GEI Newsletter Issue No. 1

Report on ‘The Future of Global Economic Institutions’ A Workshop of the Global Economic Institutions Research Programme of the Economic and Social Research Council, London, 22/23 March 1995 - by Ray Barrell

Also in this issue:

Editorial
by David Vines
Reforming the International Monetary System: Lessons from the Mexican Experience
by David Vines

Report on 'The Future of Global Economic Institutions' A Workshop of the Global Economic Institutions Research Programme of the Economic and Social Research Council, London, 22/23 March 1995
by Ray Barrell

This GEI programme workshop, hosted by CEPR on 22/23 March 1995, consisted of four sessions totalling eight papers, and an after dinner talk by Sir Nigel Wicks .

1. The IMF and World Bank

The first session was chaired by Jim Rollo (Foreign and Commonwealth Office). Max Corden (Johns Hopkins University) gave the first paper on the International Monetary Fund (IMF) and the World Bank. He identified the reasons for the existence of such institutions as follows:

• market failure. The inability of the market to evaluate projects or prospects without unacceptably high risk premia.
• political failure.The inability of governments to plan and evaluate, and even when they do, their inability to effectuate their decisions.
• bureaucratic failure. The inability of the support structure to process information and provide briefing and advice for politicians.

These are all potential reasons for the existence of multinational organizations, although not all may operate at once. We need to be able to identify which failures are relevant to which situation, and we need to describe how to remedy the failures.

The World Bank has a responsibility for developing countries, and as such it is clear that 'failures' can exist within the structures of its subject group. Its existence cannot be justified on a 'flow of funds' basis, as it addresses long-term large-scale structural projects. The fact that its customers are governments presents it with problems, however, in part because they can be dishonest, and even when honest they can be misguided. World Bank projects such as the Pergau dam in India, which was a government idea, can as a consequence come in for considerable criticism, and hence there can be dilemmas about the origin of projects.

The Bank is a development organization and as such it has no need for original ideas, because these can come from academics. The Bank does undertake empirical work, however, and this has a significant role in the development process and in the propagation of ideas and information.

There is a continual debate over whether the Bank is too big, and there are regular reorganizations. There have been criticisms of that undertaken in 1988 which caused too much disruption, as does the continual internal movement. A new round of cuts of up to 25% are expected, but it is unlikely that they will improve the average quality of the work carried out.

The IMF is generally better run, in part because it has a better defined mandate, and is smaller. There are also managerial differences that stem from the arrangement that the Fund has a European Director, while the Bank has a US appointee.

There is a vast amount of information in and about the Fund, and it is difficult to assess the value and flow patterns. However, it is clear that there are three functions:

• It is a clinic for sick countries, where conditions for support are developed
• It is an information clearing house and a source of general advice
• It has a role to play in the international monetary system

1.1 Clinic

It is difficult to assess whether it is effective as a clinic, as it is only likely to have a marginal impact, and is most successful where the countries involved (Asia Pacific, say) would have acted in a similar way:

• case studies are done in detail, and familiarity with a country's history is useful
• the Fund (and the Bank) are most successful where the elite agree with objectives
• some failures exist, especially in Africa, but education has taken place

1.2 Information and Advice

The core of this role is World Economic Outlook , but there is also much internal information. The unpublished Recent Economic Developments , regularly updated and circulated to governments, are especially valuable for LDCs and more are becoming available. Some material is politically sensitive and would need more work if published, however.

The Fund also undertakes regular Article 4 missions to all countries. These are now thorough appraisals, although they have grown out of the surveillance of exchange rates. Missions can make a difference, especially in small countries and LDCs, but in general they help to force the finance ministry to justify its policies.

1.3 System Role

The dominance of Germany , Japan and the United States in the system means that the Fund can only provide information and commentary in the G7 process.

Jim Rollo opened the discussion and drew a useful distinction between peace-keeping, peace-making and preventative diplomacy, suggesting that the Fund's roles could be split up in an analogous way. It is also important to note that the clinic queue has dropped and it is questionable whether the clinic can still be financed given that no OECD country really needs a programme. Max Corden responded that the Fund has skills and a role, for instance in the recent Mexican crisis, in organizing funds from others. Andrew Crockett (Bank for International Settlements) discussed the Fund and market failure, and the problem of the scale of capital flows. He suggested that it would be possible to design institutions to deal with these modern problems. Richard O'Brien (American Express Bank Ltd) asked if we needed a 'global government' from such institutions, as it sometimes resulted in too rapid action, as in Mexico, rather than facing the need to make systemic judgements.

Martin Wolf (Financial Times) thought the Fund's actions were often inappropriate because of complicity with governments on market failure. It kept information from the market, and would not comment even if it thought policy was wrong, which made it easier for governments to ignore advice. Richard Portes (CEPR) asked who was best placed to make systemic judgements and suggested that this would be the G7 and the US Treasury and these would be narrowly based. The other functions of the Fund overlapped with those of the OECD and the EC. David Evans (University of Sussex) pointed out bureaucratic failure often related to incentives, and William Perraudin (Birkbeck College and CEPR) suggested that open commitments made policy credible, but left an incentive to conceal information. Randall Henning (Institute for International Economics) gave a justification for the proposed Mexican facility and suggested that such a process should be institutionalized. This left the problem that it was difficult for the Fund to act in a constructive and open way, because it might then cause the crisis it was trying to avoid. Daniel Dultzin (OECD) pointed out that the Fund's role had changed, from helping avoid large current account deficits under Bretton Woods to the wider task of removing market failure.

Max Corden replied and summarized his position, describing the Fund's role:

• it gives information to the authorities
• it gives basic information to markets

He felt that it was better to build on an existing institution than build a new one to face evolving problems. This happened with the collapse of the Bretton Woods system; and the institution has evolved. It forms the core of a network, not a global government, it is a forum for discussion, it helps coordination, and it is a vehicle for informing and training officials.

2. The World Trade Organisation

The second talk was by Jesus Seade (WTO) on the future of the World Trade Organisation (WTO) and its relations with other global economic institutions. He put the WTO in a historical perspective, starting with the role envisaged in the 1940s:

• it would be the keeper of law on trade
• it had a judicial role, ensuring rules were enforced, as were penalties
• it would be a negotiating forum which ensured that tariffs were reduced

In the 1940s, tariffs were close to 50%, while by 1984 they averaged only 6% and are now probably only 3½%. This reduction has been a major factor behind the more rapid growth of trade when compared to output.

In the Kennedy Round (1967) negotiations began to switch to a consideration of rules in addition to tariffs. The Tokyo Round (1979) stressed the importance of rules, especially with regard to subsidies and anti-dumping cases. As GATT got more involved in these issues it inevitably became more concerned with domestic policies. It is now having to look at matters of intellectual property rights and environmental policy, as these can be the instruments of the 'new' trade policy. This has led, especially in the Uruguay Round, to discussion of domestic policies towards competition and investment.

The selection of issues has changed over time, with agriculture dropped in the 1950s and textiles disappearing into the Multi Fibre Agreement in the 1960s. There was also an increasing problem of controlling voluntary export restraints. The objectives of the Uruguay Round included expanding coverage to include agriculture and services, and the results have been notable, especially in terms of commitments to deal with production and export subsidies. There was also progress on intellectual property where codification and consolidation of a number of conventions is necessary. Items such as copyright and software licensing have been brought into trademark negotiations, where enforcement mechanisms exist. The inclusion of services is a new departure, with a commitment to open up financial services, transport, telecommunications and tourism. Future developments will also focus around the trade and environment nexus which has only begun to be seriously discussed in the 1990s.

The potential for the development of new tools for protection cannot be denied, and a wider agenda is required to deal with them. There should be room for manoeuvre to create a new order without protectionism. There are a number of new issues surrounding trade and competition; over the next five years the WTO, with enthusiastic backing from Japan, will look at competition policy. This leads the WTO into the area of trade, competition and investment as the investigation of rules in labour and social standards. The latter can also be used as instruments of the new protectionism. There are nevertheless problems with the broadening scope of the WTO, and clearly discussion could become lengthy over difficult issues such as social and labour market standards.

The general trends in the future will gradually widen the scope of GATT/WTO. It could look at migration and at company law, both of which affect patterns of investment and trade. The coverage of intellectual property issues is likely to be extended, and agriculture will increasingly become a major part of the agenda. Clearly care has to be taken as this broader, more comprehensive, structure is constructed.

The broadening scope of work may well mean that the trade policy review process will expand beyond simple trade matters to include a review of macro policy and its implications for the exchange rate. This will increase the degree of potential cooperation with the Bank and the Fund, and there may be a need for a new agreement between these major players to ensure the coherence of approaches to natural, regional and global problems. This process will entail the WTO becoming more active in feeding views into the G7 process, where there may be an increasing impact from the multinational agencies, including standard-setting organizations.

Jim Rollo began by suggesting that a new dispute resolution mechanism was necessary. Sarah Hogg (House of Lords) suggested that as the WTO increased its scope it would be diverted away from the analysis of tariffs and other current tasks. Stephen Woolcock (London School of Economics) asked whether the large agenda for the WTO was causing it to over-reach itself. It needed clear action criteria, and a clear dividing line on areas of responsibility. Sheila Page (Overseas Development Institute) drew a distinction between the Bank/IMF style of organization, which needs funds to be credible, and the GATT/WTO structure, which was built around the law. There is a role for a stronger WTO, but it is circumscribed as it still cannot initiate actions, only regulate and respond. Mike Neilson (Commission of the European Communities) asked whether the WTO should take a strong role on the environment, as there was no global organization in this area. Peter Holmes (University of Sussex) suggested GATT's information function may have been important, but as the WTO becomes more powerful in the post-Uruguay Round era, this role may become harder to effectuate, because power reduces the ability to comment.

Jesús Seade summarized the discussion, suggesting that although (longer) rounds were inevitable, the WTO had the ability to act on an issue-by-issue basis. Tariffs were no longer driving the OECD/WTO agenda, but they were a significant matter in the LDC/WTO discussions. There was a need to discuss how to reduce LDC tariffs, especially as reciprocity agreements are harder to make in the current low tariff world. Perhaps 'regional' arrangements with mutual tariff reductions were workable. These had helped us reach a position where 44% of world trade was bound at a 0% tariff, with a further 15% operating on a 'most favoured nation' basis. The GATT process may have been accepted because of its mutual nature.

3. Coordination, Global Coherence and Regionalism

The second session was introduced by Andrew Crockett . He suggested GEIs were designed to help governments deal with market failure. The environment in which they do this has changed, and the projects in the GEI portfolio look at the effects of change. This was the context in which a contribution from the EC had been solicited. Mike Neilson of DGII spoke on a personal basis about coordination, global coherence and regionalism, discussing the relations between institutions and their objectives. The IMF had set the standard on information disclosure, but the EC was able to go further and make public recommendations. This changed the nature of its role, and influences the institutional review that will form part of the Hallifax G7 meetings.

The agenda to be discussed involved an analysis of:

• systemic financial stability
• the role of law in international relations
• the shape of institutions and standards regulations
• environmental issues and the need for coordination

The possibilities for institutional innovation were circumscribed by the increasing power of markets, the development of regional structures, and increasing interdependence in the world economy, however. The existing institutions had not worked as well as they might:

• macro stability had not been achieved
• the poor were not gaining
• global commons were still in need of protection

Many problems developed because of spillovers between policy areas. Instability in exchange rates and monetary policy disrupted the capital flows essential for trade and development; hence failure in one area causes failure in another. A similar problem arises with the environment, where progress with LDCs could be made, but requires changes in trade relations. Further area spillovers are in evidence when considering new trade issues, e.g.regulations on intellectual property playing a role in trade relations. Finally, there have been large spillovers between the global situation and the pace of development in poor countries. Such spillovers make coordination between institutions vital.

Given the increasing importance of interlinkages there might be the need for a Delors/Sutherland over-arching global institution. Many of the relevant issues were now being dealt with by the WTO, however, and many spillovers could be dealt with at a national (or regional) level. There is a larger gap over coordination on the environment, but there is still room for institutional development. There may be little need for new institutions because there is considerable scope for cooperation between the Bank/IMF and the UN as well as the WTO.

There are a number of questions for the GEIs to answer:

• can their agendas be rebalanced to deal with the growing number of emerging countries joining them?
• are policy interlinkages increasingly important, and can institutions cooperate?
• can trade and development issues be dealt with fairly?
• how can they deal with the new issues of social and environmental standards?

There was a lively discussion, opened by Amlan Roy (Queen Mary and Westfield College), who argued that we need better understanding of the role of markets and their information function. Sheila Page suggested we need to address the issue of who the system is being run for. Cooperation may be oligopoly, and hence not universally beneficial. Conflicts between WTO/IMF over, for example, tariffs/trade and tariffs/tax revenue may be inevitable. We also have to decide at what point regional organizations become representative. David Vines argued that it was difficult to produce coherent, consistent outcomes on standards and regulations because objectives differ.

Richard Portes pointed out that institutions develop their own style and objectives, and overlapping responsibilities and subsequent conflict are common, for instance in relation to the former CPEs. Renato Filosa (Bank for International Settlements) asked whether the Fund was more efficient because of its narrow mandate and answered that it was not; wide agendas were often necessary, e.g. in Eastern Europe. Some roles are inconsistent and more concentration could reduce power.

Max Corden talked about increasing overlaps between the Fund and the Bank, with the Fund becoming more interested in poverty and the Bank developing a macro role. Randall Henning (INstitute for International Economics) stressed the role of G7 summits as a tool for developing cooperation when policy areas interact. Stephen Woolcock thought issues should be addressed one at a time. The meeting discussed methods of making institutions cooperate effectively and it was agreed that regions that have developed for mutual benefit will increasingly negotiate with other regions. Control areas should also be recognized as some issues are global, others regional. Paul David (All Souls College, Oxford and Stanford University) added that there is a major overlap between standards setting organizations.

4. The G7

At the Groucho Club, Sir Nigel Wicks (HM Treasury) gave a talk to delegates on 'the G7 Coordination Process'; a text is available from the Director of the GEI Programme. He thought that the GEI programme was timely as after the Naples meeting it was decided that the next G7 summit would discuss reform and he set out three areas for discussion:

• the current GEI architecture
• challenges to the structure
• the form of G7 coordination

Bretton Woods achieved a great deal 50 years ago and the institutions created have helped sustain income growth and have stimulated more rapid growth in trade. Capital flows have become very large as a result, partly because of the success of these institutions. It is useful to look again at the architecture, however:

• the end of the Cold War provides a reason for re-design
• globalization has changed the nature of economic relations
• G7 has been central, but its importance has declined
• good prospects elsewhere give weight to non-OECD countries, especially Pacific Asia
• increasing complexity means more consensus and more collective actions are needed.

We should ask whether we have the right portfolio of institutions, and we should use history to gauge this. In particular, what do we learn from the stock market crash of 1987, the ERM crises, the collapse of bond prices in 1994, and finally from the recent Mexican crisis? They all reflect the effects of increasing integration of world capital markets and we need institutions to deal with this without capital controls. The new system needs to be built on prevention, procedures to deal with accidents and on robust laws and rules. Information can help prevent accidents, as long as policies are sound, and hence stronger surveillance is needed. It would be unwise to create a lender of last resort, however, and we should place reliance on free markets, diversified portfolios and stable policies.

Coordination among the G7 can be used to produce significant modifications to domestic policies but this is difficult to achieve. The G7 is not well-equipped because power is shared both between and within countries and their institutions. There is also a difference in objectives between the US which favours growth and Germany (and Japan) which favours stability. The G7 process is, difficult to turn into a formal coordination, however, and effective cooperation is a much more reasonable goal. The key roles of the G7 can be to put pressure on the US and to provide a forum for governments as well as a route for the coordination of views of the major independent central banks. David Vines ended the evening by agreeing with Sir Nigel that a formalization of the G7 coordination process would result in part in a transfer of stress and functions to other arenas.

Continued - 5. Regionalism

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