By Gregory T. Chin and Kevin P. Gallagher
The global economic order is undergoing significant change, especially as it pertains to the Global South. In the 20th century, the legacy Bretton Woods Institutions (BWIs) served as one of the only sources of foreign exchange and international development finance for countries in the Global South. Today, these institutions sit within a far more complex landscape of rival and complementary institutions with similar missions. China has played a key role in driving this diversification and in reshaping the BWIs themselves.
The People’s Republic of China was not present at the creation of the BWIs and only joined in 1980 after the thawing of relations with the United States and the West. In those early years China was largely a ‘rule-taker’ inside the BWIs—assimilating and benefiting from learning and implementing the policy and regulatory norms, rules, standards and receiving the financing that the BWIs had to offer.
From the beginning, however, China expressed concern about the lack of voice and representation for countries in the Global South and itself within these legacy institutions. Moreover, China did not support the imposition of fiscal consolidation and deregulation tied to support from the BWIs. For that reason, China has never taken on a standard IMF program, and it has pushed back against the most onerous conditionality of the IMF and World Bank and their loans. Within coalitions such as the G-24, the G-11 and BRICS, China has joined other Southern countries in pushing back on the Western agenda within the BWIs.
These coalitions have managed to achieve incremental but meaningful change in the legacy institutions. The IMF and World Bank have shifted to a less doctrinaire stance on capital account and exchange rate liberalization, are more apt to finance infrastructure and energy and have less onerous conditionality these days—as a result of the pushback from China and other Global South coalitions within the BWIs. They have acted as ‘rule-shakers’ inside the Fund and the Bank.
Still, frustrated with the slow pace of reform within the BWIs, China has also acted as a new ‘rule-maker,’ by creating or co-creating a host of new institutions such as the network of bilateral currency swaps for emergency financing between China’s central bank and its foreign counterparts, the co-creation of the Chang Mai Initiative Multilateralization, and the BRICS Contingency Reserve Arrangement, as well as providing new international development finance from China Development Bank and China Export-Import Bank, the New Development Bank and the Asian Infrastructure Investment Bank.
In our new book, China and the Global Economic Order, we trace this history and argue that China has been able to trigger these significant changes both inside and outside of the legacy institutions through what we call ‘two-way countervailing power.’ The build-up of additional institutions allows China and other countries in the Global South to have more choice on their terms when it comes to international money and finance. Moreover, because of the capabilities and prowess of these new institutions, China and its coalition members can exercise two-way countervailing power within and outside the legacy institutions, and in ways not possible in the absence of the parallel institutions.
However, China’s success has generated counter-reactions, especially from the United States and its Western allies. The United States appears to be doubling down on China and Southern partners inside the BWIs, aiming to take back the gains in this century. It is not clear whether two-way countervailing power will thus continue to work, or change the legacy institutions, or if the Western pushback will prevail.
While the world order is more uncertain than it has been since the end of the Second World War, China is now at the center of changes that are reshaping the global economic order.
Gregory T. Chin is a Non-Resident Senior Fellow with the Global China Initiative at the Boston University Global Development Policy Center and an Associate Professor of Political Science/Political Economy at York University, Canada.
Kevin P. Gallagher is the Director of the Boston University Global Development Policy Center and a Professor of Global Development Policy at the Frederick S. Pardee School of Global Studies at Boston University.
