The Third Framing

Branko Milanovic asks whether an international economic system can exist in a world of nationalisms?

The post World War II international economic organizations were conceived and founded at the Bretton Woods conference held in July 1944, almost exactly eighty years ago. They sought to avoid the disastrous economic effects of protectionism that deepened and lengthened the Great Depression and perhaps led to the War. The rules were based on the ideas of fixed exchange rates, moderate tariff protection, ability to borrow in order to solve temporary balance of payments problems, depolitization of economic decision-making, and in the guise of the International Bank for Reconstruction and Development (the World Bank) to raise funds in rich countries to fund individual economic projects in poorer countries.  Hundreds, or perhaps thousands, books were written on the topic. From my recent readings (which were often motivated by different concerns), let me provide just three references: Mark Mazower’s “Governing the World”, Samuel Moyn’s “Not Enough “ (my review here) and Zach Carter’s, “The Price of Peace” (my review here). In addition, the framers planned to create International Trade Organization, which did not materialize then but was “substituted” by the General Agreement on Tariffs and Trade (GATT) that laid down the rules on tariffs, dumping, subsidies etc. that regulated world trade.

The system changed when the US decided to abandon dollar’s parity to gold (under Nixon), flexible exchange rates replaced the fixed rates, and trade became much more liberalized, including, in many cases, the opening of the capital account (i.e. ability to transfer capital from one country to another). By the 1980s, under the influence of the Thatcher/Reagan revolutions in the two most economic-policy-influential countries in the world, the fall of communism, and China’s reinclusion in the global economic system, there was a further liberalization of exchanges while the depoliticization of project lending was replaced by the World Bank Structural Adjustment Loans (SAL) that were direct cash loans to governments in exchange for neoliberal policy reforms.

This represented a signal departure from the earlier rules of depolitization. When lending for projects, the World Bank really, or ostensibly, tried to avoid political conditions and insisted on simple economic viability. For sure, it could be argued that economic viability implied strict market rules but that was not an explicit condition. With the demise of communism, neoliberal rules embraced the world and as far as international development was concerned they became summarized under the ten principles known as the Washington Consensus (originally defined by John Williamson in response to Latin American debt crisis). The rules, among others, included: lower tariffs and no discrimination among trading partners (Rule No 5), reduced government spending and elimination of subsidies (Rule No 1), depoliticization of the economy and absence of industrial policies (Rule No 2), deregulation of all economic activities (Rule No 9), and privatization (Rule No 10).

These rules, even if defined with respect to a development crisis in Latin America, applied in principle to all countries equally. These were, in the minds of their originators, the sound economic principles, “espoused by all right-minded economists” as valid for the United Kingdom as for Bangladesh, for the United States as for Gabon.     

That’s where the things stood until recently. Whatever you think of the rules, they were relatively simple, clear and universal.  They were supported by the countries of the political West which enjoyed absolute voting majority in the IMF and the World Bank, with the United States alone able to veto the decisions that it did not like.

With the current geopolitical tensions, international economic policies of the West are in the process of dramatic change. Instead of an open worldwide trading system, the current approach calls for the creation of trade blocs among the political allies. This is in contravention both of the first and the second framing of the international economic system that sought to differentiate trade from political relations, having learned from the disastrous creation of politically-segregated trade blocs between the two World Wars.

The current policies openly accept or call for the politization of economic decisions by accepting economic coercion as a normal toolkit. The US currently has 38 sanction regimes that affect about 50 countries, hundreds of entities and probably thousands of individuals. The European Union is not far behind. China is using similar coercion with respect to several Asia-Pacific countries.

The calls for, and increasingly the practice of, industrial policies, of “decoupling”, technological sovereignty, politically-motivated bans on trade or investment are segmenting international economic relations in function of purely geopolitical and so-called security concerns.

The point is that in practice the neoliberal international regime that debuted in the 1980s is dead. The major countries that defined its rules have ceased to abide by them. We are thus facing a strange situation where the main architects and the founders of the neoliberal international order no longer believe in it and do not apply it, but somehow the system should be still apparently adhered to by the rest of the world. This is an untenable situation. There is no way in which a World Bank mission to an African, Latin American or Asian country can seriously complain about government subsidies, trade discrimination, seizure of assets of political opponents, trade bloc trading, or industrial policy while the very same policies are prosecuted by the framers of the international economic system. The  contradiction can be papered over for a while, but cannot be ignored forever.  If the international neoliberal rules are no longer considered the appropriate rules for the United States and Europe, should they be considered as the right rules for the rest of the world?

There is simply no current answer to this question. The new rules have to be invented and introduced or the entire system will become incoherent and internally contradictory so much that eventually no “system” at all will exist. The world will be back to individual country optimization under the rules of the jungle.

The international ideological aspects of the decisions taken by the US and the European Union are seldom taken into account by the domestic decision-makers because the thinking about the rest of the world and development does not loom large for the politicians who deal with China, Russia, national security and the like. But the ideological development problem will not go away. The framers in 1944 realized its importance and created a system that responded to the needs of the time and had an internationalist, even cosmopolitan, aspiration in mind. If the world is now moving towards policies of national self-sufficiency and national interest above everything else, then an international system of rules not only does not make sense, but cannot exist. Or it may end up in total irrelevance the way the League of Nations did.

This first appeared on Branko's Substack.

Image: Onefineham via WikiCommons  Creative Commons Attribution-Share Alike 3.0 Unported