Krueger addressed an overflow audience on November 4, not surprisingly, since her topic was two large and prominent international organizations located just a few blocks away from the SAIS auditorium.
Krueger first addressed the World Bank, overviewing the evolution of the Bank from a lender to sectoral development projects to a leader of structural adjustment. Krueger noted that since middle-income countries can now finance development projects for themselves, the World Bank has a choice of lending to a smaller base of low-income countries, or embracing what she called “softer issues.” She was quick to point out that by “softer,” she did not mean social issues per se, because spending and reform in the health and education sectors had proved to be important and valid components of economic development. The term referred instead to the World Bank’s taking on issues such as resettling indigenous peoples or requiring adherence to core labor standards—concerns where Krueger considered the link with economic development less clear. She suggested that this tendency of the World Bank to “go all over the place” could possibly contribute to the diminution of public support for the institution.
International Monetary Fund
Turning to the IMF, Krueger suggested that for the monetary institution, the debt crisis in the 1980s was a key period that in some ways presaged the controversy that surrounded the IMF during the Asian financial crisis. During the debt crisis, the key was to keep the private creditors at the table, since IMF resources were low compared with the troubled countries’ total external debt, and this same point is still relevant today. Krueger said that the starting point for any analysis of the IMF has to be the recognition that the institution simply does not have the resources to counterbalance international capital flows.
Three other issues came to the fore with the Asian crisis: the greater size and varied composition of private capital flows; the weightier role of the exchange rate regime; and the centrality of domestic financial sector issues—which “muddied the waters quickly.” The key relationship, which is not understood by the IMF’s critics, is that when a country has an unrealistic foreign exchange rate and banks have been—one way or another—encouraged to borrow overseas, then a balance of payments crisis will likely go hand in hand with a sharp deterioration in the quality of the banks’ balance sheets. Krueger made it clear that she agreed with the current thinking that favors the polarized options of a currency board or a freely floating exchange rate. Solutions to the exchange rate-financial sector link include prohibiting industrial country banks from lending their domestic currency to developing countries except when a liability in the local currency is created, and raising reserve requirements for such cross-border lending. If such solutions are not firmly applied, and perhaps even if they are, the future of the IMF is going to be inextricably linked to domestic financial sector issues. The centrality of the financial sector led Krueger to the subject of coordination of the various international institutions.
Coordination of international institutions
Surprisingly, it was not the coordination of the World Bank and the IMF that interested Krueger, who said that the two institutions coordinated fairly well and that, moreover, a bit of competition was a good thing. Rather, she expressed concern about the coordination of the World Trade Organization (WTO) with the Bretton Woods institutions and the even wider coordination that international financial supervision required.
With regard to the WTO, in Krueger’s view, developing countries lack the institutional ability to comply with changes in trade practices, and the World Bank and, to a lesser extent, the IMF will need to help their members in this regard. To accomplish effective international financial supervision, many different bodies—ranging from official entities to trade associations to national authorities—covering many different disciplines—including banking, corporate finance and management, accounting, property rights, and legal procedures for bankruptcy—need to be involved. This is a real coordination problem, because the whole process is at risk of bogging down as one group feels it cannot do its assessment properly until another institution completes its part of the work. Ultimately, Krueger said, political realities may be a stumbling block to the technical solutions to the coordination dilemma that one might envision.