THERE ARE THREE CHIEF ECONOMIC EVILS—starvation and poverty in the third world, unemployment in the industrial countries (and, in consequence, in many other countries too), and price inflation in the industrial countries that has been so fast as to be socially unacceptable at home and to complicate immensely social and economic adjustment in much of the rest of the world. Some would argue that together these evils constitute unshakable evidence of the malfunctioning of the international economic system. But that was not the theme or conclusion of the discussions held under the auspices of the International Monetary Fund and the Overseas Development Institute at Windsor at the end of March 1985. The approach was different. The analysis concentrated on more particular and technical issues, not because the individuals concerned (or the organizations they worked for) ignored the major problems, or believed that they were beyond human intervention, but because the task was to consider international monetary adaptation. The concern was with the way that aspect of the general economic system worked, how it could be improved, and whether it had fundamental flaws that seemed to call for radical change.
THE PERIOD SINCE THE DEMISE OF THE BRETTON WOODS SYSTEM in the early 1970s has been one of structural change, market adaptation, and unprecedented financial innovation in the international financial system. The structure, operation, and institutions of the international system have evolved in a largely unplanned manner and without a clearly defined and agreed official framework—the latter being represented by governments in industrial countries, aid agencies, and multilateral development and financial institutions. Given this lack of structure, the evolution of the international financial system responded to significant changes in the economic and financial environment, and new objectives and behavior patterns of private institutions. In particular, the balance of the roles of the official and private sectors has altered substantially. This has meant, most especially, changes in balance of payments financing arrangements, but also in exchange rate behavior, the provision of international liquidity, and the essentially demand-determined course of international reserves.
TWELVE YEARS HAVE PASSED since the advent of generalized floating in March 1973, and by now considerable experience has accumulated with the operation of the present mixed system. Under this system, the currencies of the largest countries float, in some cases jointly with other major currencies, while most other countries continue to have exchange arrangements involving pegs or other mechanisms that limit exchange rate flexibility. Countries with floating exchange rates often try to influence them through various means, but unlike the other countries they do not try to maintain their rate at a particular level (which in arrangements such as crawling pegs may be changes frequently) through intervention or restrictions on exchange transactions.
THE TERMS “BALANCE OF PAYMENTS ADJUSTMENT” and the “costs” of such adjustment are often used in a very loose and sometimes distorted fashion. References to adjustment and its costs abound in the recent literature but these are almost never defined, even though, on examination, their meaning is far from self evident. An attempt is made in this paper to respond to this deficiency before turning to discuss some problems associated with the design of adjustment programs in developing countries and with the long-term retreat from the notion of adjustment as an international process.
THE ANALYSIS OF THE ROLE OF RESERVES in the monetary system has generally focused on the demand for reserves. That is, the decisions of individual countries to hold various types of reserve assets and changes in these preferences are seen as affecting prices and economic activity in the world economy. One well-known conclusion of this type of research is that the demand for reserves has apparently not changed significantly in recent years despite very important changes in exchange rate regimes, international capital markets, and a number of other institutional developments.1 The apparent stability in demand for reserves might suggest that the role of reserves in the system has also not changed greatly.
THREE ASPECTS OF THE DEBT PROBLEM of developing countries are touched upon in these notes: the magnitude and geographical coverage of the problem; the requirements for the successful resolution of difficulties from the side of the debtors; and the evolution of the issue from the side of the creditors.
THE FIRST SECTION OF THIS PAPER surveys the main developments that have taken place in the international monetary system since the early 1970s. The abandonment of fixed exchange rates and the partial privatization of the creation of international liquidity represent a clear shift to the market and a negation of the postwar idea of a collectively managed system with tight official control over financial markets.
The paper summarizes the main issues arising from experiences of industrial and developing countries with capital account liberalization and it examines the IMF's treatment of capital controls in its surveillance, use of IMF resources, and technical assistance activities. Case studies of recent experiences with capital controls in Chile, Colombia, Malaysia, and Venezuela are presented.