CHAPTER FIVE - REFORMING THE INTERNATIONAL MONETARY AND FINANCIAL SYSTEM:
TOWARDS STABILITY AND THE GLOBAL GOOD

2. IMPROVING INTERNATIONAL MACRO-ECONOMIC POLICY COOPERATION AND THE IMF'S POWERS OF SURVEILLANCE AND INTERVENTION

The Committee, in suggesting the above as an area for further work to be done, is aware that policy coordination is one of those perennial objectives devoutly to be wished for though seldom carried through. Nevertheless, we agree with Michael Webb that this does not mean any joint action by government authorities is futile, which would in effect leave it to the capital markets to pull the strings whatever the consequences for domestic economies - from plunging or soaring currencies, high real interest rates, unsteady real exchange rates, etc. As he told the Committee: "Coordinated intervention can send a very strong signal to foreign exchange traders. . . . here I mean among essentially the [central banks of] United States, Japan and Germany . . . but also joined by other G-7 central banks." In his view, the "two crucial requirements for success . . .[are] that monetary and fiscal policy should be moving in the correct direction [and that] intervention has to be consistent. This is because traders pay a lot of attention to what central banks say as well as what they do or what governments say as well as what they do. This points to . . .a real problem with the kinds of intervention that have been attempted in the last few years. It's not consistent. In fact, it is remarkably inconsistent and here again, the big issue is the United States." [23:8]

Beyond trying to influence the U.S. or other major powers to act in a more globally responsible direction, another problem which some point to is the weakness of leaving matters to self-policing actions by the G-7, which both Culpeper and Helleiner saw as having failed repeatedly. Culpeper argued that: "What we need is a mechanism, probably the IMF, which can bring about policy coordination through international discussion, not just a private discussion among the most powerful countries."[21:17] 55 IN HELLEINER'S VIEW:

The financial machinery, which should be able to deal with this, is centred instead in the G-7, subject to the peculiarities of the U.S. Congress and the difficulties of negotiating with the Bank for International Settlements.

One must simply get that together and systematize it on a longer-run basis so that special drawing rights can again be provided in sufficient size, the size of the IMF's resources can be expanded sufficiently to allow them to deal with such issues and problems, and the conditions attached to their lending are clarified and democratized. No doubt if that is done well it will also involve an increased IMF role in surveillance and the provision of early warnings to those who are engaged in macro-economic management at the national level throughout the world. [16:9]

Such arguments support appeals that the IMF be given broader and stronger supervisory powers from the Bretton Woods Commission, the recent Report of the Commission on Global Governance, and from leading U.S. economists such as Jeffrey Sachs. Although a frequent critic of the existing IMF, Sachs makes a compelling argument, raised earlier by the Committee, that a reformed IMF could usefully be given international legal powers analogous to that of a "bankruptcy" administrator in the case of debtor countries facing insolvency. 56 JOHN WILLIAMSON OF THE INSTITUTE FOR INTERNATIONAL ECONOMICS, WHO TESTIFIED BEFORE THE COMMITTEE IN WASHINGTON, REINFORCES THE CASE FOR A MUCH MORE EXTENSIVE AND VIGOROUS IMF SURVEILLANCE AND SUPERVISION ROLE. FINANCE MINISTER PAUL MARTIN ALSO STRESSED THIS ASPECT, NOTABLY THE ELEMENTS OF FRANKER POLICY ADVICE, MORE TRANSPARENT PROCEDURES, AND RAPID DISSEMINATION INTO THE MARKETPLACE OF BETTER INFORMATION ON KEY ECONOMIC INDICATORS. THE QUESTIONS WHICH SUCH PRESCRIPTIONS WILL NEED TO CONFRONT ARE THE DEGREE TO WHICH A SUBSTANTIAL TRANSFER OF SOVEREIGN POWERS TO THE IMF IS REQUIRED, AND THE DEGREE TO WHICH IN THE ABSTRACT PROPOSALS FOR ENHANCED COLLECTIVE SURVEILLANCE SIDESTEP THE PROBLEMATIC CURRENT REALITY THAT THERE IS ONE IMF FOR THE G-7 AND OECD COUNTRIES, AND QUITE ANOTHER IMF FOR THE REST.

Another set of problematic questions and prescriptions links the issues of stronger powers to those of the kinds of resources that a beefed-up IMF would need to have available to it. We have already cited the stalemate over the issue of new SDR allocations since the annual Fund-Bank meetings in Madrid last fall. Mr. Martin, in addressing the IMF Interim Committee on 26 April, raised the prospect of a quota increase and a study of the future role of SDRs. He indicated to the Committee in his appearance on 2 May that Canada was open to a significant increase in the Fund's resources. The amount and nature of such an increase would have to be commensurate with an agreement among its members (not only the G-7) on the scope of the role that a renewed IMF would be asked to play. That may be the rub since there is not as yet much consensus around the more challenging ideas being debated on either side of this equation for increasing the Fund's reformed powers and endowing it with more responsive resource capacities.

Williamson, for example, argues controversially that the Fund should at last be granted a large "quick-disbursing facility" to deal with Mexico-type situations of sudden capital outflows. To deal with currency problems, he agrees that well-timed coordinated and consistent interventions by monetary authorities can influence exchange market behavior. But he then goes much further to see the IMF as acquiring in this regard a strong overarching surveillance capacity in which it would calculate and publicly announce "fundamental equilibrium exchange rates" (FEERs) for the major currencies. In accepting this IMF-led system, G-7 authorities would have to agree to support wide "target zones" for exchange rate movements. Again, given the problems alluded to above, and the continuing travails of Europe's exchange-rate mechanisms, the practical realism of this gives us pause. Michael Webb cautioned the Committee that "target ranges are part of the problem [and are] too quickly overwhelmed." Moreover: "governments and central banks have demonstrated a very clear preference for small exclusive groups to manage this sort of intervention. They've never been very interested in having the IMF play a role in this." [23:9-10] The experience of just how difficult it has been to achieve cooperation around monetary policies or adjustments within the closer confines of the European Union is not encouraging in this respect. What chance then is there for a breakthrough at the level of the G-7?

In a sense, this returns us back to precisely the problem identified by Culpeper, Helleiner and others, and to the role which countries beyond the G-7 must play in order to achieve a long-term solution. Nonetheless, we believe that in Halifax Canada should start by moving the G-7 closer to an acceptance of the need for improving their policy cooperation and for strengthening the IMF's role in helping them to achieve that goal. Thinking ahead to June, Williamson makes a case that at least deserves a serious hearing for bringing together effective international macro-economic coordination and fundamental IMF reform:

A system of IMF surveillance that was focused on the calculation of FEERs and the encouragement of policy adjustments to defend target zones defined around them would return the Fund to the central place in international policy coordination that it was given at Bretton Woods. Such a system would have avoided the Mexican crisis, could hope to preempt future crises, and should raise the general standard of macro-economic management. A request by the G-7 leaders to the IMF to start making plans for the implementation of such a system, coupled with an offer to submit their own policies to collective IMF surveillance based on those principles, would be a worthwhile outcome of the Halifax summit. 57

Accordingly, the Committee recommends that, given the importance of stabilizing international financial and currency markets, Canada should seek an agreement in Halifax on a study of ways to strengthen the coordination of macro-economic policies both within the G-7 and among other countries, especially those with important financial markets. This study, which would report to the next Summit, should as part of that task consult widely on the most appropriate manner for increasing the powers and capacities for effective intervention by a reformed IMF - particularly in regard to its ability to stabilize economies suffering sudden capital outflows, to stabilize as much as possible major currency movements, and to exert effective public surveillance and supervisory oversight over the relevant policies of major developed as well as developing-country economies. Specifically, this analysis should evaluate what practical modalities to achieve these objectives can be established in the medium term around which there is a realistic prospect for obtaining consensus.