Opinion: 80 years post Bretton Woods, it’s time for just finance

In the 80 years that have passed since the Bretton Woods Conference — held in Bretton Woods, New Hampshire, in July 1944 — the world has changed almost beyond recognition.

Yet, the international financial architecture established at the conference largely remains the same, reinforcing the power dynamics of an era when colonial powers ruled the world.

The inequalities of this architecture were laid bare by the COVID-19 pandemic when advanced economies were able to respond to shocks through large discretionary spending measures — estimated to represent at least 10% of their GDP.

A similar response was not possible for low- and middle-income countries, which had to borrow from international financial markets or rely on emergency support from the International Monetary Fund or other international financial institutions. Monetary tightening in high-income countries, which led to increased interest rates, dealt an additional blow to LMICs, increasing their financing costs and risking a full-blown debt crisis.

While not a silver bullet, reforms to the IMF’s Special Drawing Rights, or SDRs, could help act as a buffer, easing the worst inequalities of this antiquated architecture. Yet such reforms are opposed by some of the IMF’s high-income member countries.

SDRs: A marginalized piece of the international financial architecture

Created in 1969 as the IMF’s reserve asset, the promise of SDRs has remained largely unfulfilled. While not currency themselves, SDRs can be exchanged for hard currency between central banks, and act as the IMF’s unit of account. Read more here.

Fifty years ago, there was a concerted push by newly independent states to create an SDR “development link” to ensure SDR allocations were directly linked to countries’ development needs.

However, the United States and Germany blocked these efforts, helping to create what Colombia’s former finance minister, José Antonio Ocampo, has referred to as an international monetary “non-system” where LMICs must try to self-insure against volatile cross-border capital flows.

Despite an amendment to the IMF Articles of Agreement in 1978 stating that IMF member countries should work to make the SDR the principal reserve asset in the international monetary system, SDRs remained under-utilized until the 2009 global financial crisis when the IMF’s board approved two quickfire SDR allocations worth a total of $286 billion.

The 2021 SDR allocation in the wake of the COVID-19 pandemic — valued at $650 billion — was by far the largest in the IMF’s history. However, the majority of it went to countries that needed it the least, because SDR allocations are distributed according to the IMF’s out-of-date quota system, where the United States and Europe retain significant control.

Nevertheless, the allocation was the largest form of non-debt-creating crisis relief provided to many emerging markets and low-income economies, totaling over $250 billion, with many countries using SDRs for fiscal purposes.

Back to the future: Calls for a fit-for-purpose SDR system

As of mid-2022, SDRs still accounted for just 6.8% of global reserves. This marginalization is not due to a lack of demand from global south governments, finance experts, and civil society.

The 3.0 version of Barbados’ influential Bridgetown Initiative released in May this year called for the IMF and its shareholders to “achieve agreement on a new $500bn issuance of SDRs.” The Group of 77 and China’s Third South Summit held in Kampala, Uganda, in January, went further, calling for “new issuances of SDRs, driven by the need to enable the achievement of the Sustainable Development Goals, including eradicating poverty.”

Calls for change are also emanating from the United Nations: A 2023 report from the U.N.’s High-Level Advisory Board on Effective Multilateralism proposed key SDR reforms as part of an enhanced global financial safety net, including automatic annual SDR allocations aligned with global growth rates, and selective SDR allocations to countries with weak external positions. These recommendations may be endorsed at the U.N. Summit of the Future in September.

In April, ActionAid USA and the Bretton Woods Project launched our own proposal for SDRs reform, which was endorsed by 18 other civil society groups. We’re calling for:

• A new general allocation of SDRs to provide immediate relief in the face of a growing debt crisis that is putting global climate and development goals at risk.

• Predictable and needs-based allocations in the future to provide a consistent safety net for vulnerable countries.

• Reforms that reduce the legal hurdles to using SDRs.

SDRs reform faces opposition from some of the IMF’s most powerful shareholders

Despite shrinking overseas development assistance from many high-income countries and a worsening debt crisis in LMICs, some countries remain firmly opposed to SDR reform.

In an op-ed published in April, Germany’s Federal Minister of Finance Christian Lindner and Bundesbank President Joachim Nagel argued, “efforts to use [SDRs] … for development financing should be viewed with skepticism. This could fuel expectations for the IMF to allocate SDRs more frequently for reasons other than their original function as a reserve asset.” The IMF board’s recent lukewarm approval of SDR “rechanneling” via multilateral development banks shows this sentiment extends beyond Germany to other European countries as well.

The U.S. Treasury also appears reluctant to support a new issuance. Congressional Republicans have come out against SDRs writ large. However, authorizing a new issuance does not require any spending or congressional approval. The decision rests with U.S. President Joe Biden for SDR allocations up to $650 billion.

Given that SDRs have remained a marginalized tool in the IMF’s toolbox, arguments about the “original function” of SDRs ring hollow. It’s symptomatic of the IMF’s anachronistic governance that the U.S. and European countries can block more frequent issuances of SDRs — an ask that enjoys the support of the “majority world” — eight decades after the Bretton Woods Conference.

It’s time for high-income countries to act to ensure a fit-for-purpose global financial safety net. Otherwise, the conditions needed to achieve global climate and development goals will likely fail to materialize.