The 70-year itch

AMERICA learned the benefits of economic co-operation the hard way. Its failure to create institutions to help steer the world economy after the first world war exacerbated the Great Depression and paved the way for the next conflagration. That is why, at a small resort in New Hampshire as the second world war was drawing to a close, America and its allies sketched out a rough management plan for the world economy and created some institutions to safeguard it (see Buttonwood). Despite some flaws, the Bretton Woods agreements, signed 70 years ago this month, helped usher in a long and relatively peaceful period of economic growth.

Yet today’s pre-eminent powers seem to have forgotten this lesson. America and Europe have failed to strengthen and reform the offspring of Bretton Woods, the IMF and the World Bank; they have been sluggish in providing a bigger role for China in these institutions (it still has less voting power than the Benelux countries). Meanwhile, China, like America a century ago, flexes its muscles close to home but outsources global leadership to others. The combination could lead to another dangerous, rudderless spell for the world economy.

Parts of the Bretton Woods system have proved more durable than others: its capital controls and fixed exchange rates had largely gone by the end of the 1970s. But the whole edifice now looks rickety. Countries moan over destabilising capital flows while global trade talks remain in near-stasis. Barack Obama sensibly promoted a plan to give the IMF more resources and increase the clout of fast-growing developing countries within it. Yet Congress now refuses to support the agreed reforms. Meanwhile both America and Europe have pursued ambitious trade deals with each other and non-Chinese Asia. And again Congress has in effect blocked those efforts too, before the deals have even been struck.

China has taken the hint. Its interest in the World Bank and IMF, always half-hearted, is waning. Instead, China’s leaders are working to build a separate system. At a summit later this month the leaders of Brazil, Russia, India, China and South Africa are expected to agree to create a $50 billion “BRICS” development bank and consider a BRICS contingency fund modelled on the IMF. China also plans to create an Asian infrastructure bank that will rival the Asian Development Bank, a regional lender dominated by Japan (see article).

Like the West’s regional trade deals, China’s institution-building looks benign in isolation. Why not invest in underdeveloped countries? Yet its flurry of initiatives, which conspicuously excludes rich countries, may signal a strategic shift. Rather than take more responsibility within the existing system, China seems to be creating a rival one.

Not seeing the Woods for the trees

If John Maynard Keynes were alive, he would sigh not just at the risks in all this economic nationalism but also the huge missed opportunity. Freer trade through multilateral deals would help the world economy and reduce the allure of mercantilist policies that invite retaliation. Or imagine what would happen if the West and China worked together to liberalise the latter’s capital account: China’s financial markets would become less distorted, while the emergence of the yuan as a global reserve currency would ease Western fears about their currencies’ overvaluation. Perhaps it is time to send another group of dignitaries to New Hampshire.