This session brought together a distinguished panel of senior policymakers from different regions of the world to discuss the lessons that had emerged from the conference for the future work of the Bretton Woods institutions. Kenneth Clarke, the Chancellor of the Exchequer of the United Kingdom, introduced and moderated the discussion. His opening remarks were followed by statements from the four panelists, each of whom played a key role in major economic transformations in his own country: Kwesi Botchwey, the Minister of Finance of Ghana; Moeen Qureshi, who has served both as a Senior Vice President of the World Bank and as Prime Minister of Pakistan; Leszek Balcerowicz, former Deputy Prime Minister and Minister of Finance of Poland; and Paul Volcker, former Chairman of the U.S. Federal Reserve System.


Kenneth Clarke noted that the challenges currently facing the Bretton Woods institutions were as demanding as any they had faced since their establishment, although the institutions themselves had already changed a great deal. The issues under discussion in the present session promised to dominate much of the agenda of the ministerial meetings in Madrid.

A number of issues touched on in earlier sessions remained to be resolved, such as the extent to which the Fund should be actively involved in encouraging the liberalization of capital markets throughout the world. In addition to asking the panelists to make progress in dealing with that issue, he asked for reactions to his recent proposals for alleviating the multilateral debt burden of the poorest, most severely indebted countries, proposals that were intended to build on the advances that had already been made to secure Trinidad terms for those countries burdened with bilateral debt. It would also be useful to explore the more general issues related to the development work of the Fund and the World Bank—conditionality, structural adjustment, and so on, that had been frequently debated. Finally, he suggested that panelists might also wish to consider whether both the Fund and the Bank should enhance their efforts to encourage private capital inflows and activities of the private sector more generally, alongside the development and support of public sector activities in developing countries.

Kwesi Botchwey

It is an honor and a privilege to have been invited to speak at this conference. Ghana, as is well known, was not represented at the Bretton Woods conference whose fiftieth anniversary we are celebrating here. Indeed, it was not to become a sovereign nation until a full 13 years after the conference. Therefore, in a certain sense, my very participation in these proceedings is testimony to the great transformation that the Bretton Woods institutions have undergone. But more important, it is a pleasure to participate in these proceedings because Ghana has benefited immensely from 12 years of very close relations with the Fund and the Bank in terms of both financial and technical assistance. We therefore know firsthand that there is more than ample cause for celebration.

Let me begin by associating myself entirely with all those who have rightly applauded the authors of the Bretton Woods system and the great achievements that have been recorded over the past 50 years in world output, trade, and the quality of life in general. But even as we applaud these achievements, it is important that we critically review the working of the system as we prepare for a future laden with so much promise and yet so much challenge. I should like in this connection to offer an African perspective.

But first, I would like to make a few general remarks. There clearly is an urgent need to strengthen international coordination of macroeconomic policy. The case for such coordination is in my view self-evident and compelling. As many commentators have noted, the consequences for global economic activity and interest rates of uncoordinated monetary contraction among the Group of Seven countries in the early 1980s contributed, in no small measure, to the Third World debt crisis. Developed countries, whose domestic policies have such a trenchant effect on the world economy and thereby on other countries, must not be allowed to do what they please merely because they do not draw on Fund resources. Some mechanism for monitoring and enforcement must be part of the coordination system, and I agree with those who suggest that the institutional agency for such coordination should be the Fund—a more democratic Fund—and not the Group of Seven.

I also support the view that for low-income countries, especially those in sub-Saharan Africa, the Fund and the World Bank will need to provide more, not less, vigorous financial support to compensate for private capital flows, which for these countries are likely to continue to be weak for some time to come. The Bank and the Fund can also offer useful advice to these countries to help them reduce their vulnerability to commodity price instability through more aggressive use of futures and options markets.

Now, let me turn to the role of the World Bank and the Fund in sub-Saharan Africa. By most accounts and assessments, including the World Bank’s, the medium- to long-term outlook for Africa is one of unrelenting gloom. As the Bank’s President, Mr. Preston, reminded us yesterday, the sub-Saharan region is the only one in which poverty is actually projected to increase by the end of this century. It is almost as if this is the working of some iron law, as if the African lion is condemned perpetually to lag behind the general advance, to surge forward at best occasionally, but then quickly to relapse helplessly into some predestined backwater. But we know that no iron laws are at work. Indeed, not too long ago China and the East Asian countries, whose miraculous successes we now cite with such salivating approval, were themselves regarded with the same pessimism. Today, their successes are considered so rapid and so grand that even their mistakes are sometimes presented as “creative” policy responses.

That sub-Saharan Africa is a subregion in travail, no one can deny. But it is important to appreciate that in this subregion too, a change or turnaround is not just possible, it is happening in many countries, thanks in part to the active support of the Bretton Woods institutions and the donor community at large.

The experience of Ghana over the last 12 years—and Ghana is not alone in this regard—offers an excellent example of this turnaround. Through sustained domestic policy reform designed to stimulate growth and ease impediments to factor mobility and productivity, and with international support from multilateral and bilateral sources, we have succeeded in reversing more than a decade of negative growth, which saw incomes fall by over a third and saving and investment ratios decline to negligible levels. Real GDP growth has averaged about 5 percent a year, imports and exports have more than doubled, and revenues have expanded many times over, enabling us to increase expenditure on education and health. Comprehensive structural reform covering the civil service, and the public sector as a whole, as well as a major overhaul of the financial sector, is under way. Thanks to a rapidly growing stock market and a highly successful recent international flotation, Ghana is today cited among the world’s most promising emerging markets. Contrary to the fears of the skeptics, these fundamental changes have not been imperiled in any way by the transition to multiparty democracy, which was successfully accomplished in 1992.

In listing these gains, my purpose is not to hawk the glory of Ghana’s adjustment experience. Indeed, a great many difficulties remain. It is to say that change is possible and also to acknowledge the role of the Fund and World Bank in the achievement of Ghana’s turnaround.

Let me now conclude by looking at some specific areas in Fund and Bank practice where improvements are needed to expedite the delivery and enhance the effectiveness of assistance to reforming countries.

First, it is important to appreciate that reform or adjustment programs do not, and indeed cannot, define the entire context of the national development effort. If things are done right, they must be located in and therefore be informed by a long-term national vision defined by the country itself and anchored in a broad national consensus. Again, it must be left to the country itself to decide how this consensus is to be forged.

Second, the programs must be “homegrown” or “owned” by the adjusting country. This is now widely agreed, but there is a danger of this perfectly agreeable aphorism simply being intoned by the parties as they walk to the negotiating table, like an incantation, designed—as most incantations are—to free them from the tedious obligation to think through what they are saying. Fund and World Bank staff and the authorities must understand and accept this idea of ownership with all that it implies for program content, timing, and sequencing. But what does ownership mean exactly? It must mean above all that the authorities agree with and see the program objectives as being fully consistent with their goals, as something that they need to do on their own, not as some imposition they must accept because they “need the money” and have no other choice. If differences exist between, say, the Bank and the country over any particular aspects of the reform package, they must be resolved through dialogue.

These observations are particularly relevant in adjustment lending, and the worst case of derogation from country ownership is where the World Bank seeks to lure the country into accepting the Bank’s preferred package by promising additionality or front-loading of tranche releases or some other incentive. When this happens with an adjustment loan and its financial flows are built into an entire macroeconomic program, it follows that macroeconomic projections are made based on an agreed growth target, export projections and import elasticities, and capital flows. The adjustment operation then becomes in a sense the channel through which financing is provided; if there is any delay in the fulfillment of tranche conditionality for whatever reason, the whole macroeconomic program is thrown off balance. As all adjustment loans have a general macroeconomic stability condition, the macroeconomic imbalance caused by the nondisbursement of a “main” tranche from a principal adjustment loan cascades through all other adjustment loans by means of the general conditionality. If in the mean time bilateral grants are attached to this principal adjustment loan, the crisis affects not only the foreign exchange cash flow but also the financing assumptions of the budget as grants become unavailable for financing. The program is then crushed under the weight of a labyrinth of cross-conditionality and multiple conditionality as lawyers and country economists haggle over whether conditions have been met. This is no way to run an economy, and the World Bank especially should explore less disruptive ways of tying in financing gaps with policy reform over a medium-term framework, and in ways that make these flows more predictable.

Third, there is a more general need to review the entire concept and working of conditionality, especially if the Bank’s preoccupation with slow disbursements should lead to an intensification of the conditionality hassle instead of its rationalization. The least we should do then is to make conditionality less susceptible to mechanical legal interpretation. In this connection, privatization targets, for example, can be very awkward indeed. When do we say, for instance, that a state enterprise has been divested? When a sale agreement is signed with a willing buyer? When he pays the purchase price in full? What if he changes his mind? What if no buyers come at all? Where conditionality is not met, there must not be a rush to blame it on a lack of political will by the authorities. Instead, a principled appraisal of all the relevant conditions that affect program implementation must be undertaken, and the result accepted by all parties. Waivers must then be granted where the circumstances warrant, without any hidden costs to the country or indeed to the staff arguing the case before the Executive Board of the institution!

Finally, there has been a certain surge in bilateralism through tied-aid export credits and donor funds, which, for whatever reason, have to be allocated administratively rather than through the market. A frank review of these arrangements by the Bretton Woods institutions and donors is called for.

I should like to conclude by saying that there is a welcome process of change under way in Africa that needs to be deepened and accelerated, especially in the areas of domestic resource mobilization, through further work on nonbank financial intermediaries and more aggressive private sector promotion. The World Bank especially will need to clear its resource delivery channels to improve their effectiveness.

Moeen Qureshi

We all agree that the world has undergone dramatic changes over the past 50 years. What is less clear is how these changes should affect the mandate and the operations of the Bretton Woods institutions.

I believe that the fiftieth anniversary of the Bretton Woods institutions is first and foremost an occasion for celebrating their contribution toward shaping the world as it is today, and toward improving the welfare of its people. The world community owes them an enormous debt of gratitude. As Prime Minister González said yesterday, “if these institutions did not now exist, they would have to be created” (Chapter 2). That, however, is not the issue before us. The issue is how these institutions should prepare to respond to the emerging issues and challenges of the future.

What are those challenges? For the World Bank, I would list five key areas.

First, I believe it is becoming more and more necessary for the Bank to define more clearly how it intends to pursue its fundamental mandate in the future. The World Bank’s task, as originally defined in its Articles, was to foster long-term development. It did this by providing access for developing countries to long-term capital for development, together with some useful advice on how to use that capital. Now, the agenda of the Bank appears to be increasingly influenced by the political preoccupations and concerns of some of its shareholders. These shareholders would like to see the Bank become much more proactive in advancing the cause of democracy or human rights, or curbing military spending, or promoting whatever worthy objective seems most appealing to the more vociferous of their domestic political constituencies and lobbies. In most cases, these are desirable objectives, but, however laudable they may be, they tend to diffuse the Bank’s central development thrust, politicize its image, and diminish its effectiveness.

The World Bank is a global institution with many members, and its programs must be responsive to their diverse requirements. In many of the poorest developing countries, the alleviation of poverty through investment in people and the pursuit of comprehensive reforms that promote broadly based growth must take the highest priority. In some of the more advanced developing countries, the Bank has a somewhat different role and priority, which is not dissimilar to that which it performed after World War II: to reinforce their private sectors and to facilitate their access to capital markets. In all countries, the Bank must promote the cause of the environment. The important point, however, is that in each country the Bank must remain focused on the strategic tasks that will advance its central development role and not pander excessively to the many political pressures pushing it to cover a broad canvas of ill-conceived sociopolitical causes.

Second, I believe that the greatest future development challenge for the World Bank lies in Africa, where the intensification of poverty and the related environmental degradation threaten the breakdown of societies and heighten the potential for civil conflicts. By virtually every measure of human well-being, the African continent ranks the lowest. The world community must come to grips with this problem, and the World Bank must prepare itself to play a leading role in such an endeavor.

Third, I agree very much with Mr. Preston that development is not just about economics, it is also about governance. The World Bank must continue to insist on a process of reforms—where these are needed—especially in the area of governance, as a precondition for providing its assistance. The best-laid economic plans and policies will be frustrated by poor governance. The Managing Director of the Fund has put it very incisively. He has said that the bottom line of development is to reform the government. The Bank must be prepared to take a strong position on governance issues and to deny its support to those governments in which an unwillingness or inability to improve governance is an obstacle to economic progress.

Fourth, the World Bank needs to devise new ways of promoting and supporting the private sector. This is a part of the Bank’s mandate, and the Bank was constitutionally endowed with instruments such as “guarantees” to act as a catalyst for cross-border capital flows. However, after an initial burst of activity in the late 1940s and early 1950s, the Bank has done little in this area except sermonize.

The World Bank and the regional development banks are in a position to play a major catalytic role by providing partial guarantees or by taking a small participation in large private investments, thereby raising the threshold of confidence and making possible very large private capital flows into emerging markets in infrastructure, environment, and privatization programs.

Fifth, the World Bank’s greater emphasis on lending for human resource development and poverty alleviation—which I applaud—raises the question of whether it is currently organized and equipped to perform effectively in this area. The Bank is a highly centralized institution with most of its multinational staff stationed in Washington. It will not be able to maintain the quality and effectiveness of greatly enlarged lending for the social sectors and for poverty alleviation unless it changes into a different type of institution, with a much higher proportion of its staff located in the field to work in tandem with local authorities, communities, and nongovernmental organizations.

Turning now to the Fund, it also has had superb leadership in recent years, and it has acted with the right blend of flexibility and decisiveness in becoming an emergency source of financial support and the purveyor of financial advice and discipline for developing countries and for economies in transition. But given the development of international markets and the access that the industrial countries have to these markets, as well as to each other, these countries have had no recourse to Fund facilities for nearly two decades. More important, as so many speakers have pointed out, the Fund is not drawn into the policymaking councils of the major industrial governments, and it does not serve as the central clearinghouse for the discussion of international monetary issues as its founders had intended.

By a curious turn of events, the Fund appears to have been defrocked in its own parish. It is even more curious that, on the one hand, we talk of an increasingly global and interdependent world monetary system while, on the other, we refuse to use the only multilateral instrument that is available for its surveillance. As the Managing Director has noted, there is an intellectual but not a political acceptance yet of the role of the Fund in multilateral surveillance. Since governments generally tend to act only in times of crisis, I fear that we may stumble toward a political acceptance of the Fund’s role only after we have suffered the pains of another major financial crisis. We desperately need—to quote Mr. Duisenberg—“mutually agreed rules…. providing an incentive for stability” (Chapter 7). The Fund is clearly the place to forge them.

The future challenge for the Fund can therefore be very simply stated. It is to allow the Fund to play the same role with respect to the industrial countries that it has been able to perform with such effectiveness in the developing countries. The challenge is to give the Fund a more central and credible role as the main forum for discussion and resolution of international monetary issues, including the management of the system. Its capacity to create additional international liquidity through the allocation of SDRs is of particular significance in developing the linkages between international stability and development.

Last year, when I took over as Prime Minister of Pakistan for a brief period, I had personal experience of dealing with the Bretton Woods institutions as a client. At that time, Pakistan faced a severe financial and economic crisis, which necessitated that I seek the assistance of the Fund and the World Bank. After taking some immediate steps to stabilize the situation, I initiated a dialogue with their leadership. I informed them that I would announce to the nation a comprehensive program of economic, social, and political reforms within three weeks after assuming office, but that they should be prepared to act expeditiously and provide support to the program. I was delighted to find that within a month after I had announced the program, both the Fund and the Bank Executive Boards were able to approve a stand-by arrangement and adjustment loans, respectively, in support of Pakistan’s reform program.

The program that I announced included major improvements in governance, in attention to minority rights, and in movement to free and fair democratic elections, as well as some reduction in military spending, but there was no prior discussion of these items with the Fund or the Bank. The reason that I was able to take sweeping measures in the governance area was precisely because it was clear that these were not taken at the behest of the Fund or the Bank. However, the support provided by the Fund and the Bank provided the critical elements of confidence and bridge finance that were essential to the successful implementation of the reform program in Pakistan.

Over the last 50 years, some changes have been made in the organization and institutional structure of the Bretton Woods institutions, but their basic architecture and decision-making processes remain rooted in the economic circumstances and political realities of the world of 1944.

Both institutions have an outstanding tradition of leadership at the top, which continues to this day. But just as in their organizational structure, the current arrangement by which the President of the World Bank is always an American and the Managing Director of the Fund is always a European detracts from their international character and global legitimacy.

Furthermore, since their inception, the World Bank and the Fund have functioned largely outside the purview of the UN system, of which they are specialized agencies. If the UN system is revitalized and restructured to reflect current world circumstances—for which there is increasing political support—it will become necessary to re-examine how the Bretton Woods institutions can be realigned with that system to form a more dynamic alliance to preserve and promote “human security,” in the broadest sense of the term.

It is time, in my view, to look again at the mandate and organizational structure of the Bretton Woods institutions to see whether they can be brought closer into line with the imperatives of a vastly changed world environment. We shall not achieve it in one fell swoop overnight. To use Jacob Frenkel’s phrase, we shall have to “earn it” through intensive negotiations, especially among the larger countries, and by the demonstrated excellence of the work of the Fund and the Bank.

Leszek Balcerowicz

When I was thinking about the topic of this session, I came to the conclusion that there are at least three factors that are both relevant for the future and related to the topic at hand: first, domestic policies of the respective countries; second, international economic cooperation, including the international monetary system; and third, the Bretton Woods institutions in relation to the first two factors. I will not discuss the second factor, but I would like to say a few words about the domestic policies of the developing countries, with a view to the future, including the transition economies; a little about the Bretton Woods institutions; and, at the end, a small remark about the transition problems of developed countries.

Let me start with the developing countries. In thinking about policies, it is useful to distinguish the vision of a target system and the transition to this system, given an initial situation that is usually very bad.

With respect to the target system, I think that there is now what is sometimes called a new development paradigm: a vision of the economy defined by a set of fundamentals that, if implemented, ensure a given country the possibility of fast and sustained economic growth. These fundamentals include a market-friendly state, which is limited and focused on those activities that the private sector cannot do, outward orientation, limited ratios of taxes and expenditures to GDP, dominance of the private sector, and political stability. Of course, political stability is not a solution in itself, but only if it serves as a basis for good economic policy.

One may remark that this development paradigm is not new. It is not very new. To a large extent, it is a return to old truths, and the paradigm of development through a state-dominated economy can be seen now as an historical aberration. We are largely returning to the classical truth, with some additions and modifications, such as environmental regulations, more focus on human capital formation, and so on. So perhaps this so-called new development paradigm should be called a neoclassical development paradigm.

Let me turn now to the second topic, to the transition from usually bad economic conditions to this target system. This issue is burdened with much more confusion and misunderstanding, and I think I have to be a little polemical on this point. I would like to refer to yesterday’s intervention by Richard Portes, which I think conveyed some bad advice to the transition countries in his criticism of their policies. I found it ironic that in stipulating certain mistakes, he committed mistakes of his own. Without going into detail, let me mention only a few examples. First, it is not true that there was a deliberate premature dismantling of the Council for Mutual Economic Assistance (CMEA). Quite the opposite. All the smaller countries of the CMEA tried to maintain some transitional arrangements but failed in the face of the opposition of the Soviet Union. Second, treating the countries of Central and Eastern Europe as a homogeneous group disregards very important policy differences that can be linked to differences in economic situations. Third, it is misleading to sum up all the illnesses of the member countries, all their alleged mistakes; no one attributes the sum to each country. It is as though one counted all the illnesses of the members of mankind and attributed the sum total to each person.

But these are only examples. More generally, I think Professor Portes implied that less emphasis should be put on stabilization. This is bad advice for countries burdened with a very high inflation rate at the beginning of reform—which was typical of post-Soviet economies—where stabilization should be decisive enough to break inflationary inertia and inflationary expectations. Furthermore, I think it is dangerous to suggest that more emphasis should be put on microeconomic policies, which, although a very obscure term, is usually interpreted as more detailed state intervention. To be very brief, what is needed in transition economies, which face very difficult economic situations at the beginning of the reform process, is a decisive and comprehensive program of stabilization, liberalization, and rapid privatization.

This would be, in my view, the main message to those countries that are either in the process of transition or about to launch this transition. These countries should not neglect their efforts at stabilization or at liberalization and privatization for the sake of microeconomic policies.

Let me now turn to the role of the Bretton Woods institutions and start with some givens. I take as a given that the World Bank should continue to play an important role in concessional finance, especially with respect to the African countries, and that the Fund should be focused, among other things, on the issues of monetary and macroeconomic stability. But beyond these givens there are some questions regarding the future role of these institutions.

In thinking about this future role, I think one should be guided by two criteria: first, the activities of these institutions should be focused on their comparative advantage; and second, they should continue to try to improve the economic policies of their member countries.

When one puts these criteria together, I think one comes to the conclusion that the comparative advantage will continue to reside in policy-related lending, which requires conditionality. One can have discussions about the details of conditionality, but one should not reject the principle of conditionality. Lending is linked to discussions about policy and is dependent on the implementation of certain policies.

However, I can see at least two problems in this comparative advantage. One problem can be perceived as the price of success, and this is the decline in the share of finance provided, especially by the World Bank, because some developing countries have been successful enough to attract more private capital. The second—already noted many times during this conference—is that the Bretton Woods institutions, especially the Fund, come into the countries concerned mostly in times of crisis, crises that very often are brought about by bad economic policy. This is why the Fund in particular is regarded by the domestic populace as a whipping boy.

Against this background, one could think about the response to these two problems, which I can only sketch. The first element of this response is that the Bretton Woods institutions should think about restructuring their activity in such a way that they focus more on crisis prevention activities to help countries stay on course to prevent the crises—which I know is very difficult, but worth thinking about. Second, they should then realize that their voice over time would depend less on the financial factors and more on the recognition of their expertise, which has already been stressed in the previous discussions.

What would be the practical implications of these general suggestions? First, it is worth thinking about a program of mass economic education, financed and launched by these institutions. There is a lot of talk about human capital formation as a very important activity, but the capacity to comprehend better what is good and what is bad economic policy belongs clearly to human capital formation of a very special type. This is a very important input into democratic decision making, and this democratic decision making may, in turn, be an important input into better economic decisions and better economic policies. So perhaps it is worth thinking about setting up a joint research tank charged with helping to improve the public’s understanding of good and bad economic policy.

Second, it is important to realize that most countries today are democratic and have more open societies. So it is important for the Bretton Woods institutions to realize that they should shift from their roles of being a sometimes secretive negotiator and advisor to the governments concerned to becoming agents for positive change in open and pluralistic societies. They should not see governments as their exclusive partners. It is important that Bretton Woods institutions see that they are partners with the mass media, nongovernmental organizations, and all other representatives of open societies, and that governments do not always best represent the interests of society. This implies that in selecting personnel one should look not only at technical skills but also at communication skills. This is very important, especially in countries that need a lot of convincing.

Let me finish by noting the transition problems of developed countries. Transition problems are not the monopoly of transition economies and of developing economies. I would like to mention two transition problems that seriously affect some developed countries. First, protectionism is still prevalent, especially in agriculture, as is very well known. Second, in some Western European countries there has been an oversocialization of the economy, creating a crisis of the welfare state and related high unemployment.

These transition problems should be solved for two reasons: first, in the interests of the countries concerned, and second, in the interests of other countries, because, as we very well know, dismantling protectionist devices is extremely important for the development of developing countries. It is also very important from a political point of view, because what exists now in this form in developed countries quite often gives a very bad example, and it is used by the opponents of reform in other countries to argue that this is the way to go.

Paul Volcker

In purely human terms—and here I can speak from personal experience—fiftieth birthdays inevitably are bittersweet affairs. It is much too soon for an autopsy but much too late for any sense of real celebration. I have to tell you, after participating in three or four conferences this year commemorating the fiftieth anniversary of Bretton Woods, I am struck by the parallels to the human condition. No one seems to actually contemplate the demise of the one being honored; at the same time, it is undeniable that there has been a certain loss of youthful enthusiasm and vigor. The conversation often seems to involve too many might-have-beens, too many opportunities missed, too few agreed victories. There is indeed a condition that some might interpret as encroaching arteriosclerosis, while others, more positively, would perhaps suggest there is a mature recognition of the complexities of the world and of the powerful forces beyond governments and maybe even beyond human control. I have to remind myself, and I remind you, that unlike human beings, institutions are not governed by biological realities. As we look to the future, the question is: What are the chances for a rebirth, a reconstruction, a new vigor for the Fund and the World Bank?

I have listened to all the debate this year, and it seems to me there is a strange dichotomy in thinking. On the one hand, there is a widespread sense of dissatisfaction with the performance of the world economy. A contrast is constantly drawn between the first 25 years after Bretton Woods and the second 25 years, and you know the story: slower growth, more inflation, more unemployment, slower productivity, lower savings, lower investment—all the rest. It is also quite clear that that reduced economic performance has been paralleled by much greater volatility in financial markets domestically and internationally: volatility in the sense of extreme price fluctuations, compared with the first 25 years of Bretton Woods, in financial markets; and volatility in the sense of surges and withdrawals of capital internationally. Jacques de Larosière pointed out some of the implications this morning. But it is also a fact that any relationship between the poorer economic performance and a breakdown of what used to be called the Bretton Woods system is hotly contested.

It seems to me that however one judges some of the technicalities of this debate, one might think the correlation between diminishing economic performance and increasing financial volatility would inspire more radical thinking about the role of the Fund and the World Bank. But what we seem to find instead—and I am making a simple observation from other conferences—is that any real challenge to the institutional status quo has been turned back with relatively little argument. Indeed, the case is hardly strongly pressed. This is not to say that we do not all want the Fund and the Bank to stay around. We want them to learn around the edges from experience, we want them to do a little more concentration in this area and a little less in another area, but none of it strikes me as very fundamental from a systemic point of view, posed against the evident problems of the world economy.

What is going on here? Do we have a collective lack of imagination or a lack of will? Or does it all reflect a simple wisdom and appropriate modesty, a recognition of reality? Well, part of it, I have to say, is a simple matter of human nature, which has been referred to a number of times today. We simply have not had a world-scale crisis to motivate action—certainly nothing on a magnitude of the 1930s. But in making that point, I also have to say promptly that we certainly have had some close calls in this 25-year period, and in a number of those instances the Fund and the Bank have played a key role in preventing the potential crisis from becoming a real catastrophe. In the process, success contributes to a sense of inertia.

More positively, we can all point to some important and really brilliant successes: successes in economic development, most notably in Asia, but very good grounds for hope elsewhere—in Latin America and potentially in Africa. More broadly than that, we are all aware that there has been a profound shift from the earlier postwar period to faith in market-oriented approaches. Although a faith in the market is not exactly antithetical to all government and to international institutions, in many minds they exist somewhat uneasily together. We are aware, at least in industrial countries, of a generalized lack of faith in government itself, a profound skepticism in almost all our countries about the ability of our governments to get anything very right for very long, and that skepticism inevitably spills over to the international institutions that those governments control.

Some of the implications are clearly seen, for instance, in the work of the World Bank. There are in fact, it seems to me, inherent difficulties in a public bureaucracy lending to private enterprise. If that is where the action is—and the action clearly is there much more than in the earlier postwar period—it obviously poses a problem for the Bank in how it rearranges its operations in that kind of environment.

More broadly, in this new world of private markets and many more international capital flows, the idea of managing floating exchange rates is more difficult; to some, managing exchange rates today is almost an oxymoron. We are told time and again that the volume of capital flows makes all the old possibilities in that respect nonfunctional.

Maybe it is a generational difference, but all that implied passivity does not strike me as justified. There is, of course, the view that the instability is related to economic difficulties in individual countries, that reform is fine, but nothing can be done without a better convergence of national policies. I cannot tell you how many times I myself have made a speech that we will see no stability internationally with high and volatile rates of inflation in important countries. But I used to make those speeches 20 years ago, and I still hear some of those speeches, which are almost oblivious to the fact that rates of inflation are today very low and converging—converging in a way we have not seen since the creation of the Bretton Woods system. I point out to you that we have had a remarkable movement toward the independence of central banks, which presumably brings at least a potential ability to maintain control of economic policy in that very important area. I realize that it is much harder to say favorable things about fiscal policy, but I am almost inclined to say we have had a convergence; it may be bad policy, but there is convergence.

I really do not think we can look to the excuse of lack of convergence anymore or lack of stability, or we cannot do it for much longer, if we continue to have the kind of success we have had recently. I think the problem lies elsewhere. I can understand the skepticism of public officials themselves about stabilizing exchange rates if they have a sense of lack of control over the instruments of economic policy nationally, because it is hard to conceive of stable exchange rates unless there is an ability to control national policies in a way consistent with that objective.

We are not going to be able to solve the problem of how to get more flexible fiscal and other policies here, but I think that is an important concern. Fiscal policy is a major source of pessimism, but it does not seem to me to be an excuse for passivity in the world economy. I have emphasized the importance of price stability. I think we are making remarkable progress in that direction, and that certainly should get us thinking about how we can move from domestic price stability to greater stability in exchange markets.

How can we strengthen the institutional structure? This has been what most of the conversation today has been about. I would certainly agree that, as a matter of political legitimacy—and, in less high-flown terms, as a matter of political and public support—we must be moving, if we want reform in this area, toward a more prominent role for the international institutions, as opposed to bilateral or ad hoc discussion and bargaining among major countries.

This all points toward a central role for the Fund and the World Bank, and I do not have to go through the arguments here. It seems to me that the issue resolves in part into what we do to strengthen the Interim Committee and the Development Committee. I point out that the mere fact that we are still using the word “Interim” 20 years after this Committee was created suggests a certain lack of commitment to that presumably central body governing the Fund. I think it is fair to say that criticism of the Development Committee has been greater. But I think there is a great potential—I will not rehearse it all here, because you have heard a lot about it—for bringing the management of the Fund and Bank and the organizations themselves more closely into the process of cooperation or coordination. To the extent that the process exists, it now largely revolves around the Group of Seven or the old Group of Five. You are not going to eliminate major countries talking among themselves and coordinating positions as best they can, but I think there is a difference when you bring those discussions, after whatever discussion there is among other groups of countries, more clearly into the organized, legitimate body of the Fund and the Bank, if we really want to get serious about getting action.

I have listened to all this talk about surveillance, and it reminded me a little bit—it always does—about a conversation I had 20 years ago when I was involved in trying to reform the system after the fixed rates fell, and we had all kinds of elaborate rules for this system, all kinds of surveillance mechanisms. I visited a wise official in one of the developing countries to “sell” him this story and to tell him how he ought to support these reforms, and he had an answer that always impressed me. He said, “I know all about surveillance in the Fund. When we disagree with the Fund, we get in line. When a big country disagrees with the Fund, the Fund gets in line. When the big countries disagree among themselves, the Fund does not function.” Well, I think we can all recognize some reality in that description, and I would suggest, if you are going to have successful surveillance—and I cannot go into all the details—you had better have at least some simple core of agreed rules and measures that can serve as a measure of performance applied to one country or another, big and small, difficult as it is to get any real symmetry in that process. I would suggest to you also what seems to me obvious—that if you are going to have a focus for surveillance internationally, exchange rates had better play a very large part in that process.

It is easy to point out in that connection the holes in the target zone approach, or however you want to label it. Fixed rates or floating rates are much more intellectually satisfying in the textbook and in description. Someday, we may have fixed rates, more generally. Maybe we will have a floating rate system that seems to work in a more stable way. I certainly think fixed rates are possible regionally, but I do not think we are ready to go there internationally for a very long time. But I would ask whether it is beyond the wit of man to suggest there are ranges of exchange rates that would be generally agreed to be grossly misaligned. If the answer to that question is “yes,” then we have to proceed to the next question: whether we can, with the best institutional arrangements possible, manage—and I would emphasize the word “manage”—to avoid those misalignments. I happen to read experience favorably in that connection. But, whatever your judgment is on that point, I think we can agree on some points. Success will require clear recognition of the importance of the effort; importance, let us say, at least comparable to the importance of maintaining open markets, getting GATT agreed, avoiding unjustified retaliation in the trade area, and all the rest. It will also take effort and a willingness to conduct monetary policy, in particular, with an eye to the objective of avoiding extreme misalignments in exchange rates. I am well aware that success in that endeavor will require a reasonable—maybe not perfect, but reasonable—medium-term position with respect to fiscal policy.

Furthermore, avoiding excessive exchange rate stability will take a national commitment to that objective, supported by a few agreed rules. Not least, it will take a resolution to stop meeting to celebrate the past or to discuss the problems of the present or the old problems. It will take a willingness to move from discussion to action. I would suggest, frankly, that all of those qualities heretofore have been lacking.

But I have another, prettier picture in mind. Suppose we do succeed collectively in restoring expectations about price stability—and that is a supposition that, it seems to me, we are indeed in the process of achieving, not just because of its importance internationally but because of the priority given to it domestically. Suppose we do make progress on fiscal policy and achieve a reasonable medium-term position most of the time in most of our countries—also something we should be doing for its own sake. Then, suppose we take the further step of a commitment to take the objective of stable exchange rates seriously to avoid gross misalignment. I would simply conclude with unaccustomed optimism. Under those conditions, we might be surprised at how easy it is.

General Discussion

Nancy Alexander felt that it would be useful if the panel could join some of its thinking to that of the earlier session on poverty. Some of the points emerging from the discussion of poverty were particularly striking, such as the observation that the benefits of economic growth could often be canceled out by poor income distribution and that inequality of income was a significant drag on governments’ ability to achieve the poverty reduction goal that was at the heart of the World Bank’s mandate. Given the fact that the Bank had been very deliberate about its anticipated greater role in promoting free markets in developing countries, she wondered how the market could be made to be friendly to the poorest segments of the population, which needed to be reached in a way that reduced not only poverty—indeed, earlier speakers had said that poverty reduction was not enough—but inequality as well. She asked the panel to address that question in the light of the need to deepen partnerships with a variety of players throughout society. She hoped that the vision of a people-friendly market and a participatory society could be fed into the session of the conference devoted to establishing a vision for the future.

Kwesi Botchwey replied that it was widely recognized that trying to achieve growth with equity in the distribution of benefits raised difficult issues. A key element in Ghana’s structural adjustment program was the inclusion at the outset of the program of specific measures targeted at the most vulnerable groups in society. Those kinds of measures, which in Ghana had included labor-intensive programs and direct credits to vulnerable groups to allow them to engage in productive activity, were not on their own sufficient. The resources required to achieve the desired results were large, and programs of intervention were at best a temporary expedient, designed to smooth the path of adjustment. In the end, it was necessary to ensure that growth itself was robust and that it generated a significant amount of employment.

Paul Volcker, responding to a query from the moderator, remarked that from the perspective of the United States, one of the principal issues that had to be faced squarely was that, in providing funds for development initiatives, there was no substitute for budgetary resources. If the World Bank had a role to play in fostering private sector activity in developing countries, which it clearly did, highly concessional finance would be required, which did not come easily from any donor country, including the United States.

At the other end of the spectrum, the problems that needed to be addressed were not likely to be solved in a fundamental way by infusions of money, even on a concessional basis. Many more elements had to be put in place, as experience had shown. There was currently much less optimism than in the early days of the Bank and the Fund about the benefits of lending or cash grants as the key to the process; there had been a healthy recognition of the importance of the many other factors, including the role that private markets could play. In that sense, the World Bank might fall back into what could be a very important advisory role, both in poor countries and in those providing finance.

Layeshi Yaker felt that the World Bank and the Fund deserved praise for having helped a number of developing countries achieve satisfactory rates of growth in recent decades, one of the most encouraging aspects of global economic trends in recent years. As major sources of multilateral development finance, the Bretton Woods institutions played an important role in supporting and even influencing Africa’s development programs, not only through financing programs but also through influencing the orientation of economic reforms and the overall attitude of Africa’s development partners toward the continent.

Within that context, he suggested a review of the current international monetary arrangements, particularly the strategies used in promoting economic growth and development and the mobilization of financial resources for development. The emergence of a generalized system of floating exchange rates had brought about increased volatility in the exchange rates of major currencies, which had contributed significantly to the severe economic and social adjustment costs in many countries in Africa. Africa was especially vulnerable in that respect, as many countries in the continent had moved progressively toward more flexible exchange rate arrangements in line with general developments in the world economy—hence, Africa’s interest in the establishment of a stable international monetary system.

Moeen Qureshi responded that he would not want to elaborate on the excellent discussion of those issues that had taken place in earlier sessions, particularly the previous session in which Jacob Frenkel and others had considered at some length the relative merits of fixed versus flexible exchange rates. His own sense was that, as developing countries were not able to influence developments elsewhere, the best approach from their standpoint would be to concentrate on managing their own monetary and financial affairs in an orderly way and to forget about the exchange rate system. Exchange rates would work out quite well if the monetary policies were right.