Martin Guzman was a freshman at the Universidad Nacional de La Plata in Argentina in 2001 when a debt crisis led to defaults, riots and a devastating depression. A confused middle class suffered ruin when the International Monetary Fund insisted that the government make miserable budget cuts in return for a bailout.
Watching Argentina unravel inspired Guzman to change majors and study economics. Nearly two decades later, with the government again bankrupt, it was Mr. Guzman who, as finance minister, negotiated with IMF officials over the restructuring of a $44 billion debt that was the result of an earlier, ill-conceived bailout.
Today he is one of several prominent economists and world leaders who argue that the ambitious framework created at the end of World War II to ensure economic growth and stability, with the IMF and World Bank as pillars, is failing to achieve its mission.
The current system “contributes to a more unequal and unstable global economy,” said Mr. Guzman, who resigned last year after a split within the government.
The repayment negotiated by Mr. Guzman was the 22nd agreement between Argentina and the IMF. Still, the country's economic slide has continued, with an annual inflation rate of more than 140 percent, growing queues at soup kitchens and a new, self-proclaimed “anarcho-capitalist” President Javier Milei devalued the currency by 50 percent this week.
The IMF and World Bank have drawn complaints from left and right since their inception. But the latest criticism raises a deeper question: Does the economic framework created eight decades ago fit the economy of today, where new geopolitical conflicts are colliding with established economic relationships and climate change poses an imminent threat?
This conflict of 21st century ideas over how to fix a system designed for the 20th century world is one of the most consequential conflicts facing the global economy.
The IMF was founded in 1944 at a conference in Bretton Woods, New Hampshire, to bail out countries in financial distress, while the World Bank's focus was on poverty reduction and investing in social development. The United States was the preeminent economic superpower, and many developing countries in Africa and Asia had not yet achieved independence. The basic ideology – later known as the “Washington Consensus” – held that prosperity depended on unhindered trade, deregulation and the primacy of private investment.
“Nearly 80 years later, the global financial architecture is outdated, dysfunctional and unfair,” United Nations Secretary-General António Guterres said at a summit in Paris this summer. “Even the most basic goals to combat hunger and poverty have faltered after decades of progress.”
The world today is geopolitically fragmented. More than three quarters of the current IMF and World Bank countries were not in Bretton Woods. China's economy, in ruins at the end of World War II, is now the world's second-largest, an engine of global growth and a crucial node in the world's industrial machinery and supply chain. India, then a British colony, is one of the five largest economies in the world.
The once-vaunted “Washington Consensus” has fallen into disrepute as there is increasing recognition of how inequality and bias against women hinder growth and the need for collective action on climate change.
The mismatch between institution and mission has worsened in recent years. Low- and middle-income countries are suffering from the Covid-19 pandemic, skyrocketing food and energy prices caused by the war in Ukraine, and higher interest rates. They are in debt and facing slow growth. The size of the global economy and the scale of problems have grown immensely, but funding from the IMF and World Bank has not kept pace.
Resolving debt crises is also becoming significantly more complicated, as not just a handful of Western banks are involved, but also China and legions of private creditors.
The World Bank's own analyzes make clear the extent of the economic problems. “For the poorest countries, debt has become a near-crippling burden,” said a report published on Wednesday. Countries are forced to spend money on interest payments instead of investing in public health, education and the environment.
And that debt does not explain the trillions of dollars that developing countries will need to mitigate the devastating effects of climate change.
Added to this are the tensions between the USA and China and between Russia and Europe and its allies. It is harder to resolve debt crises or finance major infrastructure without running into security concerns – such as when the World Bank awarded Chinese telecom giant Huawei a contract that turned out to be in violation of U.S. sanctions policy, or when China resisted debt restructuring agreements.
“The global rules-based system was not created to resolve national security-based trade conflicts,” Gita Gopinath, first deputy managing director of the IMF, said in a speech to the International Economic Association in Colombia on Monday. “We have countries competing strategically with amorphous rules and without an effective referee.”
The World Bank and IMF have made changes. The fund has softened its approach to bailouts, replacing austerity with the idea of sustainable debt. This year, the bank significantly increased the proportion of money that flows into climate projects. However, critics claim that the corrections made so far are inadequate.
“The way they have evolved and adapted is much slower than the way the global economy has evolved and adapted,” Guzman said.
“Time to revisit Bretton Woods”
Argentina, South America's second-largest economy, may be the world economic system's most notorious repeated failure, but it was Barbados, a tiny island nation in the Caribbean, that can be credited with turbocharging the change.
Mia Mottley, the prime minister, spoke out at the climate summit in Glasgow two years ago and subsequently launched the Bridgetown Initiative, a proposal to overhaul the way rich countries help poor countries adapt to and crippling climate change to avoid debt.
“Yes, it is time for us to reconsider Bretton Woods,” she said in a speech at the climate summit in Egypt last year.
Ms Mottley argues there has been a “fundamental breakdown” of a long-standing agreement between poor and rich countries, many of which built their wealth by exploiting former colonies. The most developed industrial countries also produce the most emissions that are heating the planet and causing extreme floods, wildfires and droughts in poor countries.
Mavis Owusu-Gyamfi, executive vice president of the African Center for Economic Transformation in Ghana, said that even recent debt management agreements such as the 2020 Common Framework were created without input from developing countries.
“We demand a voice and a seat at the table,” Ms. Owusu-Gyamfi said in her office in Accra as she discussed a $3 billion IMF bailout package for Ghana.
But when the fund and the bank focus on economic issues, they are essentially political creatures that reflect the power of the countries that created, financed and managed them.
And these countries are reluctant to give up that power. The United States, the only member with veto power, has the largest share of the vote due, among other things, to the size of its economy and its financial contributions. It does not want its influence to shrink and the influence of others – particularly China – to grow.
The stalemate over vote redistribution has hampered efforts to increase funding levels, which all countries agree need to be increased.
“Big hole” in dealing with debt
Still, as Mr. Guzman said, “Even if there are no changes in governance, there could be changes in policy.”
Emerging economies need enormous amounts of money to invest in public health, education, transport and climate resilience. However, due to their often exaggerated assessment of the risk they pose as borrowers, they are saddled with high borrowing costs.
And because they are typically forced to borrow in dollars or euros, their payments rise when the Federal Reserve and other central banks raise interest rates to combat inflation, as they did in the 1980s and after the Covid pandemic.
The proliferation of private lenders and the diversity of loan agreements have made debt negotiations incredibly complex, yet there is no international legal arbiter.
Zambia defaulted on its external debt three years ago and there is still no agreement because the IMF, China and bondholders are at odds.
There is a “big hole” in international governance when it comes to sovereign debt, said Paola Subacchi, an economist at the Global Policy Institute at Queen Mary University in London, because the rules don't apply to private loans, whether from a hedge fund or from China Central Bank. Often these creditors have an interest in prolonging the process in order to get a better deal.
Mr. Guzman and other economists have called for an international arbitrator to decide sovereign debt disputes.
“Every country has passed a bankruptcy law,” said Joseph Stiglitz, former chief economist at the World Bank, “but internationally we don’t have one.”
However, the United States has repeatedly opposed the idea, saying it is unnecessary.
Rescues also proved problematic. Emergency loans from the IMF can end up worsening a country's fiscal problems and undermining economic recovery because interest rates are currently so high and borrowers also have to pay high fees.
Those like Mr. Guzman and Ms. Mottley who are pushing for change argue that indebted countries need significantly more grants and low-interest loans with long repayment periods, as well as a range of other reforms.
“The challenges are different today,” Mr. Guzman said. “Policies need to be better aligned with the mission.”
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