The Bretton Woods negotiations are generally described as an “Anglo-American” affair in which the leading officials from the United States and the United Kingdom – Harry Dexter White and John Maynard Keynes, respectively – orchestrated a hegemonic handover of power and fashioned a new set of global rules, centred on the primacy of the US dollar. This helped prevent a return to the economic chaos of the inter-war years, but did little to support the needs and interests of the bulk of the world’s population in developing countries.
There is, no doubt, much truth in this description. Yet well over half of the governments invited to Bretton Woods were from developing regions (Helleiner 2016). Moreover, whilst the United States promoted its own strategic economic and political interests at Bretton Woods, an internationalist vision emerging from the New Deal, fashioned in the years preceding the conference, particularly in relations with Latin America, did allow for a more inclusive multilateral dialogue which at least recognized a place for all the participating countries in the conference discussions.
Particularly active in the discussions were officials from Latin America, China (which had the second largest delegation to the conference) and India (whose delegation was divided equally between British and Indian officials because of its colonial status). The developing countries were in agreement with the broad aims of the conference to support managed currency regimes and provide short-term loans to manage balance-of-payments difficulties. Many of them also saw an opportunity to construct a more development-friendly international financial regime that would accommodate the special needs of commodity exporters and support their efforts to raise standards of living through a State-led industrialization drive. However, incipient North-South lines were also visible during the negotiations, with sharp divisions over whether long-term financing should be private or public, and the relative importance given to reconstruction versus development.
The retreat from these more developmental dimensions of the Bretton Woods negotiations began soon after Roosevelt’s death in April 1945, as foreign policy positions crystalised along Cold War lines, and business interests, particularly those in the financial sector, pushed back against the New Deal coalition in the United States. The 1950s witnessed a series of further retreats from a more inclusive multilateral development agenda. Truman’s inauguration speech in 1949 made a point of emphasizing the role of private capital in promoting development, which strengthened the World Bank’s own turn to focusing on domestic reforms to attract private capital and away from providing international public assistance to state-led development programmes. The United States, along with other developed countries, also fended off moves by developing countries at the United Nations to expand its reach into development finance, blocking a proposal for a Special United Nations Fund on Economic Development to offer long-term concessional loans to developing countries, despite a General Assembly vote in its favour.
As the 1950s came to a close, with more and more developing countries gaining their political independence, the constraints on their development ambitions arising from an unbalanced international economic order became ever more apparent. In 1962, 36 developing countries from all regions of the world organized a conference in Cairo to discuss their shared economic challenges. The meeting ended with a call to convene a United Nations Conference on Trade and Development (UNCTAD). This was subsequently endorsed by the General Assembly.
The first UNCTAD conference, held in 1964 and led by the Argentinian economist Raúl Prebisch, provided some key programmatic elements that developing countries would pursue in the following years: addressing terms-of-trade losses of primary exporters through commodity agreements or compensatory financing; ensuring affordable and reliable financing for development; and promoting a sustainable export-oriented strategy for developing countries that manufactured goods for developed-country markets.
Prebisch’s report to the Conference addressed all these issues based on three essential premises: the necessity of industrialization, the need to counter external imbalances and the forces that generate them, and the need for different treatment for structurally different economies (UNCTAD, 1964). But he also highlighted the close interdependence of trade and finance in rebalancing the agenda for international cooperation and, in particular, the mutually reinforcing nature of savings and foreign exchange constraints on desired investment and growth targets for developing countries. All this meant that developing countries would need determined political efforts, domestically and internationally, to remove the obstacles to more sustained and inclusive growth.
The creation of UNCTAD as a permanent body following the end of the first conference set the stage for a more inclusive trade and development agenda. The purpose was to move beyond policies aimed simply at removing trade barriers to a more positive agenda. In the decade following the conference, UNCTAD advanced this agenda through its efforts to extend supplementary financing, improve the mechanisms of international liquidity, help create commodity agreements, and advocate for tariff preferences, increased flows of official development assistance (ODA), and debt relief. Despite these efforts and the fact that development issues were more vociferously raised at international meetings and discussions, the institutional and other arrangements that determined the functioning of global markets did not fundamentally change.
From the late 1960s, as economic tensions within and between the developed economies began to grow and spread across the global economy, the calls for a new international economic order (a term reminiscent of the call at the first UNCTAD conference by the Group of 77 (G77) for “a new and just world economic order”) grew steadily louder. The growing strains on the Bretton Woods system around the anchoring role of the dollar, the oil price shocks that followed the collapse of the fixed exchange rate system, and the accelerating distributional struggles in the developed countries that accompanied a slowdown in productivity growth, provided further opportunities for developing countries to push for a more inclusive multilateral agenda.
Negotiations on a New International Economic Order (NIEO) were launched at a special session of the United Nations in 1974. The thrust of the initiative, to break the international constraints on growth in developing countries, had much in common with the earlier efforts of developing countries at Bretton Woods and with reform proposals advanced by UNCTAD. However, the political context of the time encouraged a broader agenda which included regulation and supervision of transnational corporations (TNCs) − and their possible nationalization when required − the promotion of greater economic cooperation among developing countries, and, very explicitly, the strengthening of policy autonomy to manage deeper change in the structures of their economies.
The NIEO negotiations were seen at the time as a further challenge to the economic order established at Bretton Woods but can, with hindsight, be better understood as an attempt to revive the multilateral financial system by recovering some of its original ambition. Indeed, the possibility of forging a North-South consensus to rebalance global economic relations, strengthen international cooperation and recover the stability lost with the breakdown of the fixed exchange rate system was a central aim of the Brandt Commission established in 1977.
The favourable geopolitical and global economic situation was, however, only short-lived. Beginning in the late 1970s, international economic relations took a very different turn from what had been envisaged in the NIEO, with a more concerted policy backlash in the industrialized countries against the post-war Keynesian policy consensus. The initial response of policymakers in these countries to the breakdown of the Bretton Woods system, two oil shocks, rising labour militancy, a loss of control over inflation and, to some extent, government budget deficits, had been a series of ad hoc adjustments that aimed to contain the threat of “stagflation”.
However, as governments and business groups increasingly viewed redistribution measures and monetary disorder as the root of a wider socio-political malaise, moves to cut welfare provision, control the money supply, liberalize financial flows and use unemployment as a tool of adjustment crystallized into an alternative policy paradigm. That paradigm sought to shift the distribution of income back towards profits through a withdrawal of the State from the active management of the economy and a dismantling of the post-war political and social compromise.
The resulting paradigm shift extolled the virtues of smaller government and the benefits of freeing markets from regulatory discipline and oversight. This had its international dimension in a return to beggar-my-neighbour policies and “aid weariness,” combined with capital account liberalization and with corporations seeking greater support from their governments to find new profit opportunities abroad. Moreover, solidarity in the South was beginning to fray as robust growth in some developing countries led them to downplay the threat from structural asymmetries at the international level.
As competitiveness trumped employment as the go-to measure of economic success, liberalization moved to the centre of the policy stage with tight monetary policy cast in the sole supportive macroeconomic role. The promise was simple: freed from government intervention, particularly regulation on international capital movements, and wage-price spirals, increased competition would spur entrepreneurship, stimulate investment and bolster wealth creation with the gains trickling down to even the poorest strata of society. The wealth creation would ostensibly spread globally through free trade and heightened capital flows. President Reagan’s refusal in 1981 to give any credence to the Report of the Brandt Commission at a meeting in Cancun effectively ended the North-South dialogue and, with it, any lingering hopes of negotiating an NIEO (Toye and Toye, 2004).
At the same time, the economic reality in developing countries was becoming increasingly challenging; as Paul Volcker, Chair of the United States Federal Reserve, pushed interest rates into double figures, a strengthening dollar and falling demand for commodities turned the liquidity strains and financial stresses in developing countries into solvency crises. Mexico’s default in 1982 cast suspicion on other sovereign borrowers and the flight of private capital triggered debt crises across much of the South.
In the absence of timely concessional multilateral support, stringent retrenchment measures were inevitable. Structural adjustment programmes, backed by a very different development policy paradigm from the one envisaged in the NIEO, and subsequently christened the “Washington Consensus”, became commonplace in developing countries as a condition for renewed access to multilateral financing and an entry ticket to private capital markets. The damage these programmes caused through dramatic cuts in government spending, rising import costs and exposure to intense international competition resulted in a lost decade for many developing countries, particularly in Latin America and Sub-Saharan Africa, and put an abrupt end to the political solidarity that had underpinned the discussions for a new international economic order.
The space for countries to tailor their policies to particular histories, contexts, and institutional structures, recognized at Bretton Woods, was replaced with a one-size-fits-all agenda of so-called “sensible economic policies”. The rapid ascent of financial interests eroded the checks and balances that had previously helped to constrain the more destructive impulses of market forces and channeled their more creative impulses into the kind of productive activities needed for long-term growth. Instead, it encouraged increasingly concentrated forms of market power, shorter investment horizons, and rent-seeking behavior by banks and businesses.
The collapse of the Bretton Woods system and the derailing of progressive alternatives paved the way for a new international financial and economic order built on the free movement of capital and a strong ideological faith in the inherent efficiency and stability of markets. Whilst its champions have declared an era of “great moderation”, the reality has been one of persistent instability and rising insecurity characterized by speculative trading, boom and bust cycles, and extreme levels of inequality, in developed and developing countries alike.
In the face of these centrifugal forces, the glue holding the system together has been the explosion of private debt along with a pandora’s box of new financial instruments which promised to enhance market flexibility, ensure the smooth management of debt accumulation, and boost stability (Greenspan 2005). The emergence of this lightly regulated and privatized credit system has, instead, allowed the financial sector to transact more and more with itself, creating a complex network of closely interconnected debtor–creditor relations that harbor dangerous levels of fragility and cannot easily be re-engineered for productive investments (private or public) without a fundamental reorganization of the financial system.
Recurrent banking and financial crises have become endemic in developing countries, linked to sudden surges and stops in capital flows. The end of the boom cycle has not only pushed millions back into poverty but left behind large debt overhangs that delay the recovery of the real economy, sometimes for decades. When this cycle was repeated in the advanced countries, the consequences were global.
The response to the global financial crisis of 2008, despite bold pronouncements at the time, failed to rein in the unchecked power of footloose capital and undertake the required reforms to the international financial architecture, particularly with respect to managing sovereign debt. A decade on, the Covid-19 pandemic caused the largest global recession since the end of World War Two and further exposed and intensified the inequities and fragilities of the hyperglobalized world that emerged from the ashes of the Bretton Woods system. It has again demonstrated the incapacity of a liberalized international governance architecture to respond to a global crisis with effective, coordinated, and inclusive global policy and action. If the recovery from the pandemic is to avoid stretching the economic gaps within and across countries to political breaking point, as well as to bring us back from the brink of a climate catastrophe, big changes to that architecture will be needed.
Much like the 1970s, a combination of slower growth, economic shocks and political polarization has translated into a crisis of hegemonic leadership at the international level. And like then, geo-political tensions, energy security and the dollarized financial system are at the centre of that crisis. However, progressives in developed countries have, to date, struggled to find a successful reform narrative that links their, albeit limited, political successes at the local level and a growing intergenerational movement around environmental issues to a truly international vision. The concept of a green new deal harbours that possibility but it remains work in progress.
The kind of political solidarity in the South that underpinned the push for a NIEO is also missing. Still, there are a growing number of initiatives that challenge the dominant institutions and ideas that emerged with hyperglobalization: the New Development Bank and the Common Reserve Arrangement launched by the BRICS, China`s Belt and Road Initiative and India’s Solar Alliance, and the developing country coalition at the WTO pushing for a TRIPS waiver in response to the pandemic.
Today’s world can appear bewilderingly complex and deeply interdependent. But in truth, people everywhere desire much the same things: a decent job, a secure home, a safe environment, a better future for their children, and a government that listens and responds to their concerns. They want a different deal from that offered by the sirens of free trade and footloose capital. A new new international economic order is urgently needed.
Kevin Gallagher is the Professor of Global Development Policy at Boston University’s Frederick S. Pardee School of Global Studies and Director of the Global Development Policy Center (GDP Center).
Richard Kozul-Wright is the Director of the Division on Globalization and Development Strategies at the United Nations Conference on Trade and Development.
Photo: Bretton Woods Conference, 1944, UN Photo