The international financial institutions (IFIs) of the Bretton Woods System (BWS), namely the International Monetary Fund (IMF) and the World Bank (the Bank henceforth), were meant to overcome collective action problems among countries and help solve market failures in financing on a global scale (at least outside the “Iron Curtain”). The system worked for a while and contributed to the rapid global growth in the post-World War II period. However, it then unwound spectacularly in 1971 when US President Richard Nixon ended the pegging of the US dollar to gold, spurred on by West German, Swiss, and French redemptions of dollars for gold. Partly as a consequence, the 1970s and 1980s were decades of global

stagnation, high inflation, and high unemployment in the developed economies while many developing economies languished even more. The world economy started looking rosier from the 1990s as capital started flowing to developing economies, and trade expanded under the aegis of the World Trade Organization (WTO). Earlier in the 1980s a few economies like South Korea, Taiwan, Malaysia, and Thailand had “emerged,” and by the end of the 1990s China was emerging as the world’s economic powerhouse and the Indian subcontinent was also displaying steady growth rates of gross domestic product (GDP). China’s manufacturing growth helped boost demand for African and Latin American commodities and its purchases of US Treasury bills

financed the growing budget deficits of the United States and helped keep the Yuan low against the dollar. This new system of global payments began to be described by analysts as Bretton Woods 2 (BW2), in which exchange rates were managed by some emerging economies to uphold their export-oriented economies and the dollar was once again the reserve currency of choice, this time informally as opposed to the formal mechanism of the BWS, allowing the United States easily to finance its current account deficit. This system is not without its critics who feel that the US deficit position is unsustainable.1