Financial Times MONDAY DECEMBER 21 1998
ROBERT CHOTE: Bretton Woods revisitedThe political governance of international policymaking bodies like the IMF is seen as ripe for reform. But it is not an easy task
The Bretton Woods conference of 1944 may have laid the institutional foundations for the world's post-war economic prosperity, but it was not much fun.
John Maynard Keynes despaired of its "committees and commissions numbering anything up to 200 people, in rooms with bad acoustics, shouting through microphones, with many of those present having an imperfect knowledge of English, each wanting to get something on the record that would look well in the press at home".
So it is no surprise that the various calls this year for "Bretton Woods Two" have met with little enthusiasm from policymakers. But in the wake of the crises that have swept emerging markets in the past 18 months, they concede that the institutional architecture of the international financial system needs revisiting.
The events of recent months have underlined the importance of a holistic approach to crisis prevention and management: one that embraces macro-economics, financial sector reform, corporate governance and social policies.
This in turn demands that the various international bodies responsible for these policy areas work effectively: the International Monetary Fund, the World Bank and the various Basle-based supervisory and central banking groups, to name but a few. The political governance of these institutions is seen as ripe for reform.
The pressure for change has been felt most by the IMF, which has been criticised for (among many other things) lacking accountability and political legitimacy.
In response, Michel Camdessus, the fund's managing director, has backed a French proposal to reform the "interim" committee of finance ministers that meets twice a year to oversee the fund's activities.
"It could become an essential structure, because no other can match the scope of its responsibility and the legitimacy of its members," Mr Camdessus has argued. "At present, however, it is hampered by the ritualism of its meetings and an insufficient awareness of its uniqueness and potential."
The origins of the interim committee date back to the 1960s, when the IMF's board of governors - one per member country - exceeded 100 and became too unwieldy for discussion and negotiation.
Pierre-Paul Schweitzer, then managing director, concluded that creating a subgroup of governors improved the fund's policymaking. In part he was worried about the informal influence wielded by the Group of 10, which then comprised the US, Canada, Japan and seven European nations.
This view was shared by developing countries, but it was US disenchantment with the G10 in the early 1970s that finally opened the door for discussion of reforms to the IMF's governance.
One conclusion was that the IMF should have a formal policymaking Council of Governors, with membership based on the 20 (now 24) constituencies of countries and single countries covering all the IMF's 182-member nations, that provided its executive board of directors. Pending an amendment to the IMF's articles of agreement, an "interim" committee was set up with a consultative role.
When the articles were finally amended in 1978, there was little appetite to bring the council into being: the interim committee was working well and the executive board wished to avoid further dilution of its role.
Mr Camdessus and his French allies now propose that the council fulfil its destiny. But to do so would create a solution to which there is no obvious problem.
The interim committee has many defects, but a lack of political authority is not the issue. More important are the absence of substantive discussion, the excessive influence of IMF management, and the inflexible constituency structure, meaning key emerging market countries are under-represented.
US frustration with the interim committee prompted it to convene an ad hoc group of 22 "systematically significant economies" earlier this year to ponder financial reform. By handpicking countries to participate in special working groups, it produced three focused reports. But the G22 also set alarm bells ringing for those countries that were not invited, notably the smaller European countries that are members of the G10, such as Belgium, especially when its supposedly "one-off" meeting was repeated with President Bill Clinton in attendance.
Several countries demanded admittance and the group is likely to continue its deliberations in coming months with more than 30 nations around the table. Some European officials still fear that the US wants to see a permanent role for the body, despite assurances to the contrary.
Another point of tension is the relationship between the political governance of the IMF and the role of other international financial institutions. James Wolfensohn, president of the World Bank, for example, fears that the creation of the council could elevate the IMF to primus inter pares and leave the Bank a second-class citizen.
Bank officials have been canvassing two alternatives. One is for the interim committee to focus on the international financial system, perhaps bringing the various bodies based in Basle that supervise banks and other financial institutions, under its wing. Issues affecting poorer countries would be discussed exclusively in the "development" committee of finance and aid ministers.
A second alternative would create a body overarching both the interim and development committees. It might be easier to bring the Basle institutions into this arrangement than in effect to make them subservient to the fund.
Whichever route is chosen, the constituency structure shared by both the interim and developing committees remains a stumbling block to effective decision-making. There is a solution, but it would involve a fresh amendment to the IMF's articles of agreement and an act of uncharacteristic European self-sacrifice.
The European nations should be grouped into two or three constituencies, rather than the eight they chair at present. This would provide scope to give emerging market nations a greater voice - one appropriate to today's world economy rather than that of 1944.