The governing structure of the Bretton Woods Institutions –that is, the International Monetary Fund and the World Bank– was determined sixty years ago. In 1944, a few industrial countries accounted for the bulk of world output, trade, and capital flows. This is no longer the case. Developing countries and economies in transition, the more dynamic elements of the world economy, account today for the same volume of output as the Group of Seven (G-7) countries in terms of purchasing power parity, and for 84 percent of the world’s population. They can no longer be dismissed as minor partners in the global economy.
The lack of adequate representation of the developing countries and emerging market economies in the governance of the global economy and the declining commitment of major countries to a multilateral rules-based system of international monetary cooperation has resulted in short-sighted, and politically motivated decisions by major shareholders, which undermine the efficacy of the IMF and World Bank and have adverse consequences for world economic growth and stability. Indeed, the non representative character of the governance of these institutions increasingly threatens the integrity of the international monetary system, as countries in Asia and elsewhere move away from the IMF and take distance from the World Bank, leaving the institutions to deal mainly with low-income countries.
This paper provides an overview of the international monetary system, briefly discussing six key problems1 in which the concentration of power in a few countries and the limited participation of developing countries in the discussion of systemic issues leads to poor results:
1. the correction of global imbalances;
2. the role of the IMF in the adjustment process; 1 For reasons of space, other important problems, such as the issue of negative net transfers of resources to developing countries, and the problems of the low income countries will not be discussed. 2
3. combating deflation through countercyclical policies;
4.financial crises prevention and resolution;
5. the management of international liquidity, and
6.responding to commodity shocks.
Overcoming these problems requires a renewed commitment of industrial countries to a rules based multilateral system and the participation of developing countries in decision making in a manner commensurate with their economic importance.