The world of today, let alone that of the future, is distinctly different from the world of half a century ago when the Bretton Woods system was conceived. Instead of one dominant economic power, there are many important economies, including some smaller ones. National economic units have been globalized in important respects in finance, the scope of markets and competition, the multinational characteristics of many important products, and the reach of private enterprises and financial institutions. Fortunately, the GATT and WTO process was pursued with a steadiness that is amazing in light of the protectionist pressures that have prevailed in almost all countries. The result is a world more open to trade and investment than at any other time in this century. The citizens of every country have been the beneficiaries, as both consumers and producers.
The economics profession has provided the intellectual leadership for this gradual but enduring opening of world markets. Anyone who has been directly in the line of fire knows that progress has not been easy, but it has been both substantial and essential to the widening prosperity of the post–World War II period. The battle for open trade is never won, it must be fought continuously if progress is to be sustained.
What does all this mean for the role ahead of the economic organizations we associate with Bretton Woods? It is anomalous to have a big World Bank–IMF meeting each year with the WTO process relegated to the back burner. Conceptually, with its exchange-rate orientation, the IMF should meet in a WTO setting, for exchange rates and trade rules are two sides of the same coin. And trade and investment are the key subjects to be addressed.
The present meeting arrangement displays the reality: the World Bank and the IMF have each accumulated a huge amount of money that is the basis for large annual capital flows to and from countries that are low on the income-per-capita scale and are in economic trouble. The activities of the two organizations are becoming increasingly duplicative even though basically uncoordinated. And the activities of the IMF are not related to those specified in its charter, for the simple reason that the par-value system of exchange rates it was set up to monitor no longer exists. In the tradition of skillful bureaucracies, the IMF has turned to new areas and has managed to expand substantially its financial resources and, in the process, its influence. At the same time, as described earlier, ideas on development have changed. As the Bretton Woods Commission noted in 1994, “Of the challenges facing the World Bank Group, none is greater than adapting to a world that has turned from public sector dominance towards private enterprise and free markets.”
I believe that the bank and the IMF, particularly the latter, have been misused in recent times. Reading between the lines, it becomes clear that major governments have used the bank and the IMF to sponsor activities favored by government officials whose own taxpayers would not foot the bill. The extraordinary aid packages put together for Russia in 1992 and 1993 are cases in point. Those huge sums could no more have been absorbed effectively than they could have really been assembled with confidence. When delivery of unwisely committed money was delayed for good reason, the IMF was the fall guy—unfairly.
But since then, on its own initiatives, the IMF has approved subsequent packages of assistance to Russia totaling more than $18 billion. There are many problems with this type of IMF program, chief among them the message it sends that development comes more from obtaining outside assistance than from internal policies. In fact, the Russians are capable people, perfectly able to solve their own problems if given half a chance. When they move in a positive direction, private investment will flow on a large scale. If failure to deliver on earlier promises made cynics of Russians, efforts such as these will only reinforce that cynicism. The additional message is that organizations with no clear mandate and scads of money are dangerous.
Against the background of these developments, the present situation calls for making significant changes. Among the most important are
- The large annual meetings of the World Bank and the IMF should become WTO–World Bank gatherings. This would allow finance ministers and central bankers to mingle with trade ministers, along with their respective constituencies. These groups are strangers that should definitely meet.
I once tried these ideas on an important central banker. “You are probably right,” he said, “but I am tired just thinking about the effort involved. You should have experienced the problems we had in Madrid just trying to contain the wild proliferation of special drawing rights, an initiative from the management of the IMF.” I looked at him and replied, “I think you just reinforced my point.”
Governments have used the World Bank and the IMF to sponsor activities for which they knew their own taxpayers would not foot the bill.
- The overlapping activities of the World Bank and the IMF, the change in the traditional mission of the latter, and the need to use scarce resources carefully all argue for a merger of these two organizations. Their staffs should be combined and thereby reduced drastically in size, with an effort made to retain the relative nimbleness of the IMF. The mission of the merged organization should be carefully set out, giving its operations a renewed legitimacy and its leaders a capacity to resist even its main shareholders when a request is unwise or inconsistent with the mission. The emphasis of the mission should be to encourage private investment and trade in areas where the payoffs are located; within the constraints of its government-oriented charter, the bank has been moving in this direction. This means increased emphasis on the work of the International Finance Corporation and developing the Multilateral Investment Guarantee Agency.
- The idea of open trade should be supported in every way possible, including respecting the integrity of the WTO. This support should also include reenactment of fast-track authority so that the United States can take advantage of the sea change in attitudes in South America and can work toward open trade in the Asia-Pacific region.