One recent morning, in Washington, DC, I joined international policymakers, business leaders and academics assembled for the International Monetary Fund (IMF) and the World Bank’s spring meetings. The mood was sombre. “This is a delicate moment for the global economy,” said Gita Gopinath, the IMF’s new economic counsellor.
Seventy-five years have passed since these international financial institutions were created in Bretton Woods, New Hampshire, in 1944. Back then, delegates sought to tame the power of international finance, the growth of which helped to cause the 1929 Wall Street Crash and the ensuing Great Depression. JM Keynes – who led the British delegation – arrived at Bretton Woods with the aim of “euthanising” a financial elite he viewed as parasitic on productive economic activity.
The capital controls agreed curtailed the power of international finance, much to the chagrin of bankers, most of whom had not been invited to the conference. The Bretton Woods settlement supported the development of social democracy in the West and enabled the so-called golden age of capitalism – a period of high growth, low unemployment and falling inequality.
Yet almost as soon as the system had been implemented, the financiers launched a fightback. In 1947, a group of free-market economists convened their own conference in the Swiss village of Mont Pelerin. Their aim was to spearhead resistance against the wave of “Marxist or Keynesian planning sweeping the globe”.
The neoliberals – as the group came to be known – argued that a free market, buttressed by a strong state, was the only route to collective prosperity. State intervention, trade unions and capital controls were all undesirable influences.
As we know, the group created a network of think tanks, designed to spread the gospel of neoliberalism. But during the heyday of social democracy, these economists were viewed as extremists. It took a crisis for their ideas to enter the mainstream.
In the 1970s, the social democratic compromise between capital, labour and the state began to break down across the Western world. Keynesians struggled to explain why unemployment and inflation were rising at the same time. The new Hayekian right came to power and set about “freeing” markets. This could have spelled the end of the IMF and the World Bank but the institutions adapted. Under the aegis of the United States, they became the greatest champions of free-market globalisation.
The IMF and the World Bank pioneered the use of “structural adjustment programmes”, which forced debt-distressed countries such as Ghana and Zambia to implement pro-market reforms in exchange for debt relief. The results were often disastrous and the costs of “adjustment” typically fell on those least able to bear them. Sub-Saharan Africa and Latin America became the laboratories for the policies since imposed on Greece by the EU.
Financial globalisation has been a catastrophe for the poorest in the international system. Aside from helping to cause the 2008 financial crisis, capital mobility has sucked money out of the global South and into financial vortexes such as Wall Street and the City of London.
Today, as a new report by the United Nations Conference on Trade and Development argues, it is obvious that we need to rewrite the rules of the international economy. States must be able to choose their own route to prosperity, rather than having neoliberalism foisted upon them. Powerful countries must end practices that actively harm the global South – unfair trade treaties, corporate tax avoidance and illicit financial flows. And states must work with one another to combat climate change – based on the assumption that doing so will require levels of state intervention in the economy previously unseen during peacetime.
Here in Washington in recent days, though, the assembled dignitaries seem to have missed the memo. With seminars such as “Tapping Big Data to Improve Growth Information” and “Lessons from Experimentation with Crypto-Assets Technology”, they have far more glamorous issues to attend to.
But the international system is already fragmenting and when the next crisis comes, it might just break up entirely. What happens after that will depend upon the ideas that are lying around.
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This article appears in the 10 Apr 2019 issue of the New Statesman, System failure