On Globalization and the Role of Multilateral Agencies
J. Bradford DeLong
Why do we need to have the multilateral "Bretton
Woods" economic agencies--the International Monetary Fund
[IMF], the International Bank for Reconstruction and Development
[World Bank], and the World Trade Organization [WTO]? Let me
start with the IMF, and with Mexico.
In the fall of 1994 and winter of 1995 New
York-based investors in Mexico panicked. Each feared that other
investors would pull their money out of Mexico no matter what
the cost, and that the last investor to withdraw money would
lose the greatest amount of invested principal. Given that all
investors feared being the last one out, it made no sense for
any investor to keep his or her principal in Mexican assets
a minute beyond its maturity date.
With $5 billion in reserves to cover $23 billion
in debts that would be converted into dollars and pulled from
Mexico, the Mexican government by itself had no good options.
It could push interest rates higher than sky-high to play on
foreign investors' greed and keep their capital inside the country--in
which case the extraordinary cost of money would strangle investment
and employment, and a Great Depression would come rapidly. It
could keep interest rates lower, and find itself unable to borrow
and forced to start printing money to meet its obligations, in
which case hyperinflation would follow. Or it could formally
default--declare a form of national bankruptcy--in which case
a Great Depression would come more slowly as ripped Mexico from
its connections in the world trade network eviscerated its productive
But all this was not preordained, for as an
economy Mexico was not insolvent. It was merely illiquid. If
investors had been willing to roll over Mexico's short-term debts,
contractionary policies and a moderate devaluation to reduce
imports and encourage exports to pay the Mexican government's
foreign liabilities as they came due. Such a moderate devaluation
coupled with contractionary policies might cause a recession
(however, in Britain in late 1992 it did not), but a recession
that would be much shorter and much shallower than what faced
Mexico in the absence of funds to roll over its short-term debts.
The IMF gave Mexico other options. It--assisted by the U.S. Treasury--loaned
Mexico enough hard currency that it could pay off its international
obligations, keep the rise in interest rates low enough that
Mexico in 1995-1996 suffered only a severe recession rather than
a Great Depression, give Mexico time to wait for investors in
New York to recover their wits, and so turn what could have been
a major negative turning point in Mexican development into a
one-year interruption of economic growth.
Real Flaws in the IMF
Now the IMF is far from perfect. Its resources
are limited. Thus its first priority is not to prescribe the
policies best for the country seeking its aid but to prescribe
the policies that are most certain to get the IMF paid back.
The IMF is also very wary of making access to its funds a routine
affair--it wants there to be a certain amount of humiliation
of the government seeking aid involved. Both these factors make
the IMF lend countries seeking aid too little money, for too
short terms, at too high interest rates, with too much associated
conditionality aimed at generating substantial export surpluses
There is also a... certain rigidity, an unhealthy
rigidity, of thought at the staff level. I remember the first
time I finished an IMF Article IV consultation. I left shaking
my head because the IMF staff members there believed that Alan
Greenspan's monetary policy was risky and inflationary.
Fake Flaws in the IMF
But most of the criticisms that you probably
hear of the IMF are simply false. The IMF does not dictate economic
policies to developing countries--the IMF does impose conditions
(too harsh conditions, in my view) if countries wish to borrow
from it. The IMF does not use--as Ralph Nader will tell
you--U.S. taxpayers' money to bail out Bob Rubin's Wall Street
friends. The IMF does not use--as Pat Buchanan will tell you--U.S.
taxpayers' money to bail out shady Asian plutocrats. The possibility
of IMF loans and bailouts does not induce excessive investment
and speculation in a manner analogous to the role played by federal
deposit insurance in the Savings and Loan crisis of the 1980s.
The key difference is that the FSLIC deposit insurance agency
paid a lot of money into S&Ls that it never got back, while
the IMF gets its money back.
With respect to the World Bank, let me punt
completely. I think that World Bank research does valuable work.
I think that World Bank operations' mission is the result of
a wrong guess made at the Bretton Woods conference. At the Bretton
Woods conference the dominant belief was in a future in which
a lot of countries would be unable to borrow to fund infrastructure,
and so an ngo lender to sovereign governments like the World
Bank would fill a missing market, and give rebuilding and developing
countries an option that they would not otherwise have had. But
the world we live in is, instead, one in which private capital
markets are deep.
So the World Bank has tried to find a new
mission by tying its loans to the giving of technical advice.
But the World Bank is not very good at giving technical advice:
it suffers from all the flaws of top-down social engineering
by people who don't know the local situation detailed by James
Scott in his book, Seeing Like a State.
I think there may well be a place for a large-scale
multinational grant-making entity funding infrastructure projects
in poor countries that would not otherwise be undertaken. But
I can't figure out why we would want to have a World Bank as
it is presently organized.
World Trade Organization
I think that the World Trade Organization
has gotten off on the wrong foot--not substantively, but rhetorically.
Its panels are misapplying the principle that the rules governing
international trade should focus on the commodities traded and
not on the production processes by which these commodities are
made. And as a result the WTO is saying that the U.S. violates
its treaty obligations when it restricts shrimp sold to shrimp
caught by boats that try not to kill sea turtles, that the European
Union cannot restrict or even require the labeling of food produced
by genetically-modified organisms, and so forth.
This misapplication of the principle that
trade rules govern nations' external commodity flows, not their
internal production processes has to end. And it will end soon,
or it will take the whole WTO down with it.
But look at the broader picture. Do we need
an international forum in which the rules of international trade
are hammered out, in which disputes about treaty commitments
are adjudicated, and in which countries are given incentives
to keep their treaty commitments? Yes. For if we don't the country
with the biggest market will set the rules--which means that
the rules will be set, unilaterally, by the United States. This
means that the real decision maker, the deciding voter, will
be some Republican congressman from Tennessee, someone who believes
that international economic issues are "made for talk radio"
because you can denounce all those evil foreigners stealing our
By contrast, with the WTO, the decision maker
will be some social democrat from Luxembourg, or some democratically-elected
representative of the billion people in India.
I can understand why someone like Pat Buchanan
might hate and fear an organization like the WTO that gives political
influence over the shape of the world to Indians or European
socialists or--heaven forbid!--Zulus. But I cannot understand
why Mark Weisbrot would join him.
The Big Picture
Let me back up a little. Perhaps the reason
that Mark Weisbrot has this distaste for all three Bretton Woods
institutions--the IMF, the World Bank, and the late-born WTO--is
that they work. Without them we would have a lot more trade wars
and trade barriers and thus a lot less international trade, Without
them cross-border investments would be riskier, and we would
have less first-world funded investment in developing countries.
Without them countries that bet on international economic integration
would find no source of assistance should there be a capital
panic in New York or some major shock to their terms of trade.
More countries would follow inward-oriented development strategies.
Fewer countries would follow outward-oriented export-led development
Would this be a better world than the one
Carolina textile magnate Roger Milliken--funder
of both Pat Buchanan and Ralph Nader--certainly thinks so. He
looks forward to creating a world in which fewer people in India,
Pakistan, Mauritius, Malaysia, and Bangladesh can get jobs in
textile factories, and in which his profits are higher. The people
of the Turning Point Project--whose big ads last fall seemed
to imply that there was something wrong with people in developing
countries having the money to go to supermarkets, or to buy satellite
TV dishes--seem to think so.
I don't. I am very impressed with the growing
pile of evidence that rapid and successful economic development
is much, much easier if your country is closely integrated into
the world economy. A high export share of production--and use
of those exports to buy the capital goods and the technologies
deployed in the rich first world--appears to be a key step on
the road to raising productivity and living standards.
It looks to be the best bet to make a truly
Let me back up another step, and talk about
the people at the Bretton Woods conference more than half a century
ago who created these institutions and have handed them down
to us. What were there purposes and intentions?
They sought to create a stable and long-lasting
framework for an open world economy. The two most important and
powerful people making the decisions at Bretton Woods--John Maynard
Keynes and Harry Dexter White--saw such a framework as a key
part in making a safe, peaceful, and prosperous world. Keynes
was in his day the principal opponent of the doctrine of laissez-faire:
the belief that the market will run itself for the best.
He hoped that in less than a century that the economic problem
would be solved: that we would live in a world of abundance,
that "the arena of the heart and head will be occupied...
by our real problems---the problems of life and of human relations,
of creation and behavior...", and that we shall "assess...the
love of money as a possession... for what it is... one of those
semi-criminal, semi-pathological propensities which one hands
over with a shudder to the specialists in mental disease."
White was a man who, at least at some times and on some level,s,
saw the best hope of humanity in the transcendence and supersession
of the capitalist system by some form of socialism.
They did not seek to build institutions to
impoverish or to exploit. I think that they did their work pretty
well. And we should build on it--not tear it down.