The governing systems of the world economy have failed—in their missions and in their propaganda. Protests in Seattle, at Davos, and lately in Washington have crystallized the spirit of resentment, aimed at tiny elites with great power. Michel Camdessus, managing director of the International Monetary Fund (IMF), has resigned. As he left, Camdessus had the grace to acknowledge some of the failings of his institution.
And yet, as sometimes happens with protest movements, the anti-globalists have a weak agenda. They are a coalition led by labor, human rights, and environmental groups; their emphasis has been on protesting losses of jobs and sovereignty and ecological damage. The World Trade Organization (WTO) and the World Bank loom large on these issues and have been the main targets. Beyond debt relief, a vital first step, the protesters have said little about the IMF.
This has left the initiative to the free-market right. A congressional advisory commission, chaired by old-line monetarist Allan Meltzer, has called for cutting all the international financial institutions. Under the Meltzer proposals, supported by several Democratic commissioners including Jeffrey Sachs—because the commission did support a one-time debt write-down—the IMF would lend only short term and only to support liquidity in crises. After debt relief, everyone else would face the “rigor,” or the “discipline,” of the market.
But “market discipline” is an oxymoron. If the markets truly imposed discipline, hard-working people would not be poor, and speculators generally would not be rich. That there are hundreds of millions of hard-working poor and thousands of rich speculators tells us, all by itself, that we cannot rely on markets when worldwide economic development is at stake.
It was the failure of free international capital markets in the interwar period that led to the creation, at Bretton Woods in 1944, of the World Bank and the IMF. Their purpose was to finance the reconstruction of Europe and then to provide a framework for stable—but adjustable—exchange rates within which individual nations could pursue full employment without facing crises in their balance of payments. The key architects of Bretton Woods, John Maynard Keynes and Harry Dexter White, were not under the illusion that markets could do the job.
From 1945 until 1970, the system worked—not perfectly—but well enough. Europe and the United States enjoyed near full employment, exchange-rate stability, and unlimited capital market access. The major developing countries built on strong primary export markets to develop their own industries behind walls of protection; the period was known in Mexico, for instance, as the years of “stabilizing development.” In truth the IMF was never quite as central as its founders intended—in fact, once the framework had been set, the agency itself was a backwater—but it helped. So long as the United ...
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