Development and Bretton Woods

CHAPTER 5 Development and Bretton Woods This chapter examines why the liberalization of currency transactions, and also (to some extent) of trade, was less effective outside the developed world, or why the idea of "one world" and of a single world economy was challenged. The IMF worked out a technical and analytical device for t e achievement of stabilization, the so-called Polak model, but its operation was limited by what was at that time usually described as a failure or absence of political will in member countries. The resulting difficulties and failures obliged the IMF and the World Bank to begin to rethink issues concerned with the design of the international order and their own role within it. The conference of Bretton Woods, held in the last phase of a great world war, had—perhaps not surprisingly—concerned itself only rather peripherally with development issues. Although Article I of the Fund's Articles of Agreement stated an objective of "the development of the productive resources of all members," development finance had not been a major concern in the circumstances of 1944. The conference had avoided any attempt to distinguish between groups of members, and its participants ruled out an additional phrase suggested by the Indian delegation as part of the second "purpose of the Fund" set out in that Article: "to assist in the fuller utilisation of the resources of economically under-developed countries "1 Indeed it only became clear later that there was a specific problem about "development." It was only in the course of the first postwar decades that the "developing world" began to define itself politically and economically. Politically, the new definition came about as a result of the breakup of colonial regimes and the advent of independence. Within a short space of time, international institutions gained a large number of new members. From 1960 to 1963, the membership of the IMF rose from 68 to 101. Economically, 120 ALVARO —INo, no me toques!... IYo solo lo lograre.. Alvaro — "No, don't touch me! I can do it myself." 122 INTERNATIONAL MONETARY COOPERATION states now regarded themselves as "developing," or in the more usual expres- sions of the 1950s and 1960s as "underdeveloped" or "less developed." Devel- opment would be an important part of the assertion of national independence: it meant evolving a material basis that would eliminate economic dependence, and also satisfy the new demands and expectations of citizens. The new states searched for a particular economic strategy appropriate to their particular political condition. Their answer often lay in a partial disen- gagement from the world economy, and a reluctance to accept the IMF Article VIII goal of currency convertibility, or to see any substantial advan- tages in trade liberalization. The great movement of trade and currency liberalization, which reached a climax in the early 1960s in the developed world, thus left many poorer countries untouched. Explaining why is not easy; and indeed the reasons clearly varied consider- ably from country to country. In general, some mixture of the following arguments led states to look for a separate path of development. (1) The most obvious reason belongs to the realm of ideas and was the consequence of the application of what proved to be an inappropriate theory of development. According to a widely prevalent approach, development required a radical relative reduction of the agricultural and commodity pro- ducing sectors, which could only be achieved through the manipulation of prices and the creation of a different price structure to that prevailing on the world market. Thus a development strategy required the fostering of substitutes for previously imported manufactured products. The apparent success of the Soviet model of development reinforced this theoretical prefer- ence.2 Most development strategies envisaged a powerful role for the state in overcoming barriers to development and in planning growth. (2) Another explanation is concerned with the domestic sociology of politics. The bias against agriculture, which was almost always presented as a necessary kick start of development and as an essential part of any successful modernization strategy, was initiated by urban elites, and as it proceeded built up its own urban vested interest, with a substantial political leverage. Again, the result was to emphasize the state's role in development. (3) A final explanation concerns the international order itself. Some features of the international system posed a deterrent to would-be members: for instance, the highly restricted international availability of private capital in the 1950s and 1960s, or sharply fluctuating commodity prices (especially in the first half of the 1950s), or more politically, fear of external influence and dependence. In most cases, these causes overlapped and reinforced one another. Ideas (in this case about development) not only affect the way interest groups put 5 Development and Bretton Woods 123 their demands forward but also actually may move such organizations to form in the first place. Ideas, however, are not born in a vacuum. The existence of problems in the international order encourages people to formu- late theories to explain why. How easy would it have been to reverse these attitudes and policies? A rethinking would only be possible as a consequence of the perception that something had gone wrong. Frequently this only arises in the case of an acute crisis. But by that time the problem may be so deeply entrenched that it is impossible easily to solve. In some cases, where a large internal market and a dynamic entrepreneurial culture existed, import-substitution growth could be sustained at very high rates for a relatively long time period. The most striking example is to be found in the "Brazilian miracle" of the 1930s or again in the late 1960s and 1970s. In such cases, little rethinking even appeared to be necessary. Could these problems have been tackled by a more forthcoming or better organized international system? The World Bank, the General Agreement on Tariffs and Trade (GATT), and the IMF tried to make access to the system easier, but their efforts were not always successful. The World Bank tried to make up through its loans for the very sluggish private capital market of the early postwar years, or to spur the private sector into international lending by giving guarantees; but it would never be a perfect substitute for a private market, with its larger capacities and its ability to make a wide range of choices and assessments. For the moment, and for most countries, there was little external private sector investment available. In addition, in regard to its own operations, the World Bank was limited to lending for public sector projects. The GATT initially was restricted largely to industrial countries. As it became more universal in the course of the 1960s (by the beginning of 1971 it had 77 members), it also attempted to adapt more to the particular needs of developing countries. Article 18 of the original charter allowed developing countries to withdraw concessions on customs duties, and also to give sub- sidies, if these measures were needed in order to establish new industries that would increase production and raise living standards; they could also take exceptional measures to protect their balance of payments. For their part, industrial countries under Article 37 had committed themselves to reduce or eliminate barriers to the exports of less developed countries. But when it came to putting these principles into practice, the European countries that were members of the European Economic Community (EEC) were unable to agree to a plan to remove restrictions contrary to the GATT; and the GATT instead formulated in 1965 a much vaguer and less substantive 124 INTERNATIONAL MONETARY COOPERATION Part IV of the Agreement (which became Articles 37 to 39 and diluted the previous commitment).3 In all the most important areas of trade—in agriculture, steel, and textiles—industrial countries in fact evolved restrictive and sometimes discriminatory trade practices. As a result, some commentators began to speak of a " 'conspiracy' of noncompliance."4 The IMF's task was defined as the provision of short-term balance of payments support. This assumed a great significance in connecting economies with the world system. In the absence of available capital imports, balance of payments difficulties could prove an insuperable obstacle to integration. More fundamentally, analyzing the origins of balance of payments problems could provide a tool for diagnosing more wide-ranging economic difficulties. The balance of payments acted as a fever thermometer. Deficits might indi- cate the presence of wrong exchange rates or disincentives to export. The practical difficulty involved in responding to the diagnostic tool with short- term support that, to continue the analogy, might only provisionally lower the temperature without curing the sickness. The Clash of Ideas The first reason for the separation of many economies from the international system derived from the widespread conviction that an alternative set of economic rules or even a different logic applied to developing countries.5 The differences concerned the appropriate degree of exposure to the international economy and the desirability of domestic financial stability. (These issues were linked, in that the adoption of convertibility and fixed parities would necessarily rule out fiscal experimentation or inflationism.) A differ- ence in understanding about the operation of the international economy, and the associated conviction that the other side was acting out of a fundamentally political logic, profoundly handicapped the IMF in its relations with many developing country members. In order to become more influential, it would have had to demonstrate the validity of an economic approach as much as provide financial resources. Many influential analysts, however, believed that poorer countries would be damaged by exposure to the international system, that emerging manufactures would be destroyed, and that the export of a limited number of commodities would create an intolerable dependence.

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