Democratizing the Bretton Woods Institutions. Problems and Tentative Solutions
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This book presents the reflections of a remarkable group of world leaders who discuss their own efforts for world peace and reconciliation, efforts that demonstrate the common ground we all seek, regardless of the disciplines and professions that normally identify us. It is a book where artificial barriers are broken, and new horizons emerge. This e-book is the synthesis of years of research and direct observation of the work of the Bretton Woods institutions. It is also the result of many exchanges of views with actors and observers, IMF and World Bank executive directors, civil society representatives, colleagues professors.
The interests at stake are: The two organizations are examined simultaneously, because of the perfect symmetry in their governance structures, of their links shared memberships, contextual agreements , and of the complementarity of their missions. The focus is on their governance systems and above all on their decision-making process. In other words, their governance systems are bound to influence and shape the results of the actions of the international organizations themselves. The book describes the governance of the Bretton Woods institutions — the International Monetary Fund and the World Bank — from a legal-institutional point of view and looks for ways in which they could be changed in order to meet today's global democracy needs.
As a consequence of the global financial crisis, wisemen and committees of experts were asked to analyze the flaws and weaknesses of global financial institutions. Their reports, along with papers by think tanks, scholars and civil society representatives, proposed actions and reforms. Systematizing and commenting those hints, a fact crops out: The book examines suggestions for global economic governance reform in a plain and accessible language as a contribution to a necessary debate, which can't be confined to elite meetings and expert talks but has to involve all global citizens.
This book is the first biography in 42 years of the priest and educator whom historians have called "the most important anticommunist in the country. Walsh, as dean of Georgetown College and founder in of its School of Foreign Service, is one of the most influential Catholic figures of the 20th century. Soon after the birth of the Bolshevik state, he directed the Papal Relief Mission in the Soviet Union, starting a lifelong immersion in Soviet and Communist affairs. A pioneer in the new science of geopolitics, Walsh became one of Truman's most trusted advisers on Soviet strategy.
He wrote four books, dozens of articles, and gave thousands of speeches on the moral and political threat of Soviet Communism in America. Although he died in , Walsh left an indelible imprint on the ideology and practical politics of Cold War Washington, moving easily outside the traditional boundaries of American Catholic life and becoming, in the words of one historian, "practically an institution by himself. This compact, insightful book offers an up-to-the-minute guide to understanding the evolution of maritime territorial disputes in East Asia, exploring their legal, political-security and economic dimensions against the backdrop of a brewing Sino-American rivalry for hegemony in the Asia-Pacific region.
It traces the decades-long evolution of Sino-American relations in Asia, and how this pivotal relationship has been central to prosperity and stability in one of the most dynamics regions of the world. It also looks at how middle powers — from Japan and Australia to India and South Korea — have joined the fray, trying to shape the trajectory of the territorial disputes in the Western Pacific, which can, in turn, alter the future of Asia — and ignite an international war that could re-configure the global order.
Drawing on extensive discussions and interviews with experts and policy-makers across the Asia-Pacific region, the book highlights the growing geopolitical significance of the East and South China Sea disputes to the future of Asia — providing insights into how the so-called Pacific century will shape up. Reasserting America in the s brings together two areas of burgeoning scholarly interest.
On the one hand, scholars are investigating the many ways in which the s constituted a profound era of transition in the international order. The American defeat in Vietnam, the breakdown of the Bretton Woods exchange system and a string of domestic setbacks including Watergate, Three-Mile Island and reversals during the Carter years all contributed to a grand reappraisal of the power and prestige of the United States in the world.
Problems and Tentative Solutions
Mad money is a classic of international relations and international political economy literature. It also has profound modern relevance. First published by Manchester University Press in , the book called for an end to the volatility of international financial markets. Markets had grown, technology had advanced, and regulation had all but disappeared, resulting in financial crises in Asia and in the western world.
DEMOCRATIZING THE BRETTON WOODS INSTITUTIONS Problems and tentative solutions Aknowledgments PREFACE by Jo Marie Griesgraber. Democratizing the Bretton Woods Institutions. Problems and Tentative Solutions - Kindle edition by Susanna Cafaro, Jo Marie Griesgraber, Serena Zonca.
The book identified that finance now called the tune internationally: Susan Strange predicted that this would lead to a long, inevitable financial crisis if it continued unchecked. She was proved right within a decade of the book coming out. This reissue includes a new introduction by Benjamin Cohen of the University of California that contextualises the book, and conveys the value of the work for a modern audience. Your Results showing Filters.
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We are committed to advancing the reform of the Bretton Woods Institutions so that they can more adequately reflect changing economic weights in the world economy in order to increase their legitimacy and effectiveness. The two organizations will be examined simultaneously, because of the perfect symmetry in their governance structures,4 of their links shared memberships,5 contextual agreements 6, and of the complementarity of their missions7.
This essay will examine their governance systems and above all what I reckon is the core issue: In other words, their governance systems are bound to influence and shape the results of the actions of the international organizations themselves.
These forms of supremacy are now limited by international customary and treaty laws: They have been in effect, with only minor changes, since the 27th of December I take for granted that these expectations should be met by international or, preferably, supranational institutions that are better equipped to respond to those needs, and not by falling back to an antihistorical — in my opinion — revival of the merely national dimension.
It changed into a borrower from developed countries and a lender to developing ones that are experiencing temporary cash-flow problems, and then devoted itself to more and more structural interventions. A very serious weakness was thus exposed: Once again the developed countries showed their need for efficient, equitable and credible financial institutions. Similar winds of reform are sweeping the World Bank that, having long completed its task of postwar reconstruction in Europe, now mostly lends to countries in the southern hemisphere of the planet.
The notion of development is also changing and becoming more complex. From an economic point of view, the world scene has changed in the last twenty years, during which extreme poverty has greatly diminuished in East Asia and increased in South Asia and Sub-Saharan Africa. Among the challenges the World Bank has to face, some are specific, like the global trend towards declining resources for development. In many of the OCSE countries, the budget constraints due to deficit and debt control policies cut the volume of resources allocated for development aids, both bilaterally and multilaterally.
In fact, experience shows that only players who are fully involved in decisions concerning them can give an essential contribution to success. This new approach, known as ownership, has already substantially innovated the way the two Bretton Woods organizations work,14 but has yet to be projected onto the decisional process. There is a pressing need for a substantial improvement in the coordination of global economic policy. There is also clearly an urgent need to reform the international monetary and financial system to ensure that it is more inclusive and equitable and to thus enable more effective and credible global economic governance".
The results of their work can be found in the Manuel Report, e. Repowering the World Bank for the 21st Century, October On this subject, see Il governo delle organizzazioni di Bretton Woods, op. The committee produced a document Reform of the International Monetary System: From the following analysis, a fact will crop out: External Imbalances Globally, external current account imbalances diminished during the s.
Declining oil prices and rising imports erased the aggregate surplus of oil-exporting countries, while contractionary policies adopted in response to the debt crisis wiped out the aggregate deficit of non-oil developing countries see Figure 2. Despite these trends, external imbalances became pronounced in the large industrial countries, for the same reasons that their exchange rates gyrated so greatly. From , when most of the largest countries had small current account positions, imbalances accumulated rapidly until Opinions differed, however, on whether this phenomenon was a problem.
To some theorists and policymakers, a current account imbalance was a benign reflection of different time preferences between countries: The view that current account deficits were bad only if they reflected government rather than private sector deficits became popular for a time. If households became more myopic and reduced their saving rates, then government action to raise its own saving usually by reducing the fiscal deficit would be an appropriate policy response.
If a country developed a current account surplus because of a decline in the rate of domestic capital investment, then a fiscal stimulus either as a tax cut to reduce the cost of investing or as investment spending by the government might be called for. The predominant view among policymakers in the s was that current account imbalances were an important source of concern. Apprehensions in developing countries were heightened by the difficulty of financing large deficits after the onset of the international debt crisis in Misgivings in industrial countries were heightened by political pressures from industries that were having difficulty competing in world markets.
If the alternative to external balance was an intensification of protection against import competition through tariff and other trade barriers, the choice was clear: That political concern sometimes turned the spotlight on bilateral trade imbalances rather than the overall surplus or deficit. Although the portion of the total U. Although few argued seriously for restoration of a system of fixed exchange rates aside from a fringe movement to reestablish some form of gold standard , and most economists and policymakers accepted that official attempts to hold rates within a limited range were likely to fail, a minority view developed in support of what came to be known as "target zones.
By , industrial countries as a group had rejected target zones as a policy option, but outside economists—notably at the Institute for International Economics IIE in Washington—continued to refine the analysis of how target zones might work. Frenkel became Economic Counselor and Director of Research in , were mostly skeptical of target zones as a practical option for the key currencies. This policy cooperation exercise began with coordinated intervention in exchange markets in February aimed at reversing the appreciation of the U. It was solidified in September with the "Plaza" agreement to push for further dollar depreciation and in December by the "Baker-Miyazawa" agreement that enabled the Bank of Japan to cut interest rates without fear of a destabilizing reaction in exchange markets.
It culminated in the "Louvre" accord of February , when the major countries agreed to stabilize exchange rates "around current levels" with the explicit objective of avoiding the reemergence of large external imbalances. By , however, the objectives of stabilizing exchange rates and reducing imbalances were less easily reconciled, and cooperation in policymaking became less well focused.
The EMS was preceded by the European Payments Union —58 , which reestablished currency convertibility and multilateral trading relationships among European countries after the devastation of World War II; the European Monetary Agreement —72 , which effected convertibility and established a fund for financing temporary imbalances; and the European Monetary Cooperation Fund from , which administered short-term credit facilities in support of common margins around central values for intra-European exchange rates. The agreement on margins—known initially as the "snake in the tunnel" when it was established in and then just as the "snake" when the "tunnel" of dollar-based margins broke apart in March —succeeded only intermittently at stabilizing intra-European exchange rates.
Susanna Cafaro
In its first several years, the EMS underwent a series of exchange rate realignments that made it function very much like a "crawling peg. The other currencies were occasionally devalued against the mark, which became the de facto anchor for the system. In , however, the EMS was firmed up by the "Basle-Nyborg" agreement into a more stable system in which policy convergence was given greater prominence and realignments were to be avoided. Open Capital Markets These various efforts to reestablish a measure of stability were made against the backdrop of rapidly expanding international capital markets.
Both of those rates of increase were up sharply from the preceding several years Figure 8. By the s, policymakers had come to accept and even to embrace the growth in internationally open capital markets. When this growth began in earnest, with the advent of the eurodollar market in the s, much of the discussion of its implications concerned how to regulate and control it. The existence of unregulated offshore markets for bank deposits and loans in competition with regulated onshore markets threatened to weaken national monetary control and raised fears of unfettered inflation.
By the late s, empirical and theoretical research had demonstrated conclusively that the inflationary consequences of euromarket growth were negligible, because monetary authorities in the main industrial countries retained the ability to control domestic money creation see, for example, Mayer, Moreover, internationally active banks had played an invaluable role in financing the deficits of oil-importing countries after Consequently, in the late s and throughout the s, capital controls were loosened and dismantled throughout western Europe, North America, and Japan. Developing countries—many of them hesitantly and reluctantly—followed suit, and the pattern spread gradually as the decade progressed Quirk, Evans, and others, Growth and liberalization of capital markets contributed to the integration and interdependence of the world economy in the s.
The clearest benefit of that development was the strengthening of international trade as an engine of growth, as described above. The potential cost, which became abundantly clear in the second half of the s, was that a financial crisis in one country was now more likely to affect other markets—and to affect them more quickly. One manifestation of that danger was the speed with which the international debt crisis spread around the world in — A second came in the global stock market crash of October Moderate declines in equity prices in New York on October 16 and 17 were followed immediately by a similar softening in markets throughout Europe and Asia, and the record one-day decline of 22 percent in New York on October 20 then triggered a global sell-off in equities.
In Mexico, for example, the stock market lost 75 percent of its value in a sustained decline over six weeks. Some markets in the Asia-Pacific region, including Australia, Hong Kong, Singapore, and Malaysia, also suffered quite large percentage losses.
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As an international phenomenon, the stock market crash of was a brief storm, but if it was easily weathered, part of the credit must go to regulations introduced in the wake of the crash see Allen and others, , Chapter 5. The Fund As the Fund began to face the external challenges of the s, it was also confronting some serious internal weaknesses. The surge in lending to developing countries at the end of the s had come at the expense of maintaining the quality of adjustment programs and of the Fund's financial portfolio.
The waning of demand for the Fund's resources by industrial countries, together with the very limited consensus on whether and how to stabilize exchange rates, left the Fund struggling to define a clear role for its core function, surveillance. If the Fund was to remain the world's premier monetary institution, it would have to nurse its roots back to health or redefine its role. As the decade progressed, it did enough of both to dominate the global economic stage more than ever before.
The activities of the Fund had three primary dimensions in the s: Surveillance Surveillance was hampered from the outset by a lack of clearly defined objectives or standards. Before the Fund could assess the appropriateness of a country's exchange rate policies, it had to judge the correct level of the real exchange rate, and it had to have at least an implicit model linking that level to macroeconomic policies and to the behavior of the nominal exchange rate.
Much of the evolution of the practice of surveillance by Fund staff in the s was concerned with refining those assessments, both in the Article IV consultations and through periodic reports on the World Economic Outlook. More substantive improvements were to await the s, when the international community became more willing to adopt a broad code of conduct for macroeconomic and structural policies. At the same time, the Fund tried to develop effective procedures to make its surveillance both even-handed and "firm," but those two goals were hard to reconcile.
Wielding a club was not always compatible with being part of a club. If surveillance was to be applied even-handedly to all member countries—to those with floating rates as firmly as to those with fixed rates, to countries with strong external balances as firmly as to those that were heavily in debt, and to large countries as firmly as to small ones—it risked becoming pro forma and routine. Time and again, blame for the failure of the Fund to foresee and forestall economic crises was leveled at the genteel and diplomatic coziness of surveillance routines.
The Fund tried to mitigate this difficulty by developing procedures for identifying potential problem cases and holding special, ad hoc, reviews in addition to the regular annual consultations. The Executive Board, however, was reluctant to establish procedures that would cast a shadow over a member's economic policies, especially when the member was not seeking to borrow from the Fund. Two special consultations were held during the s with Sweden in and Korea in , but that procedure was not flexible enough to be of general value, and it fell into disuse.
An effort beginning in to give an "enhanced" operational value to surveillance by allowing countries in specified circumstances to release consultation reports to commercial creditors was marginally more successful but also was not widely applied. Another factor that weakened the effectiveness of the consultation process was that gaps in the timing of some consultations made it difficult to maintain current knowledge about conditions in countries with emerging financial problems.
In the early s, that problem was most critical in Mexico: The frequency of consultations was subsequently increased, but improving effective continuity remained a goal until well into the s. Debt Strategy The international debt crisis that erupted in catapulted the Fund into a vortex, and the ensuing efforts to contain the crisis greatly increased the Fund's role in the international monetary system. Arguably, the debt crisis was a greater catalyst for change—and certainly was a greater catalyst for growth—in the Fund than was the shift to floating exchange rates a decade earlier.
That the s marked the Fund's "coming of age," as asserted in the introduction, was due in large measure to the role that the institution played in developing and carrying out the debt strategy after Before , the IMF did not have a central role as a manager of international financial crises. The Fund lent sizable sums to the four countries involved in the Suez crisis—the first major wave of lending by the institution—and it extended credits to countries affected by subsequent shocks such as the collapse of the Gold Pool in , the turmoil in G currencies in the early s, and the oil shocks of the s.
The character of that lending, however, differed only marginally from the multitude of credits extended to member countries in quieter times Boughton, When Mexico moved to the brink of default in August , the Fund was quickly drawn into the crisis in new ways. Other official lenders, including government agencies and the Federal Reserve in the United States and the Bank for International Settlements BIS in Switzerland, moved quickly to provide short-term financing to forestall default, but it became apparent that a lasting solution required centralized coordination of creditors.
The Fund stepped into that breach by insisting that it would provide financial support for debtors' adjustment programs only after receiving assurances from other creditors, especially commercial banks, that they would increase their own lending exposure to the indebted countries. This "concerted lending" tactic, which brought the Fund into a close ad hoc working relationship both with commercial banks and with U. Although the tactic ceased to work in the latter part of the decade, the presence of the Fund remained as the centerpiece of the strategy.
The debt strategy evolved gradually through the Baker Plan growing out of debt , experimentation by the Fund and other creditors with a menu of debt-relieving operations in —88, and the decisive Brady Plan for debt reduction. That evolution broadened participation in ways that gave the World Bank, regional development banks, and bilateral official creditors a greater role but did not diminish that of the Fund.
Quality of Fund Lending In addition to the development of the practice of surveillance and of techniques for resolving the debt crisis, the shift in composition in demand for Fund resources in the late s and early s posed challenges for the Fund that took all of the decade and more to resolve.
The traditional view of the Fund was similar to that of a bank for countries: The Fund began to move away from that "monetary character" in by establishing the Extended Fund Facility EFF , which provided Fund resources on longer maturities to countries with more deeply seated economic problems. By the early s the Fund began to reexamine its lending policies in light of the continually worsening economic plight in many of its borrowing countries. Several proposed financing arrangements provoked concerns among the Fund's Executive Directors in the late s and early s.
Particularly important debates took place over whether conditionality was sufficiently strong in proposed multiyear arrangements for Sierra Leone in , Grenada in , and India in The extended arrangement for India, which was the largest financial commitment made by the Fund up to that time, was questioned by some senior staff as well as by Executive Directors, who wondered whether India really had a need to call on the Fund for balance of payments financing and whether the Fund's conditions for lending the money were sufficiently strong.
Was conditionality meaningful and effective if it merely required a country to do what it planned to do anyway? These controversies had little effect on the flow of financing to the countries in question, but they were emblematic of a deepening sense of doubt—both inside and outside the Fund—about the overall quality of the Fund's portfolio of financial claims. The customary conditions placed on Fund lending, which stressed the need for sound and sustainable macroeconomic policies, were certainly not misplaced.
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The need for macroeconomic adjustment was in fact as great as ever. Macroeconomic adjustment alone, however, was insufficient to cure the structural maladies that prevailed in many of the Fund's newer borrowers. Throughout the s, the Fund experimented with ways to supplement its calls for monetary restraint and fiscal integrity with demands for structural reform, and ways to integrate those reforms more fully into the design of Fund-supported adjustment programs.
Although that process took hold only partially and only rather late in the decade, it did eventually succeed in encouraging and helping many countries to liberalize their economic policies. Before the silent revolution in policymaking took root, some countries became so heavily indebted to the Fund and other external creditors that they either would not or could not continue to service all of their debts on time.
Quite apart from the defaults and threats of default that characterized the international debt crisis, several countries fell seriously behind in meeting their obligations to the Fund. In , for the first time in its history, the Fund found itself facing a crisis of arrears. By the end of the decade, more than 10 percent of the Fund's claims would be on countries with protracted arrears to the institution. Developing a strategy for reducing and eventually eliminating those arrears absorbed an increasing portion of the energies of management and staff.
Institutional Change The single greatest problem faced by the Fund in the s was to garner the financial resources to meet the demand for its services. Three times—in , , and —member countries were asked to approve increases in quotas, which are the basic source of permanent financing for the Fund.
In addition, the Fund undertook on several occasions to borrow from surplus countries though pointedly not from private credit markets to supplement its resources temporarily. When quotas were not raised in line with demand for Fund credits, the Fund used this borrowed money to stretch its resources by agreeing to approve credit arrangements that were larger in relation to quotas than had previously seemed prudent.
In combination with the arrears problem, these developments pushed the Fund's balance sheet and income flows into a precarious position, especially in the second half of the decade. The quota increase that was approved in and which took effect in , along with development of a more effective arrears strategy and the resolution of the debt crisis, restored some order to the picture.
The experience, however, also restored and strengthened the Fund's caution and its resolve to maintain its monetary character and its ability to preserve its resources for the continued use of countries in need. As originally conceived, the Fund had a single focus to its lending: Since , however, it has sought to provide credits to member countries for specialized purposes related to the causes of payments problems or to the problems of certain groups of countries particularly developing countries.
In addition, the Fund occasionally lent quick-disbursing funds for emergency disaster relief. Although the oil facilities and the Trust Fund were phased out in the early s, the Fund still had a variety of specialized lending windows in effect Table 1. Fund Financial Facilities, —89 Reserve tranche Available to each member country, subject only to a representation of a balance of payments need.
Reserve tranche drawings are not subject to interest charges and need not be repaid. First credit tranche Drawings are subject to Fund approval and are conditional on the member cooperating with the Fund to resolve its balance of payments problems. Emergency disaster relief Similar to first credit tranche drawings but available in additional amounts. Designed to help countries cope with natural disasters. Upper credit tranche stand-by arrangements Drawings are phased over a specified period, subject to quantitative performance criteria and periodic reviews by the Fund.
Extended Fund Facility EFF Similar to ordinary stand-by arrangements except that amounts are generally larger and are made available for longer periods; used for countries with longer-term structural problems. Compensatory Financing Facility CFF Designed to compensate countries for the economic effects of a temporary shortfall in export earnings or beginning in a temporary increase in the cost of importing cereals. Subject to conditionality similar to that for a drawing under the first credit tranche, and to a finding that the problem arose for reasons beyond the authorities' control.
Funds could be drawn immediately upon approval. Compensatory and Contingency Financing Facility CCFF Replaced the CFF in ; purpose and terms similar but with the addition of a mechanism to help countries maintain adjustment programs in the face of unanticipated adverse shocks. Buffer Stock Financing Facility Helped finance countries' contributions to certain international agreements to maintain buffer stocks of primary commmodities. Trust Fund A concessional facility financed by profits from the sale of a portion of the Fund's stock of gold. The Trust Fund offered longer-term low-interest loans to low-income countries from to The inability of many low-income countries to service debts on market terms in the s led to efforts to renew and expand the Fund's low-interest concessional lending.
That activity had begun with the Trust Fund but had gone dormant once the Trust Fund became fully committed in The ESAF eventually became one of the Fund's great success stories, as the institution channeled billions of dollars at low cost and for long maturities to many of the world's poorest countries and served as a catalyst for much larger sums from other official creditors. Nonetheless, and even though ESAF money was completely separate from the Fund's general resources, the Fund came under quite a bit of criticism: In addition to coping with rising demand for financing against a background of limited resources, the Fund faced some subtle but profound changes in its membership.
With the People's Republic of China represented in the Fund beginning in , Hungary joining in , and Poland rejoining in , the Fund had a greater concentration of centrally planned and socialist economies to look after than at any other time in its history. The short-term consequences of the inclusion of Hungary and Poland were largely confined to those countries, neighboring countries in Europe, and the staff who were working with them. The consequences of the inclusion of mainland China were greater, owing to the size and global economic importance of the country and the fact that it had a seat on the Executive Board.
The Fund worked closely with the Chinese authorities throughout the s, as both sought to promote the opening up of the Chinese economy and its integration into the world economic system. At the Brink of the s The World Economy At the close of the decade, a strong record of several years of steady economic growth in industrial countries seemed to be coming to an end.
In , the only industrial country with negative growth was New Zealand, which was just beginning a radical new approach to monetary policy in an effort to rid the country of persistent inflationary pressures. Part of the decline was a classical business cycle, as the long upswing from to produced an accumulation of sectoral imbalances.
That ongoing process was aggravated in by the economic uncertainties that followed the invasion of Kuwait by Iraq. In contrast to the last widespread recession, however, this time the major countries had room to adjust monetary and fiscal policies, thanks to the absence of any serious threat from inflation. World interest rates fell quickly, and the recession of —91 passed without a global decline in output. Growth in developing countries was also beginning to slow at the end of the s, in every region except Asia.
African economies were still weighted down by weak markets for their commodity exports, and in many cases by ineffective economic policies and other domestic ills. Some of the larger Latin American countries, notably Argentina, Brazil, and Peru, were still stumbling under the hyperinflationary weight of the failed policies of the s. Even before the crisis in Kuwait in , growth in the Middle East was already slowing because of the continuing weakness in international oil prices.
On the positive side, more and more countries were laying the preconditions for sustained growth by joining the silent revolution toward more stable and market-oriented economic policies. That movement was already pervasive in east Asia and was beginning to prevail in Latin America, including in the countries just mentioned. Even in sub-Saharan Africa, which had the highest preponderance of state-dominated policies in the late s, the list of countries with reasonably successful policies was clearly lengthening. While the Soviet government in Moscow was preoccupied with its own economic troubles and with a growing number of ethnic and regional conflicts in several Republics, the dictatorships that controlled its European satellites began to crumble in The political consequences of these emancipations occurred swiftly.
The economic consequences would take longer, as these and other socialist states gradually rejoined the world economic system in the s, but they ultimately would be no less profound. While eastern Europe was clawing free politically, western Europe was rumbling along toward economic unification. Under the terms of the Single European Act of , the European Union was taking steps to establish the free movement of goods, capital, and labor by the end of Overcoming initial skepticism about the timetable, European leaders reached a further agreement in to end all capital controls within a year.
Under the terms of the Basle-Nyborg Agreement of , the European Monetary System was solidifying its commitment to maintaining stable exchange rates and strengthening policy coordination. This process would be severely tested in —93 by speculative attacks against several currencies, but that crisis would turn out to be only a temporary setback to the drive for complete monetary unification.
The Fund More than ever before, the Fund was at the heart of the international monetary system at the end of the s. Its membership was nearly universal, except for the crumbling sphere of Soviet influence. Its surveillance over member countries' exchange rate and macroeconomic policies, though not yet as effective as it might have been, was universally accepted as an essential element in the system. Demand for its loans and other credits was high and rising: Altogether, nearly half of all members 73 out of had outstanding financial obligations to the Fund.
To meet the demand without new borrowing by the Fund, a consensus was forming that quotas should be increased substantially and soon.
When the debt crisis had erupted in , the Fund's role in defining and organizing the strategy had emerged out of a void. As that crisis ended in , there could be little doubt that the Fund would play a central role in managing the next one. How well did the struggles of the s prepare the Fund for the next decade? Future historians will have the luxury and the burden of viewing the period through what Barbara Tuchman called a "distant mirror," and they will thereby gain a perspective that is not available to the post—Bretton Woods generation.
At the turn of this century, five implications of the s seem to emerge clearly. First, successful surveillance and conditionality require partnership. The Fund must understand the political and cultural constraints that are pressing down on a country's economy, and the country must understand the economic realities macro and distributive that limit the compass for political action. The mantra for local endorsement or "ownership" of adjustment programs captures only half of this requirement.
Unless each side comprehends and even empathizes with the other, the process will fail: The more deeply ingrained the problem, especially when arrears to the Fund are accumulating, the more essential is the need for alliance. Second, effective surveillance over exchange rate policies does not require a "system" of the Bretton Woods type, but it does require general agreement on the goals of those policies and on the role of the exchange rate in economic policy. Fund surveillance was hampered in the s by a lack of such agreement.
With a wide diversity of regimes being tried, ranging from exchange rates still pegged to the value of the U. What was needed was a clearly articulated judgment on the circumstances when a country should peg to gain stability and when it should float to maintain international competitiveness. More generally, in dealing with economic systems that ranged from central planning to free and open markets and from pervasive state intervention to an absence of adequate regulation, Fund surveillance aimed to accommodate whatever system prevailed in each country.
With neither an internationally accepted policy strategy nor an effective code of good practices on national economic structures, the Fund had to rely on its ability to persuade each country to make marginal improvements within a dizzying variety of regimes. The limitations and frustrations of that experience stimulated professional debate on economic policies in the s and gradually strengthened the resolve of the international community to develop and accept a code of national economic conduct.
Third, private capital markets alone cannot generally achieve a satisfactory and stable response to an international financial crisis. Holders of sovereign debts and other cross-border claims are multifarious, are spread across many countries and regulatory systems, and have diverse interests in the outcome. That lesson was manifest in the s when commercial banks holding large amounts of low-quality sovereign debt attempted to cease rolling over their loans and were able to coordinate agreements with debtors only after the Fund and other official creditors took charge of the process.
In such conditions, which may involve severe overreactions to bad economic news, a multilateral arbiter can play a positive and even an essential role in arranging market-friendly solutions. Those solutions, however, require that creditors can be organized for concerted lending or orderly debt reduction. Optimism on that score was reasonably high at the end of the s but deteriorated as capital markets grew more complex in the s.
Fourth, the Fund, as a specialized monetary institution, cannot solve the world's economic problems alone. The reliance of many low-income countries on short- and medium-term financing from the Fund in the early s and the attempt by many middle-income developing countries to rely on macroeconomic policy reforms in the mids exposed weaknesses in the coordination of multilateral assistance. Efforts by the Fund, the World Bank, and other agencies to collaborate more fully in the second half of the decade were only partially successful.
That effort did, however, help prepare the institutions for the much greater level of coordination that would be needed in the s, when countries in transition from central planning would have to make comprehensive structural and macroeconomic reforms in a very short period of time. Fifth, the effectiveness of the Fund's financial assistance depends on the recipient countries committing to implement both macro and structural economic reforms.
Throughout the s, the Fund circumscribed its own scope for action by limiting explicit conditionality to macroeconomic policies and avoiding interference with policies that could be construed as politically rather than economically motivated. The initial successes of countries that liberalized policies on their own—the silent revolution—drew the Fund out of that reluctance in ways that would enable it to play a more active role in promoting structural reform in the s.
Whether this last lesson—that macro and structural reforms go hand in hand—fully applies in general or was merely a circumstance of the s cannot yet be judged.
All of the countries with substantial debt problems in the s had readily identifiable macro and structural imbalances that required major corrections. In the following decade, many countries were forced to reconsider the scope and speed of economic liberalization and focus instead on more mundane structural issues such as the regulation and soundness of financial systems.
Moreover, nothing in the experience of the s prepared countries or institutions for a financial crisis when macropolicies were reasonable ex ante. The scale and breadth of the flow of capital into developing countries with fledgling financial markets after raised the possibility of a new type of financial crisis—and a first glimpse into the 21st century—in which the solutions of the s could be no more than a platform from which to jump into the void. The international flow of capital in the s was a product of the confluence of three great events of the late s: As positive as those developments must be in the long run, it should not have been surprising that they had destabilizing effects in the short run.
The oil and dollar shocks of the s flowed inexorably from the policies and problems of the s, exploded into new crises that required fresh solutions, and ultimately forced policymakers to adopt more open policies. The debt shock of the s was merely the next wave in this course of economic history.
Leadership at the Fund To a striking degree, the story of the Fund's responses to the silent revolution in policymaking and the other political and economic challenges of the time is a story of the influence of the two men who led the institution through the s: Both French; both graduates of the Ecole Nationale d'Administration ENA, the prestigious academy whose graduates are familiarly known in France as "enarques" and constitute an elite corps of corporate and government leaders ; both former Directors of the French Treasury; one a former and one a future Governor of the French central bank, the Banque de France; both holders of the same paradoxical vision of the IMF as a sound financial institution dedicated to improving the welfare of developing countries.
He understood well that each of the Fund's member countries the number when he arrived in June brought its own unique issues, problems, and pressures to the table, but he took as a guiding principle that the institution should deal with all countries in as even-handed and uniform manner as possible. In conducting surveillance over macroeconomic policies, both in the public arena and in private meetings, he criticized the fiscal excesses of the United States in the same carefully structured tones that he applied to those of Argentina or Tanzania. In evaluating requests for loans, he consistently stressed that each country's economic program had to be fully financed: In his first few years as Managing Director, he built on Johannes Witteveen's initiatives to greatly expand Fund lending to low-income countries and to find ways to subsidize that lending.
He vigorously advocated the creation of a special lending window at the Fund to help developing countries finance food imports, and he encouraged the staff to work on issues related to the alleviation of poverty and the provision of basic human needs.
In his last two years in office, he supported the reinstatement of lending on highly concessional terms to the poorest countries. For a time, he was accused of being too soft in his lending decisions, but he gradually developed a sterner reputation and that side of him became largely forgotten.
A page staff report on a loan request or a surveillance review would come back to the author after a few days with several notes penciled in the margins in the Managing Director's tidy and tiny handwriting, often questioning the consistency of statements or numbers in different sections of the paper or asking why footnotes did not seem to match the text or the tables.
In meetings with finance ministers and central bank governors, he often knew at least as much about the details of their economic policies as they did.