Evolution of the International Economic System

Bretton Woods was designed to let states pursue full employment without beggaring their neighbours. Everything since has been an argument about whether that bargain was abandoned, and by whom.

This is chapter 42 of the PSIR Optional Notes, from the part on International Relations in the Paper II syllabus. The complete book is a free download.

Bretton Woods

The design

The conference at Bretton Woods in July 1944 was an attempt to avoid the interwar collapse: competitive devaluation, tariff walls and the transmission of depression. The Keynes plan proposed an International Clearing Union with an artificial reserve asset, the bancor, and symmetric adjustment obligations on surplus and deficit countries. The White plan, reflecting American creditor interests, prevailed: adjustment fell on deficit countries and the dollar became the system’s anchor.

The institutions: the International Monetary Fund to provide short-term balance-of-payments finance and to police exchange-rate commitments; the International Bank for Reconstruction and Development for reconstruction and later development lending; and a proposed International Trade Organisation, whose Havana Charter the United States Senate declined to ratify, leaving the General Agreement on Tariffs and Trade of 1947 as a provisional arrangement that lasted forty-seven years.

The exchange-rate regime: par values fixed against the dollar, the dollar convertible to gold at thirty-five dollars an ounce, adjustment permitted only for fundamental disequilibrium, and capital controls permitted, which is the feature that distinguishes the system from what followed.

Embedded liberalism is Ruggie’s term for the political bargain: multilateral openness in trade combined with domestic policy autonomy to sustain full employment and welfare. Capital controls were what made both possible at once, and their removal is what later produced Rodrik’s trilemma in Chapter 38.

Breakdown

The Triffin dilemma identified the structural flaw: the world needed dollars for liquidity, which required American deficits, but persistent deficits would eventually undermine confidence in convertibility. Vietnam and Great Society spending, European and Japanese recovery, and rising dollar liabilities relative to American gold produced exactly that.

On 15 August 1971 the United States suspended gold convertibility, imposed an import surcharge and froze prices and wages, the Nixon shock. The Smithsonian Agreement of December 1971 attempted realignment and failed; by 1973 major currencies were floating; the Jamaica Accords of 1976 amended the Fund’s articles to legalise floating and demonetise gold.

The consequences: exchange rates became a market variable, which increased volatility and the demand for reserves; capital controls were progressively dismantled from the 1970s; and the IMF’s role shifted from managing a par-value system to crisis lending with conditionality, which is what made it the object of Southern criticism.

From GATT to WTO

GATT

Principles: most-favoured-nation treatment, so a concession to one member extends to all; national treatment, so imported goods are not discriminated against internally once inside; reciprocity in negotiations; and a preference for tariffs over quantitative restrictions, since tariffs are transparent and negotiable.

Eight rounds, of which three matter. The Kennedy Round (1964–67) achieved across-the-board tariff cuts. The Tokyo Round (1973–79) addressed non-tariff barriers through codes that only some members accepted. The Uruguay Round (1986–94) was the transformative one.

The WTO

Established 1 January 1995. What changed from GATT:

• An organisation, not an agreement, with legal personality and permanent structures: Ministerial Conference, General Council and Secretariat.
• Single undertaking: members accept all agreements as a package, ending the Tokyo-round practice of selective adherence.
• Coverage extended beyond goods to services through GATS, intellectual property through TRIPS, agriculture through the Agreement on Agriculture, and investment measures through TRIMS.
• Binding dispute settlement: panels, an Appellate Body, and authorised retaliation where rulings are not implemented, with negative consensus meaning a ruling is adopted unless all members object.

The Southern grievances

The three that recur, and any answer must be specific.

Agriculture. The Agreement on Agriculture’s boxes, amber for trade-distorting support, blue for production-limiting payments, green for allegedly non-distorting support, permitted developed countries to reclassify subsidies into the green box rather than reduce them. The de minimis limits on developing countries’ product-specific support, calculated against external reference prices fixed in 1986–88, constrain public stockholding for food security. The Bali Ministerial of 2013 produced a peace clause shielding such programmes from challenge, made indefinite in 2014 pending a permanent solution that has not been agreed.

TRIPS. Twenty-year product patents were required in fields, notably pharmaceuticals, where many developing countries had granted only process patents. The Doha Declaration on TRIPS and Public Health (2001) affirmed the right to use compulsory licensing and to determine grounds for it, and the 2003 and 2005 amendments permitted export under compulsory licence to countries lacking manufacturing capacity. India’s Section 3(d) and the Novartis judgment (2013) are the standard illustration of using the flexibilities.

Dispute settlement. The Appellate Body has been unable to hear appeals since December 2019 because appointments to fill vacancies have been blocked, on the argument that it had engaged in judicial overreach and disregarded the ninety-day deadline. The effect is appeals into the void: a losing party can appeal a panel report to a body that cannot convene, leaving the report unadopted. The interim workaround is the Multi-Party Interim Appeal Arbitration Arrangement under Article 25, which a minority of members including the European Union, China and Canada have joined. The 2025 paper’s question on salvaging the system asks for exactly these options: restore the Appellate Body with reforms on precedent and timelines; expand the interim arrangement; accept panel reports as final; or move to plurilateral dispute settlement outside the WTO.

CMEA and the socialist economies

The Council for Mutual Economic Assistance, founded in 1949 partly in answer to the Marshall Plan, organised economic relations among the Soviet Union and its allies. Its features: bilateral rather than multilateral trade balancing; prices administratively set with reference to lagged world prices, which in practice subsidised Eastern Europe’s energy imports; the transferable rouble as a unit of account rather than a convertible currency; and the International Socialist Division of Labour, an attempt at specialisation among members that Romania in particular resisted as consigning it to agriculture.

Its weaknesses: no convertible currency, so surpluses could not be spent freely; no price signals, so specialisation was administrative rather than efficient; and a persistent technology gap with the West. It was dissolved in June 1991.

The New International Economic Order

The demand emerged from decolonisation and from the analytical work of Raúl Prebisch, whose Prebisch-Singer thesis held that the terms of trade of primary commodity exporters decline secularly against manufactures, so that trade itself transfers value from periphery to core. UNCTAD was created in 1964 with Prebisch as first Secretary-General, and the G-77 formed the same year.

The 1973 oil shock demonstrated Southern leverage, and the Sixth Special Session of the General Assembly in 1974 adopted the Declaration on the Establishment of a New International Economic Order and its Programme of Action, followed by the Charter of Economic Rights and Duties of States later that year.

The demands: permanent sovereignty over natural resources, including the right to nationalise with compensation determined by domestic law; an Integrated Programme for Commodities with buffer stocks and a Common Fund to stabilise prices; indexation of commodity prices to manufactures; non-reciprocal preferential market access, realised partially through the Generalised System of Preferences; technology transfer on concessional terms and reform of the patent system; regulation of transnational corporations through a code of conduct; increased development aid toward the 0.7 per cent target; and greater voice in the IMF and World Bank.

Why it failed: the developed countries had no incentive to concede and the General Assembly’s resolutions were not binding; the oil shock split the South between oil exporters and oil-importing developing countries; the debt crisis of the 1980s destroyed Southern bargaining power and put the IMF in the position of creditor; and the ideological turn to the Washington Consensus displaced the entire framework.

Its legacy is nonetheless real: the Generalised System of Preferences; special and differential treatment written into WTO agreements; the Common Fund for Commodities; the principle of permanent sovereignty over natural resources, now customary law; and the common but differentiated responsibilities principle in environmental agreements. The 2024 paper’s question on India’s potential leadership of the Global South in establishing a new international economic order is asking whether this agenda can be revived, which Chapter 52 addresses.

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