3 The IMF and the World Bank in an Evolving World This session fea tured two speakers from major countries who have played ac­ tive and important roles in their countries for many years. The first speaker was Manmohan Singh, the Finance Minister of India and one of the chief archi­ tects of lndia's recent economic reform program. He was followed by C. Fred Bergsten, the founder and Director of the Institute for International Economics and a fo nner Assistant Secretary of the U.S. Tr easury Department. After they addressed the global issues affecting the Bretton Woods institutions from their unique perspectives, the Chairman of the session-lıımberto Dini, Minister of the Tr easury of Italy-offered an overview and synthesis of the suggestions presented. The speakers then responded to a number of questions and com­ ments raised by other participants. Manmohan Singh When I was invited to speak at this conference, I accepted with great pleasure. Fiftieth anniversaries are festive occasions when old friends gather to relive pleasant memories, to rejoice and felicitate. I have been privileged, in various capacities in the Government of India, to dea! with the Bretton Woods institutions for almost half of the 50 years we are commemorating today. I have innumerable pleasant memories and old friends associated with these institutions and it is therefore a partic­ ular pleasure to be part of this celebration. Twoscore and ten years is not a very long time for historians, but it is time enough to reflect on the achievements of institutions and draw new blueprints for the future. The world has changed beyond recogni­ tion since the Bretton Woods conference gave birth to the Fund and the World Bank. Superpower rivalry, which was a dominant force until re­ cently, has evaporated, and the threat of a global military conflagration is lower than it has ever been in living memory. From only a handful of developing country members at inception, the Bretton Woods institu­ tions now have some one hundred and thirty. Instead of a world di­ vided into market economies on the one hand and centrally planned economies on the other, we now have a truly global economy, of which all countries are a part. 35 ©International Monetary Fund. Not for Redistribution 36 The IMF and the World Bank in an Evolving World The world has not just changed, it has also prospered. World output has grown faster than ever before in the half century since Bretton Woods, and world trade has grown even faster than output, increasing global interdependence. The developing world has shared in this pros­ perity. Some developing countries have shown spectacular perfor­ mance and many others are moving confidently down the same path. Unfortunately, progress has not been even. Growth in many countries has been slow, and there is clear evidence of serious retrogression in the 1980s in sub-Saharan Africa and parts of Latin America. These positive developments cannot be ascribed to any one cause. They are the result of several factors, economic and noneconomic, inter­ nal and external, operating differently in different countries. However, there is little doubt that one of the reasons for rising prosperity in this period has been the durable framework of multilateral cooperation in trade and international finance, supervised by the General Agreement on Tariffs and Trade (GATT) on the one hand and the Bretton Woods in­ stitutions on the other. If these institutions are to be judged solely on the basis of the postwar performance of the world economy, they can legiti­ mately daim credit for a job well done. In a changing world, institutions must necessarily ada pt to changing circumstances and the Bretton Woods institutions are no exception to this rule. In fact, the record of the past 50 years clearly shows that these institutions have already changed considerably since their creation. It is therefore appropriate that the fiftieth anniversary should be an occasion to ask questions about the future role of the Fund and the World Bank in the light of the current world situation and emerging challenges in the future. The challenges before us, in my view, are the following: • If there is one single factor that explains the success of the postwar world economy, it is the sustained expansion of world trade. The international community must therefore give the highest priority to maintaining an open trading system. The world needs credible assurances that the growing trade rivalries between the United States, Europe, and ]apan will not be permitted to undermine the open, multilateral, and nondiscriminatory world trading system. • The problem of the persistent high level of unemployment in the industrial world must be ad.dressed in a manner that promotes the growth of world output close to its underlying potential. • The arduous programs of stabilization and structural economic re­ form that have been launched in dozens of devetoping countries over the past decade must be assisted to a successful conclusion, which calls for assured access to markets and access to finance on reasonable terms. The world economic system must provide deveI- ©International Monetary Fund. Not for Redistribution Manmohan Singh 37 oping countries with the economic space they need to enable them to pursue successfully outward-oriented trade and development strategies. It is an irony of our times that as devetoping countries are opening up their economies, the voices of protectionism, dis­ guised in one form or another, are gaining respectability in the in­ dustrial world. • Special efforts must be undertaken to strengthen the development process in sub-Saharan Africa and parts of South Asia, where abject poverty is most prevalent and the case for assistance is strongest. • Ways must be found to ensure an orderly integration of the transi­ tion economies of Central and Eastern Europe into the global eco­ nomic system. • Ways must be found to reduce systemic risk in the burgeoning markets for international private capital and finance, especially in relation to portfolio flows, while strengthening private direct in­ vestment flows toward devetoping countries. • International cooperation to preserve and protect the environmen­ tal heritage of our planet must be strengthened with suitable finan­ dal and technical support over the medium term. These priorities call for concerted action by the international commu­ nity on several fronts and in several different forums. They also have implications for the role of the Fund and the World Bank in the future. Role of the IMF There is a view that the IMF has not much relevance in a world char­ acterized by floating exchange ra tes, the predominant role of the private sector in the provision of international liquidity, and the rise of such ex­ clusive clubs as the Group of Seven for coordinating macroeconomic policies of major industrial countries. To my mind, the progressive re­ duction in the role of the Fund, particularly in matters involving effec­ ·tive surveillance of macroeconomic policies of major industrial coun­ tries, is a matter of regret, and the trend needs to be reversed. The Fund was created to supervise the system of fixed but adjustable exchange rates and to support it as a tender of last resort. The system worked well for a while but it came under severe strain in the early 1970s and was soon abandoned as the major players moved to a system of floating exchange ra tes. The new system, combined with an explosive growth of private flows in global capital markets freed from exchange controls, made the Fund's role as a lender of last resort irrelevant for countries accounting for three fourths of world trade. No industrial country has borrowed from the Fund since the Iate 1970s, and the ©International Monetary Fund. Not for Redistribution 38 The IMF and the World Bank in an Evolving World Fund's lending activity has concentrated on developing countries and more recently has extended to the economies in transition. The expectation that a regime of generalized floating exchange ra tes would enable countries to pursue independent macroeconomic policies in line with their domestic objectives has not materialized. In practice, exchange rates have been characterized by pronounced and prolonged deviation from the fundamentals, and there has been excessive volatil­ ity, all of which has imposed significant economic costs. Indeed, float­ ing exchange rates make coordination of macroeconomic policies among the major countries even more important than earlier. This should have meant a strengthening of the surveillance function of the Fund, but this has not happened. The truth is that the task of coordina­ tion is not being performed as much as it should be in any forum. At­ tempts at coordination through the exclusive groupings of major industrial countries such as the Group of Seven, or in even sınaller groupings, have achieved only limited success. The experience with the non-system that has been in place since the mid-1970s does not inspire confidence that it represents a viable long­ term arrangement. lt has led to increased uncertainty in the world trad­ ing environment, growing volatility of exchange rates and capital flows, and a slowdown in the growth of world trade and output. I believe that today, more than ever before, we need a truly multilateral mechanism, above and beyond national instruments, for monetary coordination and stabilization of exchange rates. The GATT-Bretton Woods system, de­ scribed as "unilateral global Keynesianism,"worked well until the early 1970s largely because the United States was single-handedly prepared to direct and maintain the system. As the world became economically multipolar, the United States was neither willing nor able to perform that role. And yet there is clearly a need for effective coordination of macroeconomic policies of major developed countries for a successful and orderly functioning of a multipolar, increasingly open, and interde­ pendent world economy.