Saving Democratic Capitalism

Fred Kempe is the President and Chief Executive Officer of the Atlantic Council.

IMF employees have joked among themselves for years about when the fund’s bylaws would kick in, requiring them to move from Washington to Beijing. Written when no rival to U.S. economic leadership was in sight, the bylaws require that the headquarters be in the world’s largest economy.

They aren’t laughing anymore.

The underlying story of this week’s IMF and World Bank meetings, hosted virtually from Washington, is that democratic capitalism is suffering dangerous new blows and autocratic capitalism is enjoying new gains as a result of this disruptive year of Covid-19. The pandemic will strip 4.4 percent of the world economy this year or $11 trillion of output next year.

China, where the pathogen originated, will be the only major economy to post growth this year. The IMF predicted that China, the world’s second-largest economy, would expand 1.9 percent in 2020, while the U.S. would shrink by 4.3 percent and Europe by 7.2 percent. China’s growth will accelerate to 8.4 percent next year, said the IMF, compared to 3.1 percent in the United States and 4.7 percent in Europe.

Fixing the problem won’t be easy.

The IMF’s new global debt figures, shown in this Atlantic Council tracker, show U.S. debt will hit 130 percent of GDP thanks to the crisis. That’s the highest level since World War II, when the country was financing colossal military operations. The U.S. Treasury Department released figures Friday that show a record $3.1 trillion budget deficit in the fiscal year ending Sept. 30.

The Trump administration’s failure to leverage its stimulus spending this year on investment in infrastructure, education and research-and-development is a missed opportunity. Trade disputes with European and Asian allies have undermined solidarity among global democracies when it has been most needed.

Risks to the dollar’s continued currency supremacy may seem far over the horizon, but concerns have grown more relevant as China seizes first-mover advantage through its rollout of digital currency tests in selected cities.

To be sure, the current IMF voting share still favors the United States by roughly three to one, and the bylaws dictate that the “principal office of the fund shall be located in the territory of the member having the largest quota.” Still, even former IMF Managing Director Christine Lagarde mused in 2017 that the fund’s HQ could relocate within a decade.

Current events may accelerate her timeline.

The more significant question than the location of the IMF is what country or set of countries will write the financial and monetary rules for our coming epoch. Will democracies, rallied by the United States, revive and reform their form of capitalism, which has been ascendant for more than 75 years?

Or will the future be shaped by China and state-controlled capitalism, which its leaders argue has proved more decisive and resilient in this crisis? Or alternatively, are we entering a period of an extended, global systemic scrum of the sort experienced after World War I that lead to worldwide economic depression, currency devaluations, beggar-thy-neighbor protectionism, a breakdown of the international financial system and ultimately to war?

In a landmark speech this week, current IMF Managing Director Kristalina Georgieva called what the world is experiencing now a “new Bretton Woods moment,” harkening back to 1944 when the IMF and World Bank were created with a dual purpose: “to deal with the immediate devastation caused by the war, and to lay the foundation for a more peaceful and prosperous postwar world.”

It’s worth reflecting on the enormity of what Ms. Georgieva is suggesting, as the original Bretton Woods was the first agreement of its kind, a fully negotiated global monetary order, resting at that time upon gold and the U.S. dollar. Bretton Woods put into place the rules and the wherewithal for the expansion and sustainability of democratic capitalism, which in the end would triumph over centrally controlled Soviet-style economies.

The deal came near the end of World War II at a time when U.S. leadership was in a visionary frame of mind and had the economic and political leverage to impose its will on others, much in contrast to conditions today. Cordell Hull, the U.S. Secretary of State from 1933 to 1944, represented the view among many of that time that economic discrimination and trade warfare had been underlying causes of both world wars.

Bretton Woods was designed to avoid a repeat of that outcome. After two years of preparation, the U.S. gathered 730 delegates from all 44 Allied nations at the Mount Washington Hotel in Bretton Woods, New Hampshire, from July 1-22, 1944, before they signed the agreement on its final day.

In the cacophony of the final days of the U.S. presidential election, it would be easy to neglect the historic challenge to democratic capitalism.  Few Americans will have heard or read Ms. Georgieva’s speech this week, distracted instead by the dueling town halls of President Donald Trump and former Vice President Joe Biden.

Yet whoever is elected on Nov. 3 will be saddled with the task of reversing the slide in public faith for democratic capitalism before it becomes irreversible, and addressing inequalities while at the same time not sacrificing capitalism’s irreplaceable engine of growth and innovation.

What the United States and the world need following the Nov. 3 elections is another round of transformational American leadership of the brand that followed World War II.

For President Trump, taking on this generational challenge in a second term would demand a dramatic change of heart about building international coalitions of the Bretton Woods variety. For Vice President Biden, it would require translating his encouraging language on galvanizing global democratic partners, including plans for a first-year summit of democracies, into concrete action that would reverse current trends.

Both candidates talk about emerging stronger from Covid-19, but our problems didn’t start with the virus and they won’t end with a vaccine. Facing a second economic crisis in the space of a decade, the United States has a rare second chance to get things right alongside its democratic partners.

Crafting a blueprint for a revitalized Bretton Woods is one of the founding pillars of our new GeoEconomics Center. As the Center’s Director of Programs and Policy, Josh Lipsky, says, “America must channel the spirit of 1944, and show the world that collaborative economic leadership is the only way to achieve both peace and prosperity.”

If we fail to act, democratic capitalism may not get another opportunity. The stakes are that large.


​​​​​​A similar version of this commentary is published by as a column

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