7. The 70-year itch
Both the West and China are neglecting the institutions that help keep the world economy upright
AMERICA learned the benefits of economic co-operation the hard way. Its failure to create institutions to help steer the world economy after the first world war exacerbated the Great Depression and paved the way for the next conflagration. That is why, at a small resort in New Hampshire as the second world war was drawing to a close, America and its allies sketched out a rough management plan for the world economy and created some institutions to safeguard it. Despite some flaws, the Bretton Woods agreements, signed 70 years ago this month, helped usher in a long and relatively peaceful period of economic growth.
Yet today’s pre-eminent powers seem to have forgotten this lesson. America and Europe have failed to strengthen and reform the offspring of Bretton Woods, the IMF and the World Bank; they have been sluggish in providing a bigger role for China in these institutions (it still has less voting power than the Benelux countries). Meanwhile, China, like America a century ago, flexes its muscles close to home but outsources global leadership to others. The combination could lead to another dangerous, rudderless spell for the world economy.
Parts of the Bretton Woods system have proved more durable than others: its capital controls and fixed exchange rates had largely gone by the end of the 1970s. But the whole edifice now looks rickety. Countries moan over destabilising capital flows while global trade talks remain in near-stasis. Barack Obama sensibly promoted a plan to give the IMF more resources and increase the clout of fast-growing developing countries within it. Yet Congress now refuses to support the agreed reforms. Meanwhile both America and Europe have pursued ambitious trade deals with each other and non-Chinese Asia. And again Congress has in effect blocked those efforts too, before the deals have even been struck.
China has...