In one way this conference was well timed, with the break-down of the economies of Eastern Europe attracting so much attention in the economic and monetary fields. However, the purpose was not to address the operational aspects of the current crisis, but rather to look at the mechanisms and institutions that have evolved over the years since Bretton Woods and to consider whether and, if so, how they need to be revised, superseded or supplemented. By and large we were able to avoid undue diversion.
It was generally agreed: that the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank) had been set up to serve two distinct purposes: the Fund, drawing its funds from treasuries and central banks, was designed to manage the exchange control regime established at Bretton Woods and to act as lender of last resort, primarily to the developed world, and the World Bank, drawing its funds from the commercial market, to finance development in the Third World. With the collapse of the fixed exchange rate regime in the early 1970’s, the IMF lost its original role and had been drawn into acting as adviser, and lender to developing or debt-ridden countries, to a large extent overlapping the role of the World Bank. Both institutions increasingly attached conditions and problems arose if those conditions differed. The IMF, it was suggested, should confine itself to help in short-term liquidity crises and should leave long-term structural aid to the Bank. Distinguishing a liquidity from a solvency crisis was in practice difficult, but that (and the conditionality issue) underlined the importance of close co-ordination between the two institutions. For example, in Africa the problem was structural and long-term, not one of liquidity and the IMF was ill-equipped to tackle it. Even if a case were established for amalgamating the two bodies (and that was rejected) the practical difficulties would be insuperable.
Another more theoretical area of discussion was the need for some exchange rate regime, it being generally felt that the free-floating of the 1970’s and early 1980’ s had not provided the stability (a recurring theme) which the trading and industrial communities needed. Some argued for an evolution from the prevailing discretionary system, operating through the Group of Seven (G7) and outside the IMF, towards a system of rules, even if, as one participant pointed out, it was essential that such rules should be enabling rather than rigid (and therefore brittle) if nations were to observe them. The conference looked forward to the emergence of a monetary union in the European Community, ideally with an independent central bank, established on a federal basis, with no power to finance government deficits and a zero-inflation target - a German- style central bank, it was suggested, based in London, with a French-named currency. There was some question whether a single currency was essential, or, in advance of political union, possible.
With the EC established as a monetary zone, the conference looked towards the emergence of a Group of Three (G3), the EC, a dollar zone and a yen zone. Such a tri-polar system of management should be embedded in the IMF but act, informally or formally, as an inner council of the Fund, by analogy with the Security Council, with a view to establishing target zones for currency fluctuations, starting say with a permitted divergence of plus or minus 10% but leading over time to narrower margins. There was discussion, without agreement, whether such targets should be announced or not: and all the practitioners expressed deep scepticism whether such a regime could work, given the scale and speed of movement of money in today’s world. Nevertheless, while the market might rule, all saw advantage in co-operation in such bodies as the IMF, both for its own sake (the mere fact of meeting and talking could stand members in good stead when faced with sudden crises such as the oil crisis or the crash of 1987) and in order to keep the tri-polar relationship benign.
All saw a need to bring the countries of East Europe and the Soviet Union into the world economy, including where appropriate their inclusion in a European Economic Space; but some warned of the difficulties and scale of what was involved. The EC and the European Bank for Reconstruction and Development (EBRD), still to be set up, were already the chosen instruments here. Pleas were made for speedier and much larger help for East Europe, preferably in the form of grants: help was particularly needed in training staff for the creation from scratch of an environment for private sector investment, which was already beginning to flow from business and industry, though the banks would hold back in the face of the debt overhang. (The initiative of the Confederation of British Industry in offering training attachments to professional personnel was quoted.)
Of the other relevant institutions, the OECD came in for commendation for its work behind the scenes as a centre for informed analysis and a bridge between the formal and informal structures. The Bank for International Settlements and the Group of Ten (G10) were also commended for their work of co-ordination and standard-setting, carried out largely, and advantageously, without publicity. The crucial importance of the work of the General Agreement on Tariffs and Trade (GATT) was emphasised and the need for a successful conclusion of the Uruguay Round. While some questioned whether the GATT method of trading concessions produced the highest desirable level of liberalisation, others argued that without reciprocal concessions, no liberalisation at all would be achieved. It was claimed moreover that a defect of the work of the IMF and the World Bank in the developing world, was the insistence on unrequited unilateral tariff cuts: there should be better liaison between The World Bank and GATT with a view to better co-ordination between aid and trade policies. There was a strong plea from one quarter for the abolition of Voluntary Restraint Agreements which distorted trade at the expense of the consumer. There was no discussion of the regional development banks.
Of the informal mechanisms, the G7 was seen as more controversial. The Plaza and Louvre agreements had shown practical results in the management of exchange rates, but there was a risk that the G7 might detract from the role of the IMF. It should be kept informal to avoid the charge of setting up a rival institution.
Economic management, it was urged, could not be conducted without taking into account environmental dangers and needs, demographic trends, population movements and public health; while noting this, the conference did not attempt to discuss the substance of such issues.
In conclusion, it was agreed that without political will and the momentum that only the major actors could give, none of the institutions discussed could be effective. Moreover, with the world’s economic philosophy placing more emphasis on market forces and less on state activity, perhaps there was a case for assigning a smaller role to the institutions.
This Note reflects the Director's personal impressions of the conference. No participant is in any way committed to its content or expression.
Conference Chairman: The Hon Paul Volcker
Chairman, James D Wolfensohn Inc
LIST OF PARTICIPANTS
AUSTRALIA
Professor Harry Gelber
Professor of Political Science, University of Tasmania; currently on leave as Senior - Fulbright Fellow and Visiting Professor of Government, Harvard, and Senior Associate Member of St Antony’s College, Oxford
BRITAIN
Mr Nicholas Bayne CMG
Deputy Under-Secretary of State, Foreign and Commonwealth Office
Mr Samuel Brittan
Principal Economic Commentator and Assistant Editor, Financial Times; Honorary Professor of Politics, Warwick University; a member of the Programme Committee, Ditchley Foundation
The Rt Hon the Earl of Cromer KG GCMG
Chairman, Royal Trust Co, Jersey; Royal Trust Bank, -1 Jersey; Adviser to Baring Brothers & Co Ltd; International Adviser to Marsh & McLennan Cos, New York; Governor, Ditchley Foundation
The Hon John Eccles CBE
General Manager, Commonwealth Development Corporation
Mr Huw Evans
Under-Secretary, HM Treasury
Mr Andrew Graham
Fellow and Tutor in Economics, Balliol College, and University Lecturer in Economics, Oxford
The Rt Hon the Earl of Limerick KBE
Director, Kleinwort Benson Group plc
Sir Richard Lloyd Bt
Chairman, Hill Samuel Bank; a Governor, Member, Council of Management, and Chairman, Finance & General Purposes Committee, Ditchley Foundation
Sir Jeremy Morse KCMG
Chairman, Lloyds Bank pic; a Governor, Ditchley Foundation
Mr Jim Rollo
Head, International Economics Programme, Royal Institute of International Affairs
The Rt Hon John Smith QC MP
Member of Parliament (Labour), Monklands East; Principal Opposition Spokesman on Treasury and Economic Affairs
CANADA
Mr George Haynal
Director General, Economic Policy Bureau, Department of External Affairs and International Trade, Ottawa
EC
Dr Antonio Maria Costa
Director-General, Directorate-General for Economic and Financial Affairs, Commission of the European Communities, Brussels
GERMANY
Baron Sigismund von Braun
Adviser in foreign trade affairs to various German and foreign economic groups and firms
MD Dr Bernhard Molitor
Ministerialdirektor and Head of Economic Policy Division, Federal Ministry of Economics, Bonn
Dr Norbert Walter
Chief Economist, Deutsche Bank
NETHERLANDS
Mr George Loudon
Director and Chief Executive, Midland Montagu
Dr Onno Ruding
An Executive Director IMF (1977-80)
INTERNATIONAL FINANCE CORPORATION
Sir William Ryrie KCB
Executive Vice-President and Chief Executive, International Finance Corporation, World Bank
JAPAN
Mr Hiroshi Hashimoto
Minister and Head of Chancery, Embassy of Japan, London
Mr Takeshi Ohta
Deputy Governor for International Relations, Bank of Japan
OECD
Mr Robert A Cornell
Deputy Secretary-General, Organisation for Economic Co-operation and Development
USA
Mr Robert Browne
Currently Staff Director of the Subcommittee on International Development, Finance, Trade and Monetary Policy of the Committee on Banking Finance and Urban Affairs, US House of Representatives
Mr T Jefferson Cunningham III
Director, Midland Bank pic, New York; Vice- Chairman, Kissinger Associates Inc; a Governor, Ditchley Foundation; Member, Advisory Council, American Ditchley Foundation
Mr Robert G Engel
Group Executive, JP Morgan & Co Inc, Morgan Guaranty Trust Company of New York; Member, Board of Directors, American Ditchley Foundation
Mr Edward A Fox
President and Chief Executive Officer, Student Loan Marketing Association, Washington DC
Mr Harry L Freeman
Executive Vice-President, American Express Company (1984-1989)
Mr John G Heimann
Chairman of the Executive Committee, Merrill Lynch Europe/Middle East; Member, Federal Reserve Bank, NY, International Capital Markets Advisory Committee; Chairman, New York State Executive Advisory Commission on Insurance Industry Regulatory Reform; Member, Advisory Council, American Ditchley Foundation.
Dr Manuel Johnson
Vice-Chairman, Board of Governors, Federal Reserve System, Washington DC
Mr Randall Henning
Institute for International Economics, Washington DC
Mr Peter Keresztes
Deputy Editor, Editorial Page, Wall Street Journal/Europe, Brussels
Professor Jeffrey Sachs
Galen L Stone Professor of International Trade, Department of Economics, Harvard University; economic advisor to several governments in Latin America, Europe and Asia
Dr Horst Schulmann
Managing Director, Institute of International Finance Inc, Washington DC
Mr Richard S Simmons
Vice-Chairman, Chemical Banking Corporation, New York
Mr Frederick Ungeheuer
Senior Correspondent, Time Magazine, New York (1982)