This session brought together a panel of experts who had participated actively in other events analyzing the future agendas of the Bretton Woods institutions to examine the full range of issues affecting the institutions from the perspective of both industrial and developing countries. Professor Gerald K. Helleiner of the University of Toronto has served for several years as Research Coordinator for the Group of Twenty-Four Developing Countries, and he had organized the Group of Twenty-Four conference that was held in Cartagena, Colombia, in April 1994. Professor Peter B. Kenen of Princeton University had helped organize the Institute for International Economics conference held in Washington in May 1994, and he served as a member of the Commission on the Future of the Bretton Woods Institutions. Moisés Naím, Senior Associate of the Carnegie Endowment for International Peace, had been a featured speaker at both these conferences and a background contributor to the Commission’s report, and brought the perspective of a former trade minister and Executive Director of the World Bank for Venezuela. Chairing the session was Abdlatif Y. Al-Hamad, the Director General and Chairman of the Board of Directors of the Arab Fund for Economic and Social Development (Kuwait), who had served as Chairman of the Boards of Governors of the World Bank and the Fund in 1982.


Abdlatif Y. Al-Hamad remarked that, as an observer and practitioner in the field of development for more than 30 years, he wondered whether the agenda for the Bretton Woods institutions for the next 50 years would be very different from the agenda of the past 50. The emphasis might well be different, as might the clientele and the thrust of work of the institutions, but that would only be an indication of the great success of the two institutions in fulfilling the mandate set for them by their visionary founders 50 years ago. What was needed for the future, therefore, was more such success.

Having said that the Bretton Woods institutions had been very successful, it had also to be recognized that mistakes had been made. Throughout the past 50 years, both institutions had learned from their mistakes, and it might be expected that further mistakes would be made during the next 50 years, which would nevertheless be helpful in increasing the understanding of the dynamic process that leads to development. The issues that came most immediately to mind—such as poverty, population, governance, economic reform, and the environment—had been around in one form or another for many years and were likely to remain salient for many years to come.

Gerald K. Helleiner

Many of the points I shall make appear in the recently published proceedings of the Group of Twenty-Four conference in Cartagena, commemorating the fiftieth anniversary of Bretton Woods. I speak here, however, only for myself.

I shall make five points. The most important is the last.

Global Macroeconomic Management

The current system of global economic governance is unrepresentative and accident prone. It is run, de facto, by the Group or Seven or, more accurately, by the Group of Three. Neither the developing countries nor the smaller industrial countries have much confidence in its capacity to manage global economic events in the overall global interest. There is a broad global interest in the macroeconomic performance and in the macroeconomic policies of the major industrial countries and, in particular, in their steady economic growth, selection of an appropriate monetary and fiscal policy mix, maintenance of orderly foreign exchange and financial markets, full utilization of capital and labor, and their achievement of symmetry in the international adjustment process and liberal regimes for international trade. Obviously, there is also global interest in the provision of adequate liquidity, debt-relief proposals, rules for IMF behavior, and the like. The interests of the majority of the world’s population are not at present seen to be well served in the decision-making processes of the industrial countries, either individually or in the Group of Seven, in these spheres.

The IMF’s views carry limited weight either in the decision making of the major industrial countries or in the deliberations of the Group of Seven; effective IMF influence over economic policies is concentrated in the developing countries and the countries in transition. The Interim Committee is widely perceived as little more than a “rubber stamp”for the decisions of the Group of Seven. If the IMF is to begin to play the role originally intended by its architects 50 years ago, some way must be found both to increase significantly its role in global macroeconomic management and to “democratize” its own deliberative procedures, perhaps in conjunction with overall reform of the United Nations. Since, for obvious reasons, the Group of Seven countries are not too interested in such change, there must be united efforts and pressure by nonmembers of the Group to push reform efforts in this direction. As they do so, they will find strong professional support, not only from within the IMF but also much more generally.

Volatile Private Capital Flows

In the discussions leading to the Bretton Woods conference of 1944 and at the conference itself, there was considerable debate about how best to address problems created by volatile international flows of private capital. Debate centered upon the efficacy of controls over transactions in the capital account of the balance of payments and the possibility of an IMF role in the financing of member countries experiencing outward capital flows. These discussions and debates are current once again—in a context in which the potential flows of private capital, and hence the disruption, are much greater. Many developing countries are particularly concerned at present about the implications for their stabilization and development efforts of increasing interest rates in the industrial countries.

The Managing Director of the IMF proposes that the Fund more actively encourage members to liberalize fully their capital accounts as well as (as at present) their current accounts—a step that could require an amendment to the Articles of Agreement. He sees the Bretton Woods provisions (in the existing IMF Articles) for controls over international capital flows as anomalous and counterproductive. He also suggests a new facility for the support of countries experiencing private capital outflows, an idea that originated with Peter Kenen.1 These proposals have an old and familiar ring. Many in the developing countries and elsewhere see these proposals now, as 50 years ago, as inappropriate and the proposed facility as requiring such large sums to make the idea unworkable.

The current concerns must be addressed in a variety of ways, including the development of an agreed new regime for private international capital flows that clarifies the circumstances in which controls are appropriate and provides for greater cooperation among central banks in their application and monitoring, as well as the extension of existing swap and cooperation arrangements among central banks to include those that have not so far benefited much from them, notably the developing countries. The role and responsibilities of the IMF in international financial markets need to be clarified, and almost certainly strengthened. This review, of course, now needs to be made in conjunction with deliberations within the World Trade Organization, which has some overlapping responsibilities. The responsibility and role of the Bank for International Settlements in this context will also obviously require review.

Finance for Development

The means for the continuing provision of adequate external finance to low-income countries need rethinking. Continued reliance on official external sources of finance for these countries, sadly, is inevitable—both for liquidity and for longer-term development purposes. Consideration of these countries’ needs for external finance from official sources, as well as the terms and conditions for its provision, needs to be better integrated. Bilateral sources of official development assistance, debt relief, and finance from the regional development banks and UN agencies all need to be considered as a whole and in conjunction with the contributions of the IMF and the World Bank. The needs of the low-income countries for official finance appear likely to exceed their availability—unless new sources or modalities are found.

The Development Committee, which might have been expected to play some role in this regard, is widely seen as ineffective and irrelevant. Among the issues to be addressed are the adequacy of existing sources of liquidity and contingency finance, prospective flows of official development assistance, and debt relief for low-income countries. No amount of “adjustment” will suffice for sustained development if the requisite finance is missing. In this context, there should be consideration of the appropriate utilization of IMF gold reserves and possible modalities for writing down the debt to international financial institutions in extreme circumstances. At bottom, after 50 years of sporadic funding, much greater attention needs to be paid to the possibilities for more stable and automatic sources of official global financing for development purposes.

Ownership Issues and Research

Stabilization and adjustment programs that are effective and sustainable are those that are, in appearance and in fact, locally owned. Although there is now widespread rhetorical acceptance of this fact within the international financial institutions and the donor communities, the implications are not always reflected in changing practice. There is a great deal of “hot air” and hypocrisy in donors’ and international financial institutions’ discussions of the need for local ownership. Conditionality should be a technical, not a political, issue. This implies a heavy hand in some cases of conditionality, although on many technical issues there is professional uncertainty.

In this connection, the credibility of the international financial institutions and donors would be greatly enhanced if they supported the significant decentralization of research and advisory services in the sphere of development policy. Both research and advice are at present inappropriately concentrated in Washington. By increasing support for, and reliance upon, local research and advisory institutions in developing countries, it is likely that there will be not only improvements in the cost-efficiency, quality, and credibility of the relevant work but also genuine increases in local ownership of programs.

Review of the Institutions and Their Roles

Most important, an overall review of the current system of international economic governance and the role of the international financial institutions therein—such as is to be undertaken within the Group of Seven—must be fully participatory and representative if it is to be effective. It is time, after 50 years, for a major intergovernmental review of the Bretton Woods institutions in the context of the overall need for global economic governance, as the Group of Seven has recognized. It is time to review the roles and responsibilities of the IMF, the World Bank, the UN agencies, the regional development banks, and the World Trade Organization in an integrated fashion. Immediately and practically, it is time to review the efficacy of the Interim Committee, the Development Committee, and the Executive Boards of the international financial institutions within the overall governance system. Any such review confined to the Group of Seven, however, will carry neither a broad sense of ownership (a term that the international financial institutions use so much) nor, therefore, much legitimacy. A review by the Group of Seven is therefore unlikely to be effective. What is required is a much more representative intergovernmental review, on the general model of the Committee of Twenty of the 1970s, of the functioning of the Bretton Woods institutions and their future role in the changing world economy.2 The initiation of such a representative intergovernmental review should be the major outcome of these fiftieth anniversary meetings in Madrid.

Peter B. Kenen

Having reason to expect that other members of this panel will focus on the work of the International Monetary Fund and the World Bank in the developing world and the formerly planned economies, I propose to focus on the tasks that face the Fund in the developed world. How can it help to improve the quality of policies pursued by the major industrial countries? What can it do to promote exchange rate stability?

My place in the overall conference program is very appropriate for this purpose, because my position lies between the forceful stance adopted by Fred Bergsten this morning and the more cautious stance that Wendy Dobson will adopt tomorrow afternoon. My views will also echo those of the Bretton Woods Commission, which said in its report (Bretton Woods Commission, 1994, p. A-1) that the major industrial countries should take two successive steps: “first, strengthen their macroeconomic policies, and achieve greater economic convergence; and second, establish a more formal system of coordination to support these policy improvements and avoid excessive exchange rate misalignments and volatility.” In time, the report said, “this system might include commitments to flexible exchange rate bands.”

I nevertheless agree with Fred Bergsten that exchange rate commitments should come early in the process, not late. In my view, however, they cannot come before there have been significant improvements in national policies and, more important, improvements in the policymaking processes of the major industrial countries.

Means and Ends

When reading proposals for reforming exchange rate arrangements, like those recently made by Williamson and Henning (1994), I often wonder whether their authors regard exchange rate stability as an end in itself or as a way of improving national policies and promoting international policy coordination. In my view, it is both a means and an end.

Promoting Policy Coordination

In the analytical literature on policy coordination, optimal outcomes frequently involve exchange rate changes. When a first-best policy equilibrium is subjected to some shock, so that policies have to be adjusted to achieve a new equilibrium, we find that exchange rates in the new equilibrium differ from those in the old. By implication, the introduction of an exchange rate constraint will typically lead to a second-best policy equilibrium. In most cases, however, we also find that a coordinated policy outcome with an exchange rate constraint is distinctly superior to an uncoordinated outcome without an exchange rate constraint. Therefore, we may conclude that an exchange rate constraint can contribute to the improvement of national policies if it serves decisively to promote international policy coordination.

This is quite likely to be true. Tomorrow, Wendy Dobson will explain why policy coordination has become very difficult. Officials find it hard enough to do their jobs at home, in the face of domestic constraints and pressures, without taking time to engage in international policy coordination. It is indeed increasingly hard for them to coordinate their policies domestically when central banks are independent and legislatures are irresponsible, without having to coordinate them internationally. Accordingly, there is apt to be a chronic shortage of international policy coordination unless governments commit themselves firmly to the pursuit of common or collective objectives. These objectives in turn, are most readily defined in terms of common or shared variables. The exchange rate is, of course, one such shared variable. A minister or governor can properly speak of his or her own country’s inflation rate, growth rate, or unemployment rate, but not of its exchange rate. By its very nature, the exchange rate belongs to a pair of countries.

In brief, the pursuit of exchange rate stability may be the only effective way to relieve the chronic shortage of policy coordination and thus to achieve second-best coordinated outcomes.

Two more reasons for pursuing exchange rate stability exist, however. It is a worthy end in itself. First, exchange rate uncertainty is costly in real terms. Second, large exchange rate misalignments can undermine the trading system.

The Real Costs of Exchange Rate Uncertainty

We do not have conclusive quantitative evidence that exchange rate uncertainty depresses international trade, capital formation, or economic growth, although the body of evidence is growing (see Chowdhury, 1993, and Larraín and Vergara, 1993). Most studies of the issue, however, have focused on the wrong part of the problem. They have searched for the effects of uncertainty about short-run exchange rate movements, because it is easy to measure, rather than the effects of uncertainty about long-run exchange rate trends. It is not the mere length of the “run” that matters here; firms can make five-year forward contracts to hedge against possible losses on future payments or receipts. In the long run, however, firms face an additional risk.

If a firm knows what its foreign currency payments and receipts will be five years from now, it can use forward contracts and other financial transactions to protect itself against exchange rate changes. The possibility of large exchange rate changes over a five-year horizon, however, prevents a firm from knowing what its payments and receipts will be, because they will affect the future profitability of its operations and, therefore, the sizes of its payments and receipts. It is extremely difficult, moreover, to measure this different sort of uncertainty and thus to detect its influence on trade, capital formation, or growth.

Wendy Dobson will point out tomorrow that large multinational firms hedge against this different form of uncertainty by holding diversified “portfolios” of plants. This strategy, however, is costly to the world economy. It can only work if the firms invest in spare capacity. In other words, it reduces the productivity of capital.

Exchange Rate Misalignments and the Trading System

In his remarks this morning, Fred Bergsten argued that exchange rate misalignments are a major cause of protectionist pressures, and he cited some evidence to this effect (see, for example, Williamson and Henning, 1994, and Eichengreen and Kenen, 1994). It is therefore sufficient for me to make two brief points.

When a country’s macroeconomic policies cause its currency to appreciate, domestic firms that face more foreign competition find it hard to lobby for a change in the macroeconomic policy mix. In frustration, they resort to lobbying for trade policy relief. This tendency is particularly strong in countries such as the United States, where legislators represent individual states or districts and are thus sensitive to the vicissitudes of key industries in those states or districts.

When, instead, the policy mix causes the domestic currency to depreciate, foreign competitors try to preserve their export market shares by cutting their home currency export prices (so-called pricing-to-market). But this shows up as “dumping” and is, no doubt, partly responsible for the striking increase in the number of antidumping actions in recent years.

It is thus very clear that exchange rate instability is a continuing threat to a liberal trade policy regime.

Reforming Exchange Rate Arrangements

I have thus offered three reasons for endorsing the recommendation of the Bretton Woods Commission that the major industrial countries move toward more intensive exchange rate management. It is worth noting, moreover, that the same recommendation has been made by many of the other groups that have met this year to mark the fiftieth anniversary of the Bretton Woods conference. It was widely endorsed, for example, at the recent conference sponsored by the Institute for International Economics, to which Fred Bergsten referred in his remarks this morning. Let me repeat my three reasons before moving on:

  • First, a commitment to greater exchange rate stability can help to overcome the shortage of policy coordination;

  • Second, it can reduce the real costs of exchange rate uncertainty; and

  • Third, it can contribute to the integrity of the trading system.

At this point, however, we must confront two very serious problems. First, any attempt to stabilize exchange rates will intensify the shortage of domestic policy instruments available for managing each national economy. Second, the dynamics of the game between governments and markets produces two damaging tendencies. On the one hand, regimes that are not clearly articulated, such as the “soft and quiet” target zones of the Louvre accord, tend to decay with time, partly because, as Fred Bergsten explained, the survival of these informal arrangements depends too heavily on the views and priorities of individual officials. On the other hand, regimes that are very clearly articulated, such as the Bretton Woods system and the European Monetary System, tend to ossify, because the durability of the regime itself becomes too closely identified with the durability of particular exchange rates.

I will devote my remaining remarks to these basic problems—relieving the shortage of domestic policy instruments and achieving short-run exchange rate stability without sacrificing long-run exchange rate flexibility.

Relieving the Shortage of Policy Instruments

In a world of very high capital mobility, official intervention by itself cannot stabilize exchange rates. It must be supported by monetary policy. Another policy instrument is therefore needed to manage the domestic economy. That is why I said at the outset that the major industrial countries must improve their policymaking processes, as well as their actual policies, before committing themselves to more intensive exchange rate management. To be specific, they must find ways of making their fiscal policies much more flexible.

Wendy Dobson is pessimistic on this score. So am I. And the attitudes of my fellow economists deepen my pessimism. Many of them are distrustful, even contemptuous, of democratic politics. They are more interested in finding ways of constraining politicians than in finding ways of helping them relax the fiscal rigidities resulting from interest group pressures.

Let there be no mistake. Fiscal consolidation must come first. We cannot afford to pile cyclical deficits on top of structural deficits—and those will continue to grow, largely for demographic reasons, unless painful adjustments are made in the size and coverage of social insurance programs. Furthermore, the adjustments can lead to serious social conflict if they are not designed carefully to achieve a new social consensus. But fiscal consolidation should not be confused with fiscal rigidity. We must impart more flexibility to fiscal policies by improving the policymaking process, as well as actual fiscal policies, before we can prudently recommend that monetary policies be redeployed to achieve exchange rate stability.

The Risk of Ossification and the Role of the Fund

My second concern, the risk of ossification, brings me at long last to the role of the International Monetary Fund in helping the major industrial countries to manage exchange rates effectively.

When governments commit themselves to this objective, as I said before, they tend in practice to defend existing exchange rates tenaciously. They are fully aware of the need for periodic exchange rate changes—for what was called in the days of the Committee of Twenty a system of “stable but adjustable exchange rates.” It is nevertheless hard to make those changes in a timely fashion, and capital mobility has made it harder.

An authoritative voice is therefore needed to say, quietly but firmly, that the time has come to change exchange rates—and even to say so publicly if private warnings are ignored. That is the task of the Fund in any future attempt to achieve greater exchange rate stability.

To play that role eventually, however, the Fund and the major industrial countries should contemplate three early innovations.

First, within the Fund itself, there must be close collaboration among the relevant area departments—those concerned with the various Group of Seven countries—under the aegis of the Research Department. The Research Department, in turn, must be charged not merely with compiling the World Economic Outlook but with tracking current developments closely in the Group of Seven countries and in foreign exchange markets.

Second, the Managing Director and staff of the Fund must participate fully in the deliberations of the Group of Seven countries, and the deliberations must be integrated with the Article IV consultations between the Fund and the individual governments of these countries. Furthermore, the Managing Director should report regularly to the Executive Board on the deliberations of these governments, particularly on the views expressed by the Fund’s participants during those deliberations. In certain circumstances, moreover, it would be entirely appropriate for the Executive Board to ask that the Managing Director convey its views to the Group of Seven governments.

Third, the Fund should have its own “Council of Economic Advisors.” The members of the Council should be appointed for fixed, nonrenewable terms, to protect their independence. The Council should advise the Managing Director and the Executive Board on a continuing, confidential basis. It should also have responsibility for the preparation of the World Economic Outlook, each issue of which should begin with a new prescriptive chapter, in which the Council should make specific recommendations to individual governments, on its own responsibility. Finally, the Chair of the Council should serve as the Fund’s Economic Counsellor, participate with the Managing Director or his representative in the deliberations of the Group of Seven governments, and have broad responsibility for the work program of the Fund’s Research Department.

These are modest steps. Nevertheless, they are aimed at a large objective—restoring the Fund to an influential role in managing economic relations among the major industrial countries and moving the world decisively toward greater exchange rate stability.

Moisés Naím

Most of the analyses and proposals prompted by this fiftieth anniversary of the Bretton Woods institutions center on large systemic issues of global governance, on the need to respond to new economic and political realities, or on the impact of the policies of the Fund and the World Bank. From the search for mechanisms to dampen exchange rate volatility to proposals to merge the Fund and the Bank, or even to close them down, to the effects of structural adjustment, the anniversary has stimulated a wide debate on many important issues. Yet surprisingly little attention has been given to the factors that shape the internal behavior of the Bretton Woods institutions. The way in which these institutions are governed, the mechanisms and processes through which their priorities are chosen and their strategies defined, and the incentives and values that drive their internal culture have received scant attention. In fact, these are generally perceived as minor, even bureaucratic, details that can easily be dismissed. The attractive challenges for most officials and analysts are either to get the policy prescriptions right or to activate the political process that would lead to the adoption of the systemic changes they favor.

It is indeed possible that as a result of the debates spurred by the anniversary we will see some major adaptations of the Bretton Woods institutions to the economic, political, and technological circumstances of the world. Unfortunately, policy-induced changes in global governance require the agreement of a large number of countries that often have sharply differing views and priorities. Therefore, regardless of the quality and merit of proposals to alter radically the way in which the international economy is currently governed, the probability that sweeping changes will be adopted is not very high. The mid-1990s finds the world without a country that can effectively serve as a rallier of nations and capable of assembling the international coalitions needed to induce the systemic reforms called for by the changes in the international economy that have occurred since the Bretton Woods conference 50 years ago. Such adaptations, therefore, have to be made within the context of the existing institutional framework. From this perspective, gaining a deeper understanding of how the institutions really work and of the factors that influence their performance can provide useful insights into their ability to adapt to the new challenges. It is therefore useful to highlight some of these issues that are often overlooked but that deserve more attention when discussing proposals to reform the world economy. Let me start with the mission and the strategic orientation of these institutions.

Most of the conferences leading up to this meeting concerning the Bretton Woods anniversary and the status of the institutions and the reviews of the Fund, the World Bank, or the regional development banks have concluded that they suffer from the lack of a precisely defined mission. Changes in the international financial system have eroded the mission of the Fund while the adoption of an ever-expanding definition of the determinants of underdevelopment has led to an increasing portfolio of goals that the development banks are expected to address. In recent years, the need to assist countries emerging from decades of communism has also added to the diversification of the goals of the Fund and the Bank. Paradoxically, the lack of a precise mission has allowed the institutions to adapt quite effectively to changes in their environment.

Since their creation, the World Bank and the Fund have reinvented themselves several times in response to new challenges that their founders had not contemplated. The downside of this flexibility is, of course, a significant dose of strategic ambiguity. The combination of a blurred mission, a drastically changing external environment, constantly growing demands, and a problematic governance structure has led to a rapid accumulation of goals. The excessive number of priorities breeds not only goal congestion but strategic confusion. Obviously, such conditions would impair effectiveness and efficiency in any organization. Goal congestion is most visible in the development banks, with portfolios of goals that range from the role of women in development to the regulation of telephone companies. But it has also plagued the operations and organizational effectiveness of the Fund. Goal congestion derives not only from a blurred, changing mission. It is also the result of the very different expectations of influential constituencies regarding the fundamental role of these institutions. No doubt, ambiguity of mission, goal congestion, and strategic volatility in the Bretton Woods institutions are largely the consequence of their external environment. But they are also undoubtedly the consequences of how decision making at the top of these institutions is organized. In general, once an objective is incorporated as part of the agenda, it becomes almost impossible to remove it. Political factors, organizational inertia, and the governance of these institutions make it very difficult to shed goals, at least formally.

It is fair to recognize, however, that the existing governance system of the World Bank and the Fund has worked fairly well. It has not replicated some of the sorry experiences of other multilateral institutions. It has also proved capable of responding to new demands imposed by the international political and economic environment. In effect, one can argue that it is almost a miracle that the Bank and Fund are still—as is recognized even by some of their harshest critics—technically competent organizations. To their credit, over the years they have been able to attract and retain a respected pool of highly talented and skilled professionals. As a general rule, in the Bank and Fund, staff recruitment and promotion are determined more by merit than by politics. In many areas, the reports produced in the institutions become indispensable references in any relevant discussion. Furthermore, at a time when the world’s capacity for effective multilateral action seems to have been impaired by the end of the Cold War, the Bretton Woods institutions continue to offer a conduit through which international collective action can be reliably channeled. Such unique strengths and values therefore counsel caution in any attempt to reform the institutions. Experience has repeatedly shown that even the most resilient and sturdy of institutions is extremely vulnerable to mistakes made in the course of well-meaning reforms. This caveat notwithstanding, the Fund and the Bank, and even more so the regional development banks, like all institutions, constantly need organizational repair and maintenance.

The governance system of a multilateral financial institution typically has a board of governors composed of ministers or central bank presidents or governors who delegate responsibility to a full-time board of directors. Management responsibility falls on a strong president or chief executive officer, and the authority to adopt new strategic initiatives usually rests with the president and the top management, even though in some cases such initiatives are taken as a result of the pressures of influential external constituencies. In fact, in recent years, legislatures, nongovernmental organizations, and the media have substantially increased their capacity to shape the agenda and even the strategy of the multilateral financial institutions. The Bretton Woods institutions are more often than not found on the defensive in terms of public affairs and media attention.

An important element of the governance system is the board of Executive Directors of each Bretton Woods institution. As a consequence of an agreement made early on in the life of the World Bank and the Fund—not as a requirement of their Articles of Agreement—these boards are full-time resident bodies. Although the formal role of the board is quite clear, in practice it is quite complex and ambiguous. The board represents the interests of the shareholders and has almost total authority over the affairs of the institutions. Executive Directors, however, do not have any management responsibility and are not individually accountable for any specific decision made by the institution. Although the board has to approve every transaction and policy initiative, such initiatives are usually launched by management. Also, while Executive Directors do not have any day-to-day responsibilities, they work full-time in the institution, and although they are representatives of the governments that appoint them, they are, in fact, employees paid by the institution.

In all organizations, tension exists between shareholders (or their representatives, the board of directors) and management. This is true not just of private sector organizations but whenever an overseeing body has authority over the group of people who are responsible for daily management. Management tends to want to maximize growth, autonomy, and scope for its operations, whereas the board seeks to minimize risk, exposure, and the need for capital increases. This tension in the relationship can, in fact, be very productive. But if it is excessive, management is usually stifled, and an atmosphere of distrust, resentment, and inefficiency ensues. If, on the other hand, this tension is too weak, organizations tend to develop an operational bias toward the priorities favored by management, sometimes at the expense of shareholders’ interests. Striking a healthy balance in the tension between board and management is an important precondition for the long-term institutional survival of any organization.

In the Bretton Woods institutions, the balance between shareholders and management is particularly fragile. Governors tend to be ministers who already have such a full agenda that they cannot devote enough of their time, effort, and attention to the supervision and overall management of the institutions. In fact, the issues relating to the institutions typically come to the governors’ attention only when they pertain to their own countries or when there is a major crisis. Partly out of necessity, the governors delegate the monitoring, oversight, and the provisioning of the sense of direction of the institutions to the middle-level staff in their ministries and to the board of Executive Directors. The board, in turn, is fraught with conflicts of interest and other structural deficiencies that limit its effectiveness.

First, some Executive Directors represent borrowing countries, others represent donor countries, and still others represent both borrowing and donor countries. Second, whereas management is typically composed of specialists with many years of experience in the institution, Executive Directors are political appointees who rarely spend more than three years in the job. Third, paradoxically, even if they are political appointees, Executive Directors tend to have less access to the higher echelons of their governments than do the top management of the World Bank or the IMF. Fourth, with the growing complexity and diversity of the institution’s agenda, it becomes very difficult for Executive Directors to exercise effective oversight over all the issues on which they are supposed to make decisions. Very often, this leads to a highly ritualized and symbolic decision-making process in which management receives very little strategic direction from the board.

Reforming the way in which Executive Directors are recruited and prepared for the job, together with a concerted effort to upgrade the way in which the boards of directors of the Bretton Woods institutions operate, may have more beneficial effects than many of the good ideas about global reform that unfortunately have little chance of being implemented. High turnover rates in the boards of the Bretton Woods institutions impair the effectiveness of the boards, but high turnover is also an important factor in their general functioning.

As I have noted, Executive Directors stay for too short a time, and when they are becoming more effective they have to leave the institution. But turnover is also a factor in its top management. Take the President of the World Bank, for example. I know that the last three former presidents, and even the current one, are the first to recognize that it takes at least two or three years to develop a detailed knowledge of the intricacies of the institution and its work. By then, their term is almost over. Only after several years is it possible to grasp the essence of the problems faced by borrowing countries. Five years is too short for anybody to develop the command needed to ensure that good ideas or good intentions are, in effect, implemented and transformed into good outcomes. This is even more so if in their previous careers those appointed to the presidency of the World Bank were not exposed over a substantial period of time to the bewildering dilemmas of development or to the many specificities of the World Bank as an organization.

In the coming years, the World Bank will have to cope with major changes in its external environment, some of which have been and will be discussed here. Not often discussed, however, are the many internal changes that the Bank will experience in the future, especially in the turnover of its top management. Essentially, an unavoidable—and not always positive—generational change at the top levels of the Bank is going to coincide with substantial changes outside the Bank. Coping with both will be an enormous challenge, which, as with all challenges, will present unique opportunities to the governors and the shareholders, and to the management of the institution.

Transforming this challenge into a positive opportunity requires those who are part of the governance system of the Bretton Woods institutions to change their ways. In the coming years, nothing threatens more the stability and the effectiveness of these institutions than the possibility that their shareholders continue to behave as absentee owners, becoming interested in their collective property only when they realize that it is in great and evident danger. As we know, when danger is imminent, it is often too late to act and to be effective.

General Discussion

Ismael Serageldin asked Naím to elaborate on the emergence of the socalled civil society and the role of other external groups advocating single or multiple issues, the links among those groups, governments, the Executive Directors, and the media, and how greater openness and change in the international community would need to be reflected in the governance of the two institutions.

Naím replied that the issues that Serageldin had raised were becoming increasingly important. In an earlier paper, he had noted that the World Bank was an inward-looking institution, and he had examined the internal incentives and modalities that had led to that organizational culture.3 As a consequence of that culture, the Bank’s relationship with the external environment had never been given high priority.

The World Bank and the Fund appeared increasingly defensive and reactive. In recent years, the globalization of the media, the growing democratization in the world, the increased competition that the Bank was facing, and the growing influence of legislatures were having an everincreasing role in shaping the behavior of the Bretton Woods institution. Many nongovernmental organizations had found a way, through their parliaments, to affect the agenda and the strategy of the Bank, for example. Those developments called for a more proactive, integrated strategy for communicating with a fragmented and volatile external environment, which would impose unprecedented constraints on the Bank.

The overhaul of the governance system of the World Bank and the Fund was an important goal for the future. It was unfair to leave the Bank shouldering alone responsibilities that had actually been imposed on it by its Governors. Indeed, many of the policies for which the Bank was criticized came from other sources, although it was also true that internally generated policies had also drawn criticism. A better organized, more intelligent governance system should be able to respond better to the new realities of the world.

Wendy Dobson asked Kenen whether he could elaborate on the key point that he had made, namely, that there had to be more flexibility in domestic policy processes, particularly with regard to fiscal policy. Although she agreed with Kenen on that point, she also agreed that such a change was a huge challenge.

Kenen replied that it would be easy to dismiss Dobson’s question by merely pointing out that more flexibility would not be possible until there had been more fiscal consolidation. It would not be possible to introduce flexibility around excessively large deficits, for example, which some countries still maintained. To further the discussion, however, he would assume away that problem and confront the issue of flexibility itself.

Some years ago, he had suggested that it should be possible, although politically difficult, to devise a fast-track procedure in the United States for tax changes of a temporary duration that would allow much greater flexibility.4 One of the major problems in the United States, of course, is that any proposed change in taxes becomes an opportunity for interest group pressure to emerge on matters extraneous to the principal fiscal issues. In his view, the U.S. President should be given the power to propose, subject to approval by an up-or-down vote in both houses of Congress, a temporary income tax surcharge—nothing as complex or sophisticated as an investment tax credit, but something very straightforward and simple that would allow some variation in the fiscal stance. The problem, as he understood it, was quite different in Japan and in some other parliamentary democracies, but he was concerned that without that kind of flexibility, monetary policy would continue to be overburdened.

Jo Marie Griesgraber noted that Helleiner had described his fifth and final point—on reviewing the current systems of international economic governance and the role of the international financial institutions—as the most important. Helleiner had alluded to the work of the Committee of Twenty in the 1970s as a prototype for such a review, and she asked him to elaborate on what such a committee should be asked to do in the current circumstances, what its agenda should be, and how it should be constituted.

Helleiner, observing that a number of participants in the work of the Committee of Twenty were in the audience, noted that the details of that work were less important now than the principle that had been established: the review should be undertaken by a representative intergovernmental body that was external to the organizations. The terms of reference of such a committee should be established in a representative fashion and should be related to the governance issues raised by Naím and to the substantive issues that had occupied much of the debate during 1994 on the role of the Fund and the World Bank. At a minimum, a review should cover such issues as the relationship between the Bretton Woods institutions and the regional development banks, the United Nations agencies, and the World Trade Organization.

One way to begin the process was simply to agree to constitute such a body, and perhaps even to establish its terms of reference, which might not, at least on the monetary side, be that different from those agreed for the Committee of Twenty in 1972. Many observers were concerned that, following the very rich exchange of views over the course of the year on critically important matters of global economic governance and the functioning of the Fund and the Bank, nothing very much would be achieved. To achieve something substantive, therefore, it was necessary first to establish a process that made it possible for outcomes to emerge.

As articulated in the Cartagena conference, the issues of particular concern to developing countries that would need to be addressed included provision of adequate liquidity, mechanisms for appropriate macroeconomic governance, appropriate provisions for longer-term development finance, procedures to be employed for the exchange rate regime, and provisions governing the liberalized and vastly increased flows of private portfolio capital. Although some countries might highlight other issues, such as Fund surveillance, the essential point was that the terms of reference for such a review needed to be broadly agreed and not handled within the Group of Seven, which was unrepresentative of the world economy as a whole and in which the rest of the world did not at present repose sufficient trust. The terms of reference should be set within the framework of the World Bank and the Fund.

Kenen commented that no one, including those who had brought the Group of Seven together, had ever thought of it as an executive committee for managing the world economy. The Group of Seven process had originated when countries with similar concerns and problems, and a similar stake in the international institutions, had begun to consult one another about their positions and interests in the system. If the Group were abolished tomorrow, it would recreate itself the next day, because those countries would want to concert their positions on key issues.

The Group of Seven as an arrangement for exchange rate management or macroeconomic consultation was a little different, but its role in the governance of the system arose from the role of the countries concerned in the system, their leverage, their influence, the size of their financial support, and their common concerns. Thus, he wondered whether Helleiner, in calling for the Group’s reform, was suggesting a reduction in the weight of those countries in the voting power and formal governance of the institutions. Helleiner’s suggestion might be interpreted to mean further democratization of the institutions in the sense of reducing the decision-making influence of that oligarchy, or no further consultation among the Group of Seven countries. If the Group of Seven were given less weight in decision making, it was not clear how the willingness of those countries to support the institutions financially could be sustained.

Helleiner noted that no one was recommending the abolition of the Group of Seven. It had every right to handle the matters of greatest concern to it in any way that it deemed appropriate. Apparently, one such issue was the need for a review of the international financial institutions and the appropriateness of the existing multilateral machinery for the twenty-first century. If such a review were to take place, clearly the rest of the world would have an interest in the process; the rest of the world had a voice and needed to be consulted on the key issues. In the end, if there were no way of pursuing in a more cooperative fashion the review called for by the Group of Seven, the rest of the world might have to conduct its own review.

He was not entirely sure how the issue of democratization and the oligarchic structure of the international financial institutions would evolve. Clearly, some system through which countries with the greatest economic power contributing most to the institutions were given a greater voice was appropriate and inevitable. Difficulties were likely to arise, however, particularly for the World Bank, which prided itself in many of its publications on being a development institution as opposed to a bank, although views within the World Bank on this point no doubt varied. The Bank’s literature relating to development institutions did not disagree on the absolute need for participation, involvement, and ownership by those who were the object of development. If the role, governance, and procedures of the World Bank were to be reviewed—given that the Bank was probably the single most important development institution—all affected parties must be involved. The result of such a review could, of course, be that the World Bank’s decision-making procedures would not be altered all that much because of the factors noted by Kenen. But it was important to bear in mind that under pressure for increased transparency, openness, and participation, the Bank had already initiated new operating methods. There was, therefore, room for maneuver in many of those areas.

One of the suggestions that had arisen in a review of the Bretton Woods system that he had chaired for Commonwealth Finance Ministers some ten years earlier5 was that technical issues considered within the Executive Board (such as the details of adjustment programs or projects) should not be governed in the same way as issues of finance and control. On purely technical issues, a larger weight should not be assigned to the arguments of those making the largest financial contribution to the institution; indeed, on such issues, a system of weighting was probably inappropriate. Without discussing the interaction of the Bretton Woods institutions with the United Nations system, the problems associated with their voting procedures, and the ways of achieving appropriate representation, he would simply note that the issue was likely to be raised during the 1994 Annual Meetings. Some way must be found to return to the degree of acceptance of the global economic machinery that had existed when the United Nations had been founded in 1945. The large degree of acceptance of that machinery had somehow been lost along the way as the center of influence and power on those issues had shifted to Washington.

In concluding the session, Al-Hamad remarked that it would be difficult to bring harmony to the many rich and conflicting ideas raised during the discussion. He would note only that the debate over issues of governance was just beginning and would continue for a long time. In his view, the issue went beyond the operation of the international financial system and the Bretton Woods institutions and included governance within individual nations and societies. All countries would need to be aware of the issues involved and to contribute to the debate in their own way.


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Peter B. Kenen, “Reforming the International Monetary System: An Agenda for the Developing Countries,” in The Pursuit of Reform, ed. by J.J. Teunissen (The Hague: Forum on Debt and Development, 1993).


The Committee of Twenty was convened by the Board of Governors of the IMF in 1972 as a Committee of Governors. Its 20 members represented the same constituencies of member countries as the Executive Directors of the Fund. It completed its work in 1974 and was succeeded by the Interim Committee.


Moisés Naím, “The World Bank: Its Role, Governance, and Organizational Culture,” in Bretton Woods Commission, Bretton Woods: Looking to the Future, Background Papers (Washington: Bretton Woods Committee, July 1994).


“Beyond Recovery,” in The Global Repercussions of U.S. Monetary and Fiscal Policy, ed. by S.A. Hewlett, Henry Kaufman, and Peter B. Kenen (Cambridge: Ballinger, 1984).


Gerald K. Helleiner, and others, Towards a New Bretton Woods: Challenges for the World Financial and Trading System: Report by a Commonwealth Study Group (London: The Commonwealth Secretariat, 1983).