Past Time to Reform Bretton Woods
By THE EDITORIAL BOARD
MAY 16, 2015
The reluctance of American and European officials to give developing nations a greater role in the International Monetary Fund and the World Bank risks making those institutions less relevant and effective than they could be.
The two trace their founding to 1944, when officials from the United States, Britain and other countries met in Bretton Woods, N.H., to restructure the global economic system. At the time, America held most of the economic cards. World War II was devastating Europe and Japan, a brutal civil war in China would soon resume, and India was still a British colony.
The global economy has changed greatly since then, but who calls the shots at the two institutions has not. Both are based in Washington.
The United States and European countries collectively are the largest shareholders, and they appoint the top executives. Despite their rapid growth, China, India and other developing countries have much smaller votes than their relative size in the global economy.
For many years, officials in developing countries quietly grumbled about Western control of these two organizations, and for good reason. The I.M.F. lends to financially troubled nations, and the World Bank finances development projects in poor countries. Why shouldn’t developing countries have a bigger say? Nevertheless, they did not dare to openly challenge the status quo.
Credit Associated Press
That may be changing. China has decided that it will wait no longer for a bigger role on the global economic stage. Recently, it said it would create the Asian Infrastructure Investment Bank, a rival to the World Bank that has already attracted many European and Asian countries as members. And last year, it enlisted Brazil, India, Russia and South Africa to create the New Development Bank.
Together, the two China-led banks will have about $150 billion in capital, an amount that is roughly 70 percent of the World Bank’s $223 billion. China has also lent tens of billions of dollars to countries in Africa, Latin America and Asia through bilateral loans.
Some Western leaders, including many Europeans and the president of the World Bank, have said the West should welcome these new Chinese banks and invest alongside them. One reason is to make sure they operate at the same high standards as the I.M.F. and the World Bank, though Western leaders should have no illusions about their influence, since China intends to dominate both organizations.
The new banks pose a challenge to the West to modernize the old institutions. Even though the I.M.F. has too often pushed countries to adopt destructive austerity policies, and the World Bank has been slow to adapt to the needs of fast-growing developing countries, they remain the best tools the world has to address economic crises and finance development.
To its credit, the Obama administration tried in 2010 to increase the representation of developing countries in both institutions. For example, China’s voting share on the fund’s board would have increased to 6 percent, which is about half as big as China’s share of the global economy, though still considerably higher than the country’s current 3.8 percent share.
But Republicans in Congress have refused to ratify changes to the I.M.F., which would have also increased its capital. They signaled that they would only vote for I.M.F. reforms if they got something in return from the administration, like changes in the 2010 health care reform law.
But there is more that the administration and European officials can do on their own without waiting for Congress. For example, they can declare that they will end the anachronistic tradition of appointing a European to head the fund and an American to head the bank. They should simply pick the best candidates for those jobs regardless of nationality.
If the West does not make more space for developing countries in existing financial institutions, the result will probably be a more fragmented global economy.
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