Is the World Economy All but Lost in the Bretton Woods? : Without reform, the global exchange system will remain vulnerable to wild currency swings, risky hedging and ruthless speculators

Free markets and global capitalism are forging extraordinary changes that are rapidly reshaping the post-Cold War world. Market liberalization and privatization have almost become policy mantras, whether in China, Hungary or the United States. In fact, the fast-paced exchange of goods, services and technology is not only transforming economies but in some cases is converting decaying authoritarian societies into vital democratic ones and making tentatively democratic societies all the more enthusiastic about their newfound freedom.

With the Cold War ended, the traditional approach toward foreign policy--subordinating economic interests to national security--may soon be widely viewed as passe. High among foreign policy questions today is: How should the international community work toward greater multilateral economic cooperation in this changed and charged environment?

AT 50, BRETTON WOODS IS BEING CHALLENGED

One prominent expert--Judy Shelton, senior research fellow at the Hoover Institution--draws parallels between the end of the Cold War and the end of World War II, when the world was at a historical and intellectual crossroads and a grand strategy was believed to be crucial. The goal then was to create a global economic order to rebuild a shattered world economy and to prevent recurrence of the events of the 1930s that helped pave the way to World War II. In 1944, representatives of 44 nations gathered in the New Hampshire town of Bretton Woods and set rules of conduct related to exchange rates and international payments. With that, two extraordinarily influential institutions--the World Bank and the International Monetary Fund--were born.

The Bretton Woods agreements have been remarkably successful in establishing international monetary order and fostering an openness in world commerce that has brought unprecedented prosperity. By setting up a system that gave many nations easier access to development money, Bretton Woods built the foundation for the explosive postwar economy.

But now, 50 years later, some including Shelton question the relevance of and the need for the World Bank and the IMF and raise doubts about their impact on world affairs. They think these institutions, once vital and useful, have become elitist, wasteful bureaucracies unable to serve the real and urgent needs of the average person, especially in Latin America and Africa. Critics of these institutions point out that a key Bretton Woods accord, the strict control of currency exchange rates, was abandoned in 1973 and replaced with a floating exchange-rate system.

Is it time to revisit Bretton Woods? Certainly. That’s exactly what has been done by an independent Bretton Woods Commission, chaired by former Federal Reserve Chairman Paul A. Volcker and including other former government officials, corporate officials, academics and bankers from the United States, Germany, Japan and 15 other nations.

In recently recommending changes in the world financial structure, the commission specifically called for international monetary reform. As the panel noted, since the 1970s “there has been no sustained coherent approach to exchange-rate management” and the result has been prolonged periods of dangerous misalignment among major currencies and ineffective ad hoc policy coordination arrangements dominated by the so-called G-7 countries.

The cost of this mismanagement has been low long-term economic growth. The panel has recommended that the major industrial nations revamp their fiscal and monetary policies to achieve coordination that will thwart destructive exchange-rate volatility.

Increasingly, domestic actions have had indirect but real repercussions in world markets. Thus domestic and international economic policies can no longer be viewed as largely separate and independent from each other.

In the fall of 1992, for example, chaos reigned in European money markets when Germany, the undisputed economic giant of the European Union, raised its interest rates in order to finance the huge costs of national reunification while at the same time keeping inflation in check. EU members, whose currency rates are pegged to the German mark, begged the Bundesbank to cut its rates. It refused, producing havoc. Some members devalued their currencies, others boosted interest rates--and the net effect was a mess.

Often, less overt actions--sometimes even offhand comments--increase volatility in money markets. Earlier this year, U.S. Treasury Secretary Lloyd Bentsen said the Clinton Administration had no interest in seeing the dollar decline further against other world currencies. Currency traders nonetheless interpreted the statement as a signal for a weaker dollar and speculated against the U.S. currency, sending it southward in value against the Japanese yen. That made Japanese imports more expensive for Americans and U.S. exports less so for the Japanese. Statements by Washington were widely criticized as a de facto dollar policy that helped to put the squeeze on Japan during delicate trade talks.

Undeniably, sound national currencies are crucial to stability, investment and trade. Some highly regarded economists, such as Paul Krugman of Stanford University, prefer the status quo of the Bretton Woods system, but many others do not. The Hoover Institution’s Shelton goes so far as to advocate that the United States return to the gold standard, arguing that the gold standard is the most democratic form of money management because it is wholly objective, unlike the current system, in which governments can change the value of currencies any time and at will. Under her scenario, the U.S. government, before moving to gold, would present a balanced budget and make known that it planned to convert to gold in five to 10 years. It would encourage its allies, especially Japan and Germany, to do the same. The gold, Shelton maintains, would never have to be redeemed as long as the governments did not pursue the inflationary policies that led to gigantic budget deficits.

Most economists argue against a return to a rigid gold standard. Even so, the issue of readoption of the standard should be part of the discussion if there is to be reform of the international monetary system; if not a standard pegged to gold, perhaps a mandatory band of currency ranges should be explored. Failure to act in this area could prove critical. In a time of increasingly interdependent world economies, wild currency fluctuations can undermine trade despite the world trade accord known as GATT and all the regional free-trade agreements.

Another reason for international monetary reform is the emerging scramble among nations for capital to finance economic development. That competition is likely to put more pressure on currencies and interest rates.

Unless monetary and fiscal policies are better coordinated among nations, a backlash can occur, taking the form of an inward-looking neo-protectionism that would be a setback to free trade and more open markets.

The Volcker panel was ardent in its call for the major industrial nations to review arrangements for global economic cooperation and to begin designing an improved international monetary system. It recommended that the IMF return to its original mandate--international monetary issues--and focus on the development and implementation of monetary reforms.

Over the years, the IMF has devoted more and more resources to developmental issues. Those should be left to the World Bank, whose original mandate was to foster long-term economic growth and development. The Volcker commission complained that the World Bank lends money to too many government-supported enterprises and urged that it target funds on countries and programs that the private sector cannot or will not finance. The World Bank has already begun to move in this direction.

The panel’s suggestions were mild rebukes compared to the pointed charges by critics who claim the World Bank does more harm than good when it funds environmentally destructive programs and development strategies that force the poor to endure a disproportionate share of the social and other costs of structural adjustment. One group--Fifty Years Is Enough, a coalition of environmental, religious and labor groups--calls the World Bank the enemy of true progress.

REFORM PROPOSALS GET A LUKEWARM RECEPTION

So far, there has been little enthusiasm for any of these reforms. Treasury Secretary Bentsen said he instead prefers quiet cooperation and consultation among governments, and leaders in many other nations also have been lukewarm to the proposed changes. Even so, the person nominated to succeed Bentsen as head of the Treasury Department, Robert E. Rubin, now chairman of the National Economic Council, should carefully weigh the value of Volcker’s recommendations. Without monetary reform, the global economy will remain vulnerable to wild currency swings, risky hedging and ruthless speculators.

Bretton Woods unquestionably should be revisited. The system established 50 years ago has been the bulwark of global economic development. The guiding principles need no radical change, but the structure needs retooling, at the very least. An updated framework, reworked to reduce currency volatility and provide better means for managing new world economic realities, is needed. This should be a top priority on the international agenda.

Next week: World population and world hunger.