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The International Economic System--Under Stress
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13268 |
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CURRENT ISSUES
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10 / 1987 |
3,134 Words |
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Ernest H. Preeg
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The international economic system - often referred to as the "Bretton Woods System," in memory of the 1944 conference in Bretton Woods, New Hampshire, that created its initial institutional structure - has been buffeted by a number of shocks and strains over the past decade. Serious questions are raised about its ability to cope with rapidly changing circumstances in the world economy.
The unsustainable U.S. trade deficit, the Latin American debt crisis, and the pervasive poverty throughout much of sub-Saharan Africa are among the pressing economic problems that require persistent, concerted action by governments. But is the institutional basis for bringing governments together - the international economic system - adequate to the task? Do we need a new or improved framework for dealing with current and future economic challenges? These are the kinds of recurring questions that again come to the fore as we approach the annual meetings of the World Bank and the International Monetary Bank (IMF) in Washington beginning September 29.
The answers to these questions require differentiation between the challenges facing each of the principal institutions in the existing international system. The system is not monolithic in concept or content. The answers also need to take a longer look at where the international economy is headed and not become totally absorbed with current problems. Finally, the answers need to relate to practical alternatives in what is a very imperfect world, with many overriding constraints.
A three-pillar system
There are three principal elements, or "pillars," in the existing international economic system: the International Monetary Fund (IMF), the World Bank, and the General Agreement on Tariffs and Trade (GATT), dealing with international finance, economic development, and trade, respectively. There are numerous interrelationships among the three, but the institutions are largely independent in terms of objectives and operations.
The IMF has the most clearly defined role. It deals with relatively short-term balance-of-payments problems by providing credit and technical support to member countries during the transition back to financial stability and balance. Nevertheless, there has been considerable evolution of the IMF role in recent years. The shift from a basically fixed to a floating exchange rate system in 1971 changed, in a number of respects, the composition of an "IMF stabilization program." The oil shocks of the 1970s led to the debt crises of the early 1980s and shifted the focus of IMF programs almost exclusively to developing countries. Fund stabilization programs usually became central and prerequisite to debt rescheduling by commercial and other official creditors. The substance and pace of necessary structural adjustment in debt-laden developing nations can be highly sensitive politically, and there are frequent complaints that the IMF is insisting on too rapid and overly austere restructuring. However, the experience of the past decade is that the basic approach counseled by the IMF - a more open economy with a market-oriented exchange rate, positive interest rates, and strong incentives for private-sector savings and investment - is widely accepted. Countries that ignore such norms are likely to find themselves headed toward intractable financial crises.
One area where the IMF
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