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2 April 1999

Who rules the world?

Three bodies were set up as economic therapists to the globe. Duncan Parrish finds them much diminis

By Duncan Parrish

The world is not in depression. No such simple diagnosis could possibly capture the pageant of neuroses afflicting the global family, which run from the tantrums of the Asian contagion to the more long-term sulk of third world debt; from the aggression of the banana war to Russia’s stifling alcoholism (well, something has to come between communism and capitalism).

As with so many dysfunctional families, most of their problems stem from a person they know well – their therapist. The global economy has had three eminent physicians administering to it for many years: the International Monetary Fund (IMF) the World Bank and the World Trade Organisation (WTO), all established in 1944 to contribute as much to the postwar settlement as the United Nations.

The idea that peace can only be achieved by prosperity (in theory, we should all be too busy selling guns to each other to bother to use them) was not new. The question was what sort of peace and prosperity, and how to serve it up. Arms dealers, for instance, prefer peace with a dash of murderous instability; communists and dictators think they can send out for a prosperity takeaway, targets and figures cooked to order. The west believed, and still does, that prosperity can only be achieved through the less exciting, but rather more successful, recipe of stable international trade and growth.

International trade had collapsed during the 1930s, as countries tried to cope with the depression by devaluing their currencies and putting huge tariffs on goods from abroad. They were doing this to prevent a balance of payments deficit – buying more than you sell, or living beyond your means, as it’s usually called. A little-known economist, Harry Dexter White, suggested dealing with this by creating a global “stabilisation fund” that would keep currencies at roughly the same rate and provide temporary loans to governments to cover occasional balance of payments problems. Fortunately for him, he was chief adviser to the US Treasury secretary, who referred it to President Roosevelt. Unfortunately, FDR also had to arrange America’s entry into the second world war that week.

The UK and US convened the Bretton Woods conference on the postwar “financial architecture” before the war had even ended. White’s proposals, together with work by John Maynard Keynes, formed the foundations of the IMF, although Keynes had hoped the architecture would tend more towards the palatial.

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White realised that the fund was not enough: a stable trading environment would be useless if the US had no one to trade with. Europe would have to be given loans to rebuild itself, and the rest of the world needed them to develop any economy at all. Everyone needed to get the hell out of their shelters and start buying Hoovers. An “International Bank of Reconstruction and Development” – aka the World Bank – was swiftly set up.

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The world also needed a system of reducing those nasty tariffs. This “third man”, the International Trade Organisation, died under mysterious circumstances in Havana in 1948. It was reincarnated four years ago as the WTO, after seven rounds (or avatars, if you like) of the General Agreement on Tariffs and Trade (Gatt).

The IMF had a well-defined role: to stabilise all currencies at fixed rates to the dollar, which was fixed to the price of gold. Almost every nation is a member of the IMF; members make financial contributions and vote on matters of policy, both according to the size of their economies. This means that, unlike the UN, the IMF and the World Bank are institutionally in the pocket of the west. The IMF always has a European president (Kenneth Clarke next, if Tony Blair has his way) and the Bank an American one. The US, with its effective veto over most issues, has always dominated both institutions, a stone’s throw from the White House. Throughout the 1950s and 1960s, the IMF ensured great stability – and had huge power, as it insisted on austere, sweeping changes in policy and Thatcher-like cuts before providing economic assistance.

(Incidentally, the Fund is really a bank and the Bank is really a fund, and neither of them is the world’s central bank. This is actually the Bank for International Settlements, which is in Switzerland. This makes it central to things, but extraordinarily dull.)

The World Bank had a much more complex agenda to fulfil – global development through economic growth – although the basic idea was simple: lend money to a country (which can’t get hold of a commercial loan), develop its infrastructure, sit back and watch the boom, before reclaiming your money.

Thus the Bank was established to lend to countries no other bank was stupid enough to invest in. Here was a tricky province on the frontiers of capitalism, especially as the safest bets, the European nations, had just been dealt with by the Marshall Plan.

In its early days, the Bank was cautious but responsible. Accused of stunting the development of nations it deemed uncreditworthy, it was soon forced to take a softer line, largely because it had run out of countries that could afford to take on more debt.

Some might have thought of drawing the line here. Instead, the Bank began to give out cheaper loans. This allowed many poorer nations to borrow, but growth was still far too slow. The Bank had the backing of every big-hitting, shekel-slinging, bullion-bunging economy in the west. It saw a world that was underdeveloped and it wasn’t going to take it any more. It had cash and it knew how to use it. Dams, bridges, factories and power stations were showered on the poor like streamers in an all-American victory parade. This was gung-ho development.

It was all so exciting that private banks got involved as well. Developing nations had to extend the period over which they were to pay loans back. It had become imperative, for the sake of global investor confidence, that there should be no default on loans.

When the fixed exchange rates system failed in the early 1970s, the IMF found itself at a loose end. It amended its agreements and monitored economic policy to ensure there were no balance of payments crises. Pretty soon there were so many balance of payments crises, though, that it established a role for itself again. In the 1976 sterling crisis, the rescue package was so vast that it immediately reassured investors and the problem was resolved. The trouble with today’s IMF is that it can no longer offer bail-outs to every investor, leading to a stampede for what places in the lifeboats there are. The IMF’s potency has withered to one-quarter the relative size of its 1945 heyday, the victim of savage budgetary cuts in the west (not dissimilar to those it has always advocated).

In 1982, Mexico threatened to default on its repayments. Just when stabilising influences were sorely needed, the Bretton Woods twins were becoming obese bureaucracies, their well-meaning objectives swamped by the latest economic fads. A succession of buzzwords – structural adjustment loans, private enterprise schemes – directed lending, which often degenerated into white elephant projects, from the Akosombo Dam to the Polonoroeste forest colonisation disaster in Brazil.

More than half a century after Bretton Woods, what do we really know about “developing” a country? Critics argue that loans have all too often fostered a “dependence culture”, with the technical assistance necessary to implement many of the Bank-funded projects being provided solely by western expat experts.

The Fund’s masters, the G7 nations, are currently tinkering with the creaking structures. Too concerned with the problem of “moral hazard” (if investors are guaranteed a bail-out from a financial crisis, they become reckless and cause more damage), they restrict the Fund’s capabilities but not its influence – and beggar nations.

With the collapse of communism, the terrible twins rushed to fund a whole roster of privatisation projects in Eastern Europe – with some degree of success – and in Russia, where their attempts at reform failed. The money they poured into the former Soviet Union to kick-start a new entrepreneurial era was bled into Swiss bank accounts as quickly as it arrived. They were supposed to be managers of stable growth; instead, they acted like comperes of a financial sideshow.

In the face of the 1997-98 crises in Asia and then Russia, the Fund managed, all at the same time, to be complacent, over-bearing and completely inadequate. It miscalculated badly with its demand for reform of public finance in Asia, which aggravated recession.

The World Trade Organisation, springing into existence after interminable years of Gatt trade negotiations, has now joined the “development” fray. Its role is to act as a forum for negotiations where countries can agree plans for further trade liberalisation – or as a battlefield, as the recent banana war proved.

Every one of the 134 nations that have signed up to its agreements (everyone that counts except Russia and China) is legally bound to observe strict rules on trading practice. The agreements are hardly an “unputdownable” read: at 26,000 pages, they are unpick-upable. The complexity of law and economics is such that no one person has any idea what everyone has agreed to. There is an inevitable scene in each Quentin Tarantino film in which all the characters are pointing guns at each other, and everyone has to calm down and gradually lower their weapons. It’s hard work and if anyone flinches, they all go right back up again. Negotiations about lowering trade barriers are a bit like that, only America’s got most of the guns and there’s more swearing.

The WTO and its intention to take on social and environmental issues, human rights and development issues (again) must be taken seriously. By virtue of its intensely logical (in the minds of western economists) project, it may even become more influential than its elders in global economics – trade deals beat loans every time. But, like the Bank and the Fund, it can only ever be a humble assistant, a footman, opening the door for the majesty and folly of the markets.

The Fund and Bank, stripped of their influence, may well find they have little left to show of their original power and glory. And given what they’ve done with it, that may be a good thing for all of us.