs to adapt to changes in economic circumstances, in particular to recognize the growing economic weight of the emerging markets.

Second, the composition and structure of the institutions’ executive boards also need to adapt. Third, the current informal arrangements for appointing the heads of the IMF and World Bank, based on nationality, do not necessarily result in the best person for the job.

Risk versus reward

There are clear blocks to such fundamental change. The US would see a challenge to its ‘supermajority’,[12] and most other advanced economies would also lose influence at the two institutions. Emerging markets would be challenged to take more responsibility, in economic management and aid policy for example, in exchange for more power at the IMF and World Bank.

And there are risks to reopening the underlying basis for the institutional structure. Without a clear path forward, the existing structure could be weakened and the institutions’ ability to continue operating could be compromised.

But the current challenges require a substantial rethink of the international economic and financial architecture. Incremental changes are unlikely to be able to address these challenges. And without changes, the Bretton Woods institutions – and the international economic system that they support – will continue to erode, until at some point they break.

What needs to happen

  • A new ‘Bretton Woods’ conference should redraft the institutional basis of the IMF and World Bank, and reaffirm support for international economic cooperation.
  • Article 1 of the IMF’s founding Articles should be amended to incorporate new thinking on different economic models.
  • World Bank donor countries need to put IDA on to a permanent statutory basis, replacing the current three-year replenishment cycle.
  • Voting rights need to be further reviewed, to recognize the economic weight of emerging markets.
  • The executive boards of the IMF and World Bank need reform of both composition and structure. The existing system of appointing the head of each institution based on nationality should also be discarded.


[1] The United Nations Monetary and Financial Conference.

[2] The World Bank Group’s primary arms include the International Bank for Reconstruction and Development (IBRD), established in 1944; the International Finance Corporation (IFC), established in 1956; and the International Development Association (IDA), established in 1960.

[3] See, for example, James, H. (1996), International Monetary Cooperation Since Bretton Woods, IMF and Oxford University Press.

[4] The term was coined by John Williamson to describe policies developed during the Latin American crisis of the 1980s, but has come to be regarded as a set of neoliberal free-market principles.

[5] IMF (2019), World Economic Outlook, April 2019.

[6] By GDP, measured on a purchasing-power-parity basis.

[7] David Malpass was appointed in April 2019 for a five-year term as president of the World Bank.

[8] The ‘New Development Bank’ set up by the BRICS countries in 2014.

[9] The CMI was set up in response to the perceived lack of even-handedness in the IMF’s handling of the Asian financial crisis in the 1990s, and in response to pressure for an ‘Asian Monetary Fund’.

[10] The AIIB started operations in 2016; China is the major source of funding for the bank.

[11] A term first coined by Brazil in complaint about dollar weakness.

[12] At present the US, with over 15 per cent of the voting power, has to approve the most fundamental changes to the institutions.

This essay was produced for the 2019 edition of Chatham House Expert Perspectives – our annual survey of risks and opportunities in global affairs – in which our researchers identify areas where the current sets of rules, institutions and mechanisms for peaceful international cooperation are falling short, and present ideas for reform and modernization.