Summoning the Spirit of Bretton Woods

LONDON – A riptide is about to hit the global economy, and the West needs America to help. Just as longstanding NATO allies are helping Ukraine fight against its Russian invaders, we need the old Bretton Woods allies to win the peace. That will require equipping the International Monetary Fund and the World Bank with the tools they need to stabilize poorer countries ravaged by the conflict-driven spike in energy and food prices, COVID-19, and climate change.

Toward the end of World War II, wise Americans knew that prosperity was the best guarantor of peace – and of continued US influence. When delegates from 44 countries met in Bretton Woods, New Hampshire to plan the postwar international financial system, US President Franklin Roosevelt spoke for many when he declared that, “The economic health of every country is a proper matter of concern to all its neighbors, near and distant.” Together with European allies, the United States created the World Bank, the IMF, and then the Marshall Plan to rebuild shattered Western economies so that they became strong enough to resist the Soviet Union.

The world needs similar visionary leadership again today. After all, the economic disruption wrought by the COVID-19 pandemic pushed as many as 124 million people worldwide into extreme poverty – the first rise in global poverty this century. According to the World Bank, as many as a dozen developing economies may be unable to service their debts in the coming months.

By investing in programs to tackle COVID-19, these countries have exhausted their capacity to borrow and now face sharply rising interest rates as the West unwinds the monetary stimulus of recent years. And Russian President Vladimir Putin’s war on Ukraine means that their governments also face new demands to protect citizens from soaring wheat, maize, and energy prices.

The OECD recently reported that the prices of wheat and maize had increased by over 80% and 40%, respectively, from their January 2022 average, while the cost of oil has doubled since last year. Without help, many economies may fail, with unpredictable consequences. The 2010-12 Arab Spring was initially triggered by soaring food and gas bills, and we are now seeing economic and political instability in places like Sri Lanka.

As great-power competition once again divides the world, the West cannot afford to allow the risks of inflation-fueled instability to fester. During a recent British-American parliamentary exchange, US leaders vented their anxiety about Chinese investment in Asia and Africa. But we also heard that American leaders have learned a lesson of history: The US cannot defend the homeland by standing on the goal line; instead, it must engage upfield.

Yet, amid today’s crisis, America risks conceding ground by failing to expand the institutions it helped create in 1944. Consider, for example, the IMF’s new Resilience and Sustainability Trust (RST), which the Fund’s executive board approved on April 13. The RST is designed to help recycle the massive $650 billion in new special drawing rights (SDRs, the IMF’s unit of account) allocated to Fund shareholders last year. That is potentially a big bazooka in the war on want.

Created by the IMF in 1969 and originally pegged to gold, SDRs can supplement member countries’ reserves. They give governments vital wiggle room to redeploy funds or exchange their holdings for currencies, including dollars.

The US had proposed donating $21 billion of its SDR allocation to the IMF for its Poverty Reduction and Growth Trust and the new RST. But the final budget passed by Congress did not include the necessary language authorizing the US Treasury to act. This provision was included once again in the budget that President Joe Biden’s administration recently presented. America’s friends and allies need to urge Congress to give it the green light.

The nature of SDRs prevents the US from using them for domestic spending. And contrary to what some American politicians like US Senator John Kennedy of Louisiana have perhaps willfully misunderstood, SDRs cannot be used by hostile actors like Russia or Iran as some kind of “Amazon gift card,” because SDRs are effectively dud coins unless they are exchanged for something useful like dollars, euros, or renminbi. That is something neither America, Europe, nor China will countenance for these countries.

But America and its allies can give their SDRs to the new IMF trusts, which can then deploy the funds to make vital loans to countries that the West wants to support. Pooling SDRs in this way will greatly leverage America’s investment, thereby providing substantial new funds to help stabilize vulnerable US allies in the developing world and finance crucial investments in their low-carbon energy independence. More generally, such an initiative will provide a shining example of US leadership.

I have yet to meet a US politician who wants China to become the lender of last resort to the developing world. Almost 40% of poor countries’ debt payments this year are already owed to Chinese entities. That share is bound to increase unless the Bretton Woods institutions are equipped to prevent debt problems from arising in the first place.

Former US Secretary of State Dean Acheson said that he felt “present at the creation” as the postwar order took shape. We now need a re-creation and renewal of that order. Only American leadership can ensure that this happens.