1. GETTING BACK TO BASICS FOR A NEW WORLD ECONOMY
The Bretton Woods "twins", the International Monetary Fund and the International Bank for Reconstruction and Development, were created in an atmosphere of wartime crisis. They were intended both to solve the problems of the interwar years in the wake of the Great Depression, and to provide a sound financial basis for rebuilding a better post-war economic order around the expansion of liberalized trade facilitated by freely-convertible currencies and stable, though adjustable, exchanges rates. This system was, moreover, primarily underwritten by the leading financial powers, with the United States' role increasingly dominant, and anchored by the solidity of the U.S. dollar as the de facto world reserve currency. While not as far-reaching as one of its chief European architects, the eminent British economist John Maynard Keynes had wished, the Bretton Woods regime enjoyed considerable success in its first decades, coinciding with the longest period of sustained economic growth and relative stability in this century. The IMF was the guardian of the rules of "virtuous finance" for efficient capital movements and balance of payments adjustments. The World Bank used the capital paid in by members as collateral to leverage loans for large public-sector purposes and publicly-guaranteed projects, increasingly investing in developing countries which lacked the ability on their own to borrow on private capital markets.
Major cracks in the system began to appear in the 1960s with declining confidence in the U.S. dollar, resulting in part from its inflationary financing of the Vietnam war. This period also saw the appearance of new pools of "stateless" private finance (the "Eurobond" market) beyond the regulation of traditional monetary authorities. The U.S. was soon to take unilateral action to end the dollar's convertability to gold, following which the system of pegged currencies collapsed, never to be resurrected. The 1970s also brought the energy crisis and "stagflation"; the 1980s, steep rises in interest rates triggering a major recession and high unemployment, an accumulating debt crisis in many countries (led by Mexico's near-default in 1982), and growing and persistent imbalances between suplus and deficit countries, with the U.S. itself moving swiftly from being the world's biggest capital exporter to becoming its largest debtor. For much of Latin America and Africa, it became known as the "lost decade". In the 1990s, despite impressive increases in world output and trade volumes, many of these destablizing factors remain, and are accompanied by an explosive, electronically-aided growth in private international financial transactions. As Roy Culpeper, Vice-President of the North-South Institute, pointed out to the Committee, not counting the enormous volumes involved in currency market speculation and derivatives trading, private market lending now dwarfs the diminishing proportion of the total financial system that is accounted for by flows of official development finance through governmental channels.7
The point of this very simplified and abbreviated capsule history is that the world of 1995 is vastly different from that which faced the Bretton Woods founders; however, the objectives of shared prosperity through monetary stability, liberal commerce, and an efficient system for mobilizing and effectively distributing global savings, surely remain valid even if they are now more difficult to achieve. How have the IMF and the World Bank accommodated themselves to radically changed circumstances? In effect, they have quietly abandoned certain original functions while acquiring new ones. But above all, they have increasingly concentrated, and converged their attentions on a now shortening list of developing countries which, for reasons of debt distress (often owed to the IFIs themselves) or low-income, or both, do not have any attractive private financial alternatives. This has in turn produced intense controversies over the intrusive economic "conditionalities" attached to "structural adjustment" loans, and in other cases over the lack of environmental and human rights conditions in IFI decision-making.
At the same time, the Fund and the Bank have more than quadrupled their memberships, becoming near-universal global institutions, with large and well-appointed Washington-based bureaucracies to match.8 While global bodies must have sufficient resources to carry out mandates that are clearly essential, the problem is whether these institutions are in fact offering as much value as they should in those terms, and doing so in the most efficient manner. The Committee's meetings at the IMF produced frank admissions that its role in relation to the major industrial economies has atrophied to the point of virtual irrelevance, and that given the failure to head off systemic shocks as in Mexico, there is "some soul-searching to do". Meanwhile the World Bank, notwithstanding the outward professional confidence displayed during our meetings there, has been shaken by the chorus of criticisms from many sides, and by the results of its own commissioned study warning of the declining quality of its loan portfolio. While preparing for a new president on 1 June, the Bank seems to be trying rather awkwardly to reorient itself to "move to the market" in an era in which traditional public-sector finance is no longer seen as where the action is or should be.9
For a host of reasons, some perhaps less than fully merited, it is hardly surprising that the 1994 anniversary gave rise to more criticism than kudos, and to cries on both the ideological right and left that "50 years is enough". The storm has been gathering for some time. We do not agree that institutions which, whatever their faults, have been beneficial overall to the development of the world economy, should be torn down or discarded. We are also aware, as Alan Gill of the Department of Finance told the Committee, that there is very little appetite among donor nations for creating new international public institutions, which would inevitably be needed if either the Fund or the Bank were to be wound down. However, we are persuaded that cosmetic or ad hoc incremental changes will not be good enough to achieve long-term sustainability and public support for these institutions.
The IFIs have proved very adept at adapting themselves. As a growing "family" of organizations, they have extended their range and added to the complexity of their operations. Increasingly, that has meant in some cases encroaching on each other's turf. Overall, the tendency to organizational aggrandizement is part of the problem. The Committee believes that the forces for fundamental structural change are such as to require a rationalization of the IFIs. In effect, they need to "reinvent" themselves, as governments in Canada and other countries are having to do through processes of bureaucratic downsizing, program review, and privatization where appropriate. For the IFIs this means getting back to the basics: determining a core `raison d'Ítre' and shaping themselves into lean and efficient providers of those public goods that are genuinely required for the well-functioning of the global economy of the future.
The Committee's view has been reinforced by our meetings in Washington with the new Republican-dominated Congress, specifically the House of Representatives Subcommittee on Domestic and International Monetary Policy, where we were told bluntly "there is not a great constituency in this country for the IFIs". In the present fiscal and political climate, we believe that without major reforms, appeals for maintaining (much less increasing) public resources to the IFIs will increasingly fall on deaf ears. The IFIs must realize that this is much more than just a matter of better public relations, and not only with legislators, but that it will require acceptance - and evidence - of significant "structural adjustments" to their own operations.
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