Could Donald Trump’s lone ranger approach provide the silver bullet?

Donald Trump is playing with fire. That thought permeated last week’s spring meetings of the International Monetary Fund and World Bank in Washington.

The US president’s go-it-alone approach – especially in the field of trade – has certainly shaken things up. It is not just the threat of tariffs, nor that the US has brought the dispute settlement system at the World Trade Organisation to a standstill.

Rather, it is a concern that Trump is rejecting the multilateral system that has been in operation for more than 70 years and risks sending the world spinning back to the 1930s. This is not entirely accurate. After some hard bargaining the US has agreed to fund an increase in the World Bank’s capital that will allow it to lend more.

But everyone knew what Christine Lagarde, the IMF’s managing director, meant when she said last week that international cooperation since the second world war had helped to reduce poverty and deliver more progress than at any time in history. The rules-based system needs to be cherished not attacked.

This argument is fine as far as it goes, but as Richard Kozul-Wright, the chief economist at Unctad (the United Nations Conference on Trade and Development) pointed out, the multilateral system operating in 2018 is by no means the one envisaged by its original architects in the 1940s.

The Bretton Woods conference in 1944 that set up the IMF and the World Bank was dominated by the US and the UK, with the former having far more clout over the eventual outcome. Harry Dexter White, the US representative did not always see eye to eye with his UK counterpart Maynard Keynes but they were in broad agreement on three basic ideas. The first was that full employment was the main economic goal. The second was that the lesson from the Great Depression was that finance had to be controlled. The third was that the new institutions would not be in the business of prescribing one-size-fits all remedies but would instead create an environment that would allow countries to fashion policies for themselves in line with their own cultural preferences.

All this has changed in the past seven decades. The prevailing orthodoxy at the IMF is that curbing inflation is more important than full employment, which is why it is recommending – on the scantiest of evidence – that the US Federal Reserve and the Bank of England should be raising interest rates.

A messianic belief in free movement of capital for all countries, even those with the most immature financial systems, prevailed in the years leading up to the crisis of 2008, and was in large part responsible for it. Financial markets remain vulnerable: risk has migrated from banks to other parts of the system.

What’s more, the idea that countries that run into trouble should be allowed policy space has long since disappeared. There is a basic structural adjustment template when the IMF arrives in town: squeeze the domestic economy in order to get costs down, privatise in order to make industries more efficient, and devalue the currency to foster export-led growth.

But it is not just a question of returning to the original 1944 blueprint. Other changes are needed.

The WTO provides a rules-based system for international trade, but there is no rules-based system for debt restructuring. Plans for a sovereign-debt bankruptcy mechanism were floated in the late 1990s and early 2000s but pressure from Wall Street, which stood to lose money-making opportunities, killed off the idea.

This did not seem to matter that much at the time, because two rounds of debt relief culminating in the 2005 Gleneagles agreement seemed to sort out the debt problem. One of the features of last week’s meeting, however, was a belated recognition that debt is back. The IMF said 40% of low income countries are currently at high risk of or already in debt distress, a doubling in the past five years. Jim Yong Kim, the World bank’s president, said he was watching the situation “very, very closely” and he is right to do so. Many countries have borrowed heavily in US dollars in the world’s capital markets at a time when American interest rates are being ratcheted up.

Another fundamental weakness of the international system, highlighted by the trade tension between the US and China, is that it lacks a way of dealing fairly with current account imbalances. The IMF can force a deficit country that asks for help to import less and export more, but it has no sway over surplus countries. Attempts by Keynes to ensure both creditor and debtor nations had to make adjustments were thwarted by the US at Bretton Woods, a time when it was the world’s leading creditor nation. Trump, judging by his actions, would be a lot keener on a system that enshrined reciprocal action.

Finally, the governance of the Bretton Woods institutions fails to reflect the changes to the global economy seen since 1944. Despite some modest tweaks in recent years, voting power is still vested in the developed countries that set up the IMF and the World Bank. Every managing director of the Fund has been a European, every president of the Bank an American. The US retains a veto over all important decisions at both institutions.

There is a difference between multilateralism as a concept and multilateralism as it has been practised for the past few decades. The current state of affairs is not perfect, far from it in fact. If Trump facilitates a long overdue assessment of what a properly functioning international system might resemble, that’s to be welcomed. It would look quite different.

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