OPINION | Zimbabwe’s Bretton Woods: How a country’s failure to update its world view has left it in arrears

By Chris Chenga

There is a story told by Dominic Barton, the former Managing Director of global consultancy firm, McKinsey and Company.

According to Barton, Xi Jinping, then governor of China’s Zhejiang province, once requested all articles and papers that McKinsey had written on industrial carbon emissions. Barton expected Xi to take time to go through the bulk volumes of literature as compiled by the firm’s staff.

Most of this content was practically new. Xi wanted to reduce the carbon footprint with minimal compromise on industrial output and competitiveness. He was asking for proposals of untested industrial design and infrastructure investment, all of a pre-emptive nature, to a climate change agenda that was then barely an acknowledged reality globally.

As Barton tells it, Xi did not take longer than a day to go through all of McKinsey’s material. In only a week, he had initiated various concepts for Zhejiang’s industrialists to try out, with regulators to incentivise. Years later, as carbon emissions became an issue in global geo-politics, China had the largest renewable energy industry in the world. It could trust its own knowledge to inform negotiating strategies at accords such as COP24.

This story is about the influence that leadership has on a nation’s social mindsets, and the global positioning it yields.

In the USA, President Obama’s two terms were of relative internal civic harmony and co-operative foreign policy. Less than a year from his succession, President Trump had stirred up domestic tensions. American foreign policy saw a rapid domino trail of disintegrated international relations. Did the social sentiments ruffled by Donald Trump not exist during Obama’s time? Or maybe, the country transitioned from one who pacified, to one who turbocharged certain attitudes?

These dynamics are hard to distinguish and think about in Africa. Either leadership stays for very long, or power transitions happen between administrations of unvarying worldly outlooks. It is difficult to identify inflection points to how we have seen the world around us.

A concerned mind could agonise that many citizens miss the chance to notice global shifts due to the entrenched outlooks of prolonged leadership and unvarying establishments. This poses a vulnerability to old mindsets unbefitting of new realities. In that light, Zimbabwe may be alike to Castro’s Cuba. The world around us evolves so quickly that a nation entrenched in ideology, for years, is deprived of spotting emerging shifts and positioning itself advantageously. Can you imagine the social and economic opportunity costs?

If, for instance, political leadership pronounced two decades ago that an institution was a tool of western imperialism, that assertion may be inaccurate in a current global social and economic context. Don’t western impressions of what is out there to be gained in the world evolve? Imperialism itself is just one form of choosing to pursue gains. Alternatively, an institution may have pivoted for its own existential fit under shifting realities. No institution can retain stasis with socio-economic tides, conducting unchanging modus operandi; not even churches!    

Bretton Woods is born, with certain conventions

The IMF and the International Bank of Reconstruction and Development (now the World Bank) were founded in 1945. They were to manage a new monetary order. The United States, least harmed victor and most liquid after the war, had the greatest authority on negotiations.

Currencies were to be backed by gold, and governments were to maintain fixed exchange rates at a percentage variance to gold’s value; $35 an ounce. The US dollar would be the single global reserve currency. Pegging exchange rates to gold, with cross reference to a US dollar reserve, was meant to ensure stability of exchange rates. These exchange rates were only to be altered in rare, necessary instances, to correct trade disequilibrium.

An architect of Bretton Woods was British economist, John Maynard Keynes. Keynesian conventions assumed that trade disequilibrium required balance of payments support for governments, of which the IMF would lend reserve currency, the US dollar, in coherence with structural reforms by member states to correct disequilibrium. As most initial and prospective members were still in post-World War 2 ruin, the IBRD would provide loans to finance governmental stimulus on developmental infrastructure.

44 countries initially signed on, all allies from the World War. They subscribed to the IMF on a quota basis, on which a country’s economic potential determined its requested quota. Germany and Japan, both later joined in 1952. Africa, which consisted of European colonies, as Keynes stated, “… had nothing to contribute”.

Socio-economic dynamics of the time, seemingly, warranted this monetary order; especially as they materialized in America. Prosperity was felt largely autonomously. By 1955, the auto-industry had sold over 57million vehicles, a construction boom erected 15 million houses, and appliances, like fridges and televisions filled these homes. All this was of local production and managed monetary policy.

The Federal Reserve was not politically independent until 1951. Average wages doubled by 1948, and again in 1963. Industrialization was of a certain kind. Though mechanized, it was still very much manually dependent, using production systems, like assembly lines, as discovered in the 1930s. Europe was also re-industrializing. Stimulus, as per Keynesian discipline, was potent in developing Europe. The IBRD was providing loans, adding onto the Marshall Plan which was US governmental policy. Colonies too, massively subsidized western growth providing labour and commodities. The monetary order worked!

But, elsewhere, things were changing, fast. The Japanese miracle was all about technology and supreme efficiency. In just two decades, Japan became the second largest and most advanced economy. This had the effect of altering conventions on industrial productivity. Global demand for Japanese products, which were considerably cheaper for consumption, and economical for industrialists to merge into their production chains, paved way for globalisation.

China was also just opening up its economy to the world. Trade became a larger factor of industrialisation and consumption. This practically displaced the initial conventions of fixed exchange rates and stressed the quantities of gold and US dollars available to back global transactions. Trade was also now conducted in a context of competitiveness; as opposed to American post war and European colonial influence. This fundamentally broke the monetary order.  

In 1971, the US unilaterally debased its currency from the gold standard, initiating an era of fiat currencies. In the Middle East, nations became conscious of the finite nature of their oil, as industrial growth had spurred its demand exponentially. Bretton Woods 1 was technically obsolete, and the IMF and World Bank had to pivot to find their own existential fit under new realities, and structural composition.

Bretton Woods’ worst days

Change, the kind which comes abruptly and unexpectedly, often draws some of mankind’s best and worst traits simultaneously. These then antagonise one another. As global powers suddenly emerged in Eastern Europe and Asia, a Cold War began in the 1960s. The US supposedly found its worst utility for Bretton Woods. While many of these claims may be unsubstantiated, the IMF and World Bank have been strongly criticised for being a hand in regime change agenda, abusing financial assistance and developmental infrastructure contracting in a carrot and stick conduct.

This has left an imprint in Latin America and Africa; continents that at the time were pursuing their own suffrage and independence, at great human cost. The legacy of this era, and the wounds, are still palpable to this day. A lot of anti-Bretton Woods sentiment may still be familiarised in the identity of nationalism itself.  

Perhaps a silver lining to draw from this era would be what took place domestically in the United States. The 1960s and 70s were a time of governmental and civic disagreement. A generation, referred to as Babyboomers, emerged at a time of deep social unrest, with riots opposing government foreign policy, and internally pushing for civil rights. Maybe this generation is a strong reason the IMF and World Bank re-configured to be the globally tolerant Bretton Woods 2.

IMF and World Bank: The globalisation era

As Bretton Woods 2, the IMF transitioned from functioning as an authority, which enforced adherence to a monetary order, to a real fund. The IMF administers the economic practice of members to ensure safety, and growth, of invested quotas. Under its constitution, the IMF executive board prepares annual reports to highlight the performance of the Fund’s financial services, especially the administration of resources contributed by members.

As globalisation spread, global interests became intertwined. Capital markets became deeper and more liquid, now in trillions of dollars. Demand for foreign exchange shot up. Under fiat currencies, current account and balance of payments vulnerability meant a greater need for economic surveillance. The IMF had to become an entity of global purpose.  Today, the Paris Club, which is an assortment of heavily invested members, now has greater discretion on the Fund’s activities.

Reserve currencies include the Pound Sterling, the Euro, and recently the Remnimbi. Instances such as Japan providing $6 billion to settle Myanmar arrears reflect the greater voice of other members. Recently, former IMF MD Christine Lagarde spoke against America’s intentions of a trade war with China. Would the IMF of Bretton Woods 1 have offered such perspective, contrarian to the U.S. administration?

Testament to its broad reverence, IMF due diligence is trusted analyses even for developed economies, for instance, Britain’s options for a Brexit, along with continental Europe Article 4 appraisals. Consistently touted as alternatives, developmental institutions like the Asian Infrastructure Investment Bank (AIIB) merge their lending practices to IMF and World Bank standards. And bi-lateral lenders, like China, refer to IMF country data to inform their loan decisions. Today, it is very difficult to identify Bretton Woods as a tool of western imperialism.

But who gets it right all the time?

Economists are infamous for getting things wrong a lot of the time, then explaining why they got it wrong. That is the nature of the profession. It is a working hazard.

Many structural reform programs have not yielded overwhelming success. But often ignored is that most member nations would not approach the Fund for assistance if things were going so well, would they? Why weren’t things going so well? Greece had created its own fiscal disaster, Tunisia and Zimbabwe would not require financial assistance if they did not provide unsustainable subsidies on productively impotent sectors.

Many Finance Ministers approach the IMF and World Bank just before election cycles to fund campaigns, and not to re-adjust current account strains or develop planned infrastructure. Moreover, governments rarely see through programs, policy continuity falling on the wayside, after funds are accessed.

It seems contradictory to hold the view that the IMF is incompetent for failing to resolve cases of governmental vices, and also believe that it is patronising for governments to be told what to do. But that has long been the sensitivity of debtor-creditor dynamics.   

“As Bretton Woods relates to U.S. sanctions, corruption is a greater hindrance to fresh funding”

Capital – the money invested by Bretton Woods’ members – is incomes and savings of the citizens of other countries.

Zimbabwe has a legacy of default. Of Zimbabwe’s US$7 billion foreign debt stock, over 20% of it is owed to German citizens. The US and the UK lent Zimbabwe very little. What that implies is that Zimbabwe owes German citizens for defaults traceable to project mismanagement, and corruption. The former is understandable.

Since Zimbabwe’s first donor funded infrastructure project, the low-income public housing development at Gutu-Mupandawana in 1982, the country experienced growing pains in developmental projects. Thus, donors were kind to extend concessions to cover eventual defaults to private building societies that had funded the project.

Similar pains were experienced in projects such as Mazvikadei Dam as years went on. As a new nation, German donors understood that projects of certain magnitude were susceptible to inherent challenges posed by having new institutions, new governing staff, as well all demographic adjustments for a population transitioning from colonial rule to independent livelihoods. Since the fall of the Berlin Wall, Germany had gone through similar dynamics.  

Contrary to rigid assumptions that land reform was the only turning point, corruption strained relations with western donors. It is also why other invested members will not help Zimbabwe in its arrears clearance strategy. Defaulting, largely on unrepentant corruption, is a disincentive to all potential financiers. If Zimbabwe showed emphasis to explain missing funds, third party friends, such as China maybe, would clear Zimbabwe’s arrears in the similar manner in which Japan cleared Myanmar’s. But nobody sticks their neck out for corrupt laggards.

With cleared arrears, the US and UK would find it very hard to veto loans to Zimbabwe, as they are a membership right. As Bretton Woods relates to US sanctions, corruption is a greater hindrance to fresh funding, as it discourages multilateral support.   

Missed opportunity

Global capital is desperate to find yields. There is more than US$1.5 trillion in below zero interest rate bonds. Despite a US$2 billion misappropriation scheme, creditors are still patient to restructure Mozambique loans. The IMF encourages Angola to pursue Eurobonds, as well as availing to it the largest loan in Sub-Saharan history of US$3.5 billion.

Zimbabwe has real potential. The nation saw growth of near 15% without much productivity reformation from 2008 to 2013. Imagine the growth potential if it pursued real reform.

But, as we learned from Xi Jinping, it is leadership that influences mindsets. How is a society to utilise Bretton Woods when it was conditioned to be globally cynical? Which Bretton Woods should we dislike? Is it truly a tool of western imperialism? Old mindsets are unbefitting of new realities, and a nation fails to position itself advantageously. Maybe we need an inflection to how we see the world around us.


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