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Revisiting Bretton Woods: Proposals for Reforming the International Monetary Institutions

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Revisiting Bretton Woods: Proposals for Reforming the International Monetary Institutions A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Mikesell, Raymond F. Research Report Revisiting Bretton woods: Proposals for reforming the international monetary institutions Public Policy Brief, No. 24 Provided in Cooperation with: Levy Economics Institute of Bard College Suggested Citation: Mikesell, Raymond F. (1996) : Revisiting Bretton woods: Proposals for reforming the international monetary institutions, Public Policy Brief, No. 24, ISBN 0941276155, Levy Economics Institute of Bard College, Annandale-on-Hudson, NY This Version is available at: http://hdl.handle.net/10419/54254 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu PPB No.24 2/17/99 3:13 PM Page a1 The Jerome Levy Economics Institute of Bard College Public Policy Brief Revisiting Bretton Woo d s Pr oposals for Reforming the Interna t i o n a l Mo n e t a r y Institutions Raymond F. Mikesell No . 24 / 1 9 9 6 PPB No.24 2/17/99 3:13 PM Page 2 The Jerome Levy Economics Institute of Bard Co l l e g e , founded in 1986, is an autonomous, inde- pendently endowed re s e a rch organization. It is n o n p a rtisan, open to the examination of diverse points of view, and dedicated to public servi c e . The Jerome Levy Economics Institute is publish - ing this proposal with the conviction that it rep r e - sents a constructive and positive contribution to the discussions and debates on the relevant policy issues. Neither the Institute’s Board of Governo r s nor its Advisory Board necessarily endorses the pr oposal in this issue. The Levy Institute believes in the potential for the study of economics to improve the human condi- tion. Through scholarship and economic forecast- ing it generates viable, effective public policy responses to important economic problems that profoundly affect the quality of life in the United States and abroad. The present res e a r ch agenda includes such issues as financial instability, povert y, employment, pro b- lems associated with the distribution of income and wealth, and international trade and competitive- ness. In all its endeavors, the Levy Institute places heavy emphasis on the values of personal free d o m and justice. Editor: Sanjay Mongia Associate Editors: Theresa Ford and Frances M. Spring The Public Policy Brief Series is a publication of The Jerome Levy Economics Institute of Bard College, Blithewood, Annandale-on-Hudson, NY 12504-5000, 914-758-7700, 202-737-5389 (in Washington, D.C.), e-mail [email protected]. The Public Policy Brief Series is produced by the Bard Publications Office. © Copyright 1996 by The Jerome Levy Economics Institute. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information-retrieval system, without permission in writing from the publisher. ISSN 1063-5297 ISBN 0-941276-15-5 PPB No.24 2/17/99 3:13 PM Page 3 Su m m a r y The year 1994 was the fiftieth anniversary of the signing at Bre t t o n Wo ods, New Hampshire, of the Articles of Agreement of the I n t e rnational Monetary Fund (IMF) and the World Bank. Many a d d resses at anniversary celebrations praised the contributions of the IMF and World Bank, but they were overshadowed by the widely held conviction that both institutions are seriously in need of over- hauling. However, there is no consensus on how they should be changed. Some analysts believe that one or both have outlived their usefulness and should be abolished, while others believe that they should continue to operate, but with new responsibilities, new org a- nization, and enhanced re s o u rc e s . Underlying the proposals to alter or abolish these institutions is the belief that neither is able to deal with the world’s current economic p roblems. The IMF has had virtually no influence on the intern a- tional monetary system since the early 1970s, nor has it had a laud- able re c o rd in promoting balance of payments equilibrium and financial stability in the developing countries. The World Bank has fallen short of achieving its primary goals of reducing world povert y and putting the world’s poorest countries on the path to sustainable d e v e l o p m e n t . In this Public Policy Brief, Raymond F. Mikesell outlines the original goals of the IMF and World Bank and the activities they have assumed as they evolved and evaluates the success of the institutions in meeting both past and subsequent goals. He analyzes the curre n t debate about whether the IMF should play a more active role in managing the international monetary system, in managing curre n c y crises (such as the one recently experienced in Mexico), and in pro- viding credit to newly capitalist countries. Mikesell examines pro- posals that the World Bank do more to promote private investment in developing countries, make more loans for expanding social and economic objectives (such as reducing povert y, promoting gre a t e r equality of opport u n i t y, improving health and education, and maintaining the environment), and improve the efficiency of its o p e r a t i o n s. PPB No.24 2/17/99 3:13 PM Page 4 Mikesell cautions that he cannot state his conclusions with unequivo- cal conviction or passion; the issues are too complex, the argu m e n t s on both sides of the debate too persuasive, and the reputations of the debators too impressive. Given the large financial res o u r ces and the highly competent staffs of the IMF and World Bank, Mikesell feels that the two institutions should be doing a better job promoting trade and reducing povert y. However, because there is general agre e m e n t that there is a need for multilateral institutions to promote world trade and reduce world poverty , he feels that abolishing the institu- tions is not an appropriate response. Rather, he recommends that (1) the World Bank Group and IMF should be merged to form a single o rganization, the World Bank and Fund Group (WBFG), with one executive director for both institutions; (2) neither the IMF nor the WBG should be given responsibility for establishing and managing an exchange rate target zone system or for stabilizing the exchange rates of the major currencies; (3) the establishment of additional institu- tional constructs to deal with financial crises should be deferred; (4) the WBG should move rapidly to change the composition of its lend- ing by making fewer loans to governments and state enterprises and in c r easing its loans to the private sector, including nongovernm e n t a l , no n p r ofit entities; and (5) the WBG should be gradually downsized by reducing the number of countries eligible for loans. PPB No.24 2/17/99 3:13 PM Page 5 Co n t e n t s Summary . 3 Preface Dimitri B. Papadimitriou . 7 Proposals for Reforming the International Monetary Institutions Raymond F. Mikesell . 9 About the Author . 40 PPB No.24 2/17/99 3:13 PM Page 7 Pre f a c e The fiftieth anniversary of the 1944 Bretton Wo ods agreement caused many to reflect on the struc t u r e of the international monetary system and the usefulness of the institutions created by the agreement. Some, includ- ing former chairman of the Federal Reserve Paul Vol c k e r , have called for the ret u r n to a managed monetary system in which exchange rates are not allowed to float free l y , but are held within a set range of rates. An argument for managing rates is that it would reduce the volatility of exchange rate movements, a volatility that introduces uncertainty into global economic decision making. Those who argue in favor of maintaining the current floating rate system assert that even if an appropriate range of rates could be determined and could be agreed upon by the leading indus- trialized nations, the size of currency interventions necessary to affect those rates is too large (relative to total market activity) for central banks to un d e r take. Moreo v e r , in order to maintain exchange rates within a given band of values, central banks might have to sacrifice some freedom in their use of monetary and fiscal policies to achieve domestic objectives. Another issue is determining who would have oversight powers in such a system. Some propose that the International Monetary Fund (IMF) be more active in the international monetary system, managing currency crises and providing credit to newly capitalist countries.
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