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BRETTON WOODS: A DILEMMA FOR BENEFICIARIES

By DARLINGTON CHILUBA 

THE international financial architecture is one of the most sophisticated and complex systems ever imagined. It simultaneously enjoins interdependent functions of multiple currencies in a seamless flow of business.

Yet for all its complexity, it relies on two simple principles, among others, to ensure far reaching consensus. Value and trust are the two principles. 

The two act as guarantors of each other so that the absence of one could create an imbalance in the system. Indeed, without trust, it is difficult to establish any relationship because any value attached to that transaction, will be questionable.  

In finance, a loss or absence of trust can be catastrophic, at the very least. The great depression of 1929-1939 which happened because of a combination of factors caused a fall in the value of investments (stocks), banks collapsed, thereby affecting the money supply: in other words, there was no cash in circulation.

The 1997-98 Asia crisis which was caused in part by investors’ mass withdrawal of capital, caused seismic damage to the financial and property markets of Asia.

Lastly, the 2008-09 global economic collapse also caused widespread failure and closure of international banks and a loss in the value of real estate, particularly in the United States of America (USA).  

By and large, most economic collapses are a result of a loss of value, or a loss of trust in the value of a currency or the economic (or financial) system.  The outcome can be overbearing on private citizens, on the pension system, on the ability of government to pay for its services; the normal day-to-day banking can halt very suddenly because there is no cash. And the available cash has lost real value.

Financial crises show that political and economic decisions can have dire repercussions if oversight fails and, therefore, a sound control mechanism is of great necessity.  

As such, in the same way that nations set up the United Nations (UN) to deter wars and commit nations to peace, the same pattern followed the construction of the international financial architecture in Bretton Woods, New Hampshire, in the USA in 1944. This is where the International Monetary (IMF) and the World Bank (or more accurately the International Bank for Reconstruction and Development, IBRD) were founded. Thus, these institutions are often just referred to as Bretton Woods.  

The intention was to establish a global monetary system that would allow currencies to convert easily between and among nations. They meant to create a robust system whose value and function could be trusted by participant states and future members. At the core of this construct was a fear to ensure that market collapse was deterred or manageable with the experience gained hitherto.  

Initially, some complexities were overcome by proposing the United States Dollar (USD) as the anchor of value for currency conversion. In other words, the value of two currencies could be compared by first determining their individual worth in US Dollars.

The value of the US Dollar itself was directly tied to gold (reserves) in what was called the Gold Standard. After some unforeseen complexities, this fixed or pegged system was abandoned in the 1970s for a floating system which is practiced today.  

Something else happened in the 1970s that further entrenched the Bretton Woods institutions into the global financial system, even to national detail.

The Organisation of the Petroleum Exporting Countries (OPEC) increased oil prices, causing a spiral in the national expenditure of countries thus forcing most nations to seek out loans to finance oil imports.

It was here that the IMF positioned itself as an international lender to its member states in their time of need and, truth be told, they helped to avert a crisis that could have lasted longer.  

What appeared a temporary solution by the IMF created a debt overhung that lasted even longer than the oil crisis. For those indebted nations whose economies could not repay their loans in the short-term, the IMF became the economic manager and policy influencer from a distance.

One of the most severe critics of the IMF or Bretton Woods is that overtime, they had one set of solutions for different types of economies – that is, structural adjustment. This is something indebted European economies like Greece and Spain lamented during the eurozone crisis of 2009 -2010. In other words, there cannot be one solution for different countries.  

This is the point Zambia presented to its creditors and the IMF under heavily indebted poor countries (HIPC) in 1997 and 2000 successfully. Zambia became a member of the IMF in the 1960s and enacted the Bretton Woods Agreements Act Chapter 367 of the Laws of Zambia on 10th September 10, 1965. The same has been amended over the years. Zambia’s relationship with the IMF has been retold and recast to swing political fortunes one way and in the process the truth has been lost.  

By the early 1980s, Zambia became one of the countries whose economy needed rescue because there was no revenue base, the Zambia Revenue Authority was established properly in the 1990s. Shortages of essential commodities was rampant and even worse, there was no private enterprise – government was the economy. The country had qualified for a tranche of loans from the IMF in the early 1980s but reneged because those conditions entailed a change from economic autocracy.  

Those who made the tough decisions to allow structural adjustment as an avenue for debt restructure and forgiveness in the 1990s did so with the full national interest in mind so that, even when borrowing is necessary in future, it will never again be to the detriment of the citizens.

Bretton Woods can only do so much, the consequences of their advice, if taken, will ultimately impact the citizens. Overall, it is us who must trust the value of our own ability to manage the economy, something bestowed onto us after the economic independence of 1991.

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