LONDON — Martin Guzman was a first-year college student at Argentina’s National University of La Plata in 2001, when the debt crisis sparked defaults, riots and a devastating recession. The dazed middle class suffered ruin as the International Monetary Fund demanded dire budget cuts from governments in exchange for bailouts.
After seeing the situation settle down in Argentina, Guzman decided to change his major and study economics. Almost two decades later, when the government went bankrupt again, it was Guzmán, as finance minister, who negotiated with IMF officials to restructure the $44 billion in debt that had resulted from the previous haphazard bailout.
He is now one of the leading economists and world leaders who argue that the ambitious framework created at the end of World War II to protect economic growth and stability, with the IMF and World Bank as its pillars, is failing to fulfill its mission. He is one of the leaders.
Guzman, who resigned last year amid rifts within the government, said the current system “contributes to making the global economy more unequal and unstable.”
The repayment negotiated by Mr. Guzman was the 22nd agreement between Argentina and the IMF. Still, the country’s economic tailwinds have only increased with annual inflation above 140%, soup kitchen lines growing and new president Javier Millei, a self-proclaimed “anarcho-capitalist” who devalued the currency last week. Increase by 50%.
Since their inception, the IMF and World Bank have provoked discontent from the left and right. But the latest criticism raises deeper questions. Is the economic framework devised 80 years ago compatible with today’s economy, where new geopolitical conflicts are colliding with established economic relationships and climate change is an urgent threat?
The clash of 21st century ideas about how to fix the systems created for the 20th century world is one of the most important problems facing the global economy.
The IMF was founded in 1944 at a conference in Bretton Woods, New Hampshire, to help countries in financial crisis, while the World Bank focused on poverty reduction and investing in social development. The United States was the preeminent economic power, and many developing countries in Africa and Asia were not yet independent. The basic ideology, later known as the “Washington Consensus,” held that prosperity depended on unimpeded trade, deregulation, and the dominance of private investment.
“Nearly 80 years later, the world’s financial architecture is outdated, dysfunctional and unjust,” UN Secretary-General António Guterres said at a summit in Paris this summer. “Even the most basic goals on hunger and poverty have been reversed after decades of progress.”
Today’s world is geopolitically divided. More than three-quarters of current IMF and World Bank members were not members of Bretton Woods. China’s economy, left in ruins at the end of World War II, is now the world’s second-largest economy, an engine of global growth, and an important hub for the world’s industrial machinery and supply chains. . Although India was still a British colony at the time, it was one of the top five economic powers in the world.
The once-vaunted “Washington Consensus” has fallen into disrepute, with widespread recognition of how inequality and bias against women hinders growth and the need for collective action on climate change.
In recent years, the mismatch between institutions and missions has become more apparent. The impact of the COVID-19 pandemic, soaring food and energy prices related to the war in Ukraine, and rising interest rates have left low- and middle-income countries in debt and facing low growth. The size of the world economy and the scope of its problems have grown enormously, but funding from the IMF and World Bank has not kept pace.
Resolving the debt crisis is also highly complex because it involves not just a few Western banks, but also China and a large number of private creditors.
The World Bank’s own analysis outlines the extent of the economic problem. The report, released Wednesday, concluded that “debt has become a near-paralyzing burden for the poorest countries.” Countries are forced to spend money on interest payments instead of investing in public health, education, and the environment.
And that debt doesn’t account for the trillions of dollars developing countries will need to mitigate the damage of climate change.
Additionally, there are tensions between the United States and China, Russia and Europe and its allies. It is more difficult to resolve debt crises or finance major infrastructure without facing security concerns. For example, when the World Bank awarded Chinese telecommunications giant Huawei a contract that was found to violate U.S. sanctions policy, or when China resisted a debt restructuring deal.
“The global rules-based system was not built to resolve national security-based trade disputes,” IMF First Deputy Managing Director Gita Gopinath said Monday in a speech at the Colombian Institute for International Economics. ” he said. “There are countries that compete strategically under undefined rules and without effective referees.”
The World Bank and IMF have made changes. The fund has softened its approach to relief, replacing austerity with the idea of sustainable debt. The bank has significantly increased the proportion of its funds devoted to climate-related projects this year. But critics say the fixes so far aren’t enough.
“The way they have evolved and adapted is much slower than the way the global economy has evolved and adapted,” Guzman said.
“It’s time to revisit Bretton Woods”
Argentina, South America’s second-largest economy, may be the world economic system’s most notorious and repeated failure, but it was the small Caribbean island nation of Barbados that accelerated the momentum for change.
Prime Minister Mia Mottley spoke at a climate change summit in Glasgow, Scotland, two years ago, and subsequently laid out a comprehensive plan for how rich countries can help poorer countries adapt to climate change and avoid crippling debt. He promoted the Bridgetown Initiative, a proposal to revise the city. .
“Yes, it’s time to revisit Bretton Woods,” she said in a speech at the climate change summit in Egypt last year.
Motley argues there is a “fundamental breakdown” in the long-standing agreement between poor and rich countries, many of which have made their fortunes by exploiting their former colonies. The most advanced industrialized countries also produce most of the emissions that heat the planet and cause extreme flooding, wildfires, and drought in poorer countries.
Mavis Owusu Gyamfi, executive vice president of the African Center for Economic Transformation in Ghana, said even recent agreements to address debt, such as the 2020 Common Framework, were created without the input of developing countries.
“We are speaking out and demanding a seat at the table,” Owusu-Gyamfi said at his office in Accra to discuss the IMF’s $3 billion bailout for Ghana.
But if funds and banks focus on economic issues, they are essentially political creations that reflect the power of the countries that establish, finance, and control them. .
And those countries are reluctant to cede that power. The United States is the only member state with veto power and receives the largest number of votes, due in part to its economic size and fiscal contribution. China does not want its own influence to shrink and the influence of other countries, especially China, to expand.
Efforts to increase funding levels have been hampered by an impasse over vote redistribution, and countries agree on the need to increase funding levels.
‘Big hole’ in how to deal with debt
Still, as Guzmán said, “even if there is no change in governance, there could be a change in policy.”
Emerging countries need huge sums of money to invest in public health, education, transport and climate resilience. However, they face high borrowing costs because the market tends to exaggerate their risk as a borrower.
And because they are usually forced to borrow in dollars or euros, if the Federal Reserve or other central banks raise interest rates to combat inflation, as they did in the 1980s and after the coronavirus pandemic, they will Payments will skyrocket.
The proliferation of private lenders and different loan agreements have made debt negotiations incredibly complex, but there is no international legal arbiter. Zambia defaulted on its external debt three years ago, but no deal has yet been reached due to conflicting opinions between the IMF, China and bondholders.
Paola Subacchi, an economist at the Institute for Global Policy at Queen Mary University of London, said there was a “giant hole” in international governance when it came to sovereign debt, with rules restricting private loans, whether from hedge funds. He said that this is because it does not apply. Or China’s central bank. Often these creditors are interested in prolonging the process in order to get a better deal.
Guzman and other economists are calling for an international legal arbitrator to adjudicate disputes related to sovereign debt.
“Every country has a bankruptcy law, but internationally we don’t have one,” said Joseph Stiglitz, former chief economist at the World Bank.
However, the United States has repeatedly opposed the idea as unnecessary.
The rescue also proved to be problematic. With interest rates currently so high and borrowers also having to pay high fees, a loan of last resort from the IMF could further exacerbate the country’s financial woes and undermine its economic recovery.
Those calling for change argue that indebted countries need significantly more subsidies and lower-interest loans with longer repayment terms, among a range of other reforms.
“Today’s challenges are different,” Guzmán said. “Policy needs to be better aligned with mission.”
