Kenneth Rogoff, Economic Counsellor and Director of the Research Department, International Monetary Fund, offers some thoughts on four issues of mutual interest that just might fill the pages of OECD Observer over its next 40 years.
1. The IMF has become known as a champion of economic stability and modest deficits, yet there is no paradox in saying the real challenge for the future is to find ways to sustain larger current-account deficits. Industrialised countries will need goods and services for a ballooning number of retirees over the next few decades. Who will provide them? More immigrants from the developing world would help. But so would large current-account surpluses vis-à-vis the developing world, which would allow industrial countries to save abroad for the decades after 2030, when they will want to run deficits of 3-4% of GDP. Right now, the system cannot easily tolerate the giant debt accumulation that would allow countries to save for that day.
We have to make the global economy work better. Expanding trade would help support deeper capital-market integration. Better procedures to govern international lending contracts are also essential, as the IMF has recently emphasised.
2. Since the breakdown of the Bretton Woods system of fixed exchange rates in 1973, the world has seen a panoply of different exchange arrangements. As many as 15 distinct systems have been tried, across the spectrum from fixed to floating, according to a recent IMF study. What have we learned from this over the past 30 years?
First of all, with freely flowing capital, maintaining a fixed exchange rate is akin to a game of Russian roulette in which survival is a matter of luck. Second, countries that have tried to sustain rigidly fixed rates indefinitely via capital controls have generally seen the effectiveness of this approach eroded over time. Indeed, a close look at many so-called fixed exchange rate regimes reveals dual exchange rates, parallel markets, and other forms of “back-door” floating. Third, it is often very hard to explain floating rates – front door or back door – in terms of underlying macroeconomic fundamentals like interest rates, inflation rates and growth.
So where do we go from here? Since 1945, the number of currencies in the world has doubled along with the number of countries. Perhaps the arrival of the euro marks a turning point, and over the coming decades this number will plummet, ending perhaps in two or three core currencies, with a scattered periphery of floaters. Getting there, and managing macroeconomic policy with less exchange-rate flexibility, is one of the major political and economic challenges of the 21st century.
3. Since its creation, OECD countries have largely abandoned capital controls, and for good reason. As economies become more open and develop more sophisticated financial sectors, capital controls become more and more difficult to enforce. If capital controls are too heavy, the need to comply with complex regulations hampers trade. And in countries with governance problems, capital controls can be a particularly insidious source of corruption.
Yet it is important not to be dogmatic. Experience has shown that there are real risks in lifting long-standing exchange controls before the internal regulatory structure can handle the resulting capital flows. And even in countries that have largely dispensed with capital controls as a regular mechanism, there may still be a role for limited and temporary controls, particularly on inflows, but in some cases on outflows. Finding the right pace at which to dismantle clearly pernicious capital controls will not be easy, however, and achieving the correct balance should be high on our research and policy agendas.
4. Making economic policy in Africa is no job for the faint of heart. Many countries have suffered from civil conflict. This problem has diminished somewhat but drought remains an issue – and a far worse one if civil conflict is simultaneously present. Factor in the HIV/AIDS crisis, which in addition to its tragic human toll is literally decimating the most economically productive members of many African societies. Add to that the unpredictability of international aid flows, which is topped only by the extraordinary price volatility in world markets of their primary exports. How can one possibly stabilise such economies?
In practice, policymakers often try to shield the economies from extreme volatility by imposing tight controls across the economy. Unfortunately, such controls not only block the price signals that help the economy react to changing circumstances, but also feed inefficiency and corruption. That many parts of Africa have made great progress in lowering inflation, liberalising markets and resuming growth is a testament to the perseverance of the Africans themselves. Still, the challenges remain, and we will need to find new approaches in the years ahead if the UN’s Millennium Development Goals are to become anything more than a dream for Africa.
The IMF was established not long before the OECD to address problems like these. Finding approaches that resolve them – and the many more immediate dilemmas facing our 184 member countries – constitutes the heart of the IMF’s work programme. I applaud the work of the OECD Observer in shedding light on these complex topics and bringing them to the attention of a broader circle.
Rogoff, K., “Managing the world economy”, The Economist, 3 August, 2002, Available online (see link below)
©OECD Observer No 235, December 2002