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Wednesday, April 21, 2010

The IMF and World Bank Meetings and International Monetary Reform

Dr. Douglas O. Walker
Robertson School of Government

The Spring meetings of the International Monetary Fund and the World Bank will take place later this week and next.

On the agenda is a review of the state of the world economy, the prospects for a recovery in world output and trade, and of course, the impact of the global financial crisis and measures that could be taken to strengthen the global financial system.

The main G-20 Summit of national leaders will take place directly after the joint Fund-Bank meeting. In preparation for this meeting finance ministers of the G-20 countries will meet on 23 April to discuss the impact on national policies on the global economy and other options for dealing with any future financial crisis, including the possible imposition of a global bank tax.

It is reported that as part of the G-20 finance minister discussions, leaders of Brazil, Russia, India and China intend to press for major reforms of the international financial system to reflect their growing influence in global affairs. This question has been a background issue for many years. Among the most important questions to be raised by these countries are quota allocations determining representation in the governance structure of the IMF. Presently, quota shares are allocated according to economic weight in the global economy, but these have not been updated to reflect fully the changing economic and financial importance of emerging countries. More substantively, poorer countries would like to increase the basic quota allocation for all developing countries in order to gain more influence in decisions related to access to finance. It has also been suggested that European seats on the IMF's board be consolidated to make way for greater representation by developing countries in international financial institutions. There is of course deep resistance to these suggested changes and the implied loss of standing in the international system implied by reductions in voting shares and representation at the IMF.

Seen in longer-term perspective, these changes represent more than the shuffling of seats around the Board of Governors' table at the IMF. It is not only that changes to the Board will involve increased influence of developing countries in day-to-day decision-making, but a fear that the rules and institutions of the international system will be fundamentally changed in ways inconsistent with the open international economy created at the end of the Second World War. Broadly speaking, the international system now in place was built on “Western” thinking, that is, a commitment to constitutional or limited government, freedom of the individual as the root of human rights, dedication to the rule of law, faith in free markets and private property and enterprise, and, in greater or lesser degree, a policy of free trade or at least openness to the world economy. These were the ideas (one might say, ideals) that drove the unprecedented expansion of the world economy in the post-World War II period. They were imposed on the world by the United States in the form of the United Nations as the political center of the international community and the Bretton Woods institutions as the economic centers for reshaping the international economy. The intellectual premise of the system was that an open international economy would enhance incomes and productivity through specialization in production and diversification in consumption and that widening prosperity would promote peace and development.

From the 1950s into the new century these ideas were in fact the basis of policy decision-making at international organizations. They were imperfectly implemented, of course, and were overlaid with much too much emphasis on the role of government in human affairs, but it is fair to say the set of rules and regulations, increased emphasis on treating people equally. Gradual removal of impediments to domestic and international commerce and general strategy of democracy and markets brought about a truly extraordinary period of progress for all mankind. In this sense, the dimensions of human progress made since 1950 have been enormous and much of this progress can be traced to the possibilities unleashed by the ideas and values that originated in Greece, spread to Rome, became the culture of the West, and formed the foundation on which the advances of the modern world were built.

As the momentum of world commerce increased and the prosperity spread to the far corners of the globe, the importance of developing countries, especially countries in Asia, increased as the loci of world production and engines of world growth shifted to that region. Asia and developing countries in other regions not only account for a growing proportion of world output but have become huge exporters of capital, with the U.S. and Europe largely absorbing their excess saving. While both the global savers and the global users of capital are dependent upon one another, it is the savers who provide the resources on which policy is based and hence it is the savers that in the end have key influence in setting international policy. Simply because the U.S. has a persistent deficit and borrows heavily abroad, its influence has weakened and it can no longer shape international policy they way it once did.

History reflects many different international orders where the rules and norms of the international economy vary greatly. The present Western-oriented order established at Bretton Woods stresses market openness and nondiscrimination across countries and for that reason promotes participation and spreads its benefits widely to all countries that embrace the spirit of its goals and objectives. No set of countries has benefitted more than China and other developing countries that chose to operate within the Bretton Woods system. At the same time, the very rise of these countries raises questions about whether they will use their growing influence to change the system fundamentally to better serve what is seen by many observers as their more nation-centric orientation with its greater sympathy to policies of internal dirigiste and external protectionism.

The challenge of bringing China and other emerging countries into the international economic system is more than the granting of additional voting power and more seats around the table of decision-makers at international institutions. It is also ensuring that the principles of the expansive and open international order that has served the world so well in the past are not compromised as the system accommodates to the large-scale and long-term changes now taking place in the world economy. This, let me add, is not simply a matter of ensuring that emerging countries embrace the Western rules and norms on which the present system was built but that the countries of the West, especially the United States, remain true to their own ideals and history.

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