Wanted - a Keynes for the Nineties

FIFTY years later, Lord Keynes is still at the centre of international debate. Would he approve of the rise of a monumental global financial market as the century ends, or would he dwell on its risks? Would he support a tax on such international transactions to be used as a hedge against greedy speculators, or would he advise leaving well enough alone? Those intent on learning the lessons of the first 50 years after creation of the Bretton Woods system still seek guidance from its creators.

From now until the 50th anniversary in July of the historic Bretton Woods meeting that created the International Monetary Fund, the World Bank and the General Agreement on Tariffs and Trade, there is a conference every week. All are focused on the continued management of the world economy - 50 years after these institutions were put in place. Inevitably, there are calls for a little 'creative destruction'.

The most persistent urge either a merger of the IMF and the World Bank or the elimination of one or more of these post-Second World War pillars. Clearly, there is dissatisfaction with the status quo in an era marked by the end of the Cold War and the beginning of new challenges posed by the environment, record migration flows, the rise of new economic powers and global poverty and underemployment on a massive scale.

Last week, a distinguished group of policy-makers met to mull over future economic challenges, much as Lord Keynes and his contemporaries had decades earlier. Sadly, one of their conclusions was that today's system suffers from a lack of the strong leadership and vision that guided the post-war period. Indecisive leadership by multi-member committee seems to be the order of the day. This explains the growing hunger for regional economic groupings that give more substance to the process and syphon off dissatisfaction with the whole.

Still, even the critics are forced to admit that the overall record of the Bretton Woods institutions has been impressive.

A paper by Peter Kenen, of Princeton University, and Barry Eichengreen, of the University of California at Berkeley, summarises the achievements. In the first 25 years after the war, the big industrial countries grew nearly twice as rapidly as in any period before or since. And over the next 25 years, a group of newly industrialising countries joined this 'convergence club'.

The authors conclude that three main factors contributed to the strength and effectiveness of these institutions: first, the willingness of the US as the dominant economic power to make side-payments and apply sanctions when change was necessary; second, the small number of homogenous countries involved in their design; and third, the closed nature of domestic economies, which allowed them to pursue individual goals - such as full employment - without seriously violating international rules.

Today, given the economic slowdown in the industrial countries, the rise in unemployment globally, and the lack of a dominant economic power, one is forced to ask whether an exceptional - not to be repeated - half-century has drawn to a close. The answer, based on lessons from the past, is: not necessarily.

Indeed, with inflation at historical lows and growth burgeoning in the main developing markets, there is reason to believe that the next half- century could be one of equally impressive growth. This assumes a certain amount of fine-tuning based on a shared vision, apparently based on regional centres operating under a system of agreed international rules.

However, what we have learned from the Bretton Woods experience is that the institutions must be flexible to be effective. This means that some of them may disappear if they are no longer necessary and that others will undergo big change.

The new challenges that the old structures are ill prepared to handle are all loosely tied to globalising and include: foreign direct investment and the rebirth of multinational enterprises, refugee and migration flows, the environment, new regional economic arrangements and the unfinished business of a world trade organisation. As a result, there are proposals for a plethora of new institutions and structures: a Gatt for investment, a global environmental organisation, an international capital markets supervision authority, an institutionalised Group of Seven (G7) arrangement to provide a steering committee for global decision-taking, and so on down the line.

Those who abhor the creation of yet more bureaucratic structures - and there are many - tend to concentrate instead on a rebalancing of roles.

DeAnne Julius, at British Airways, for example, argues that a good way to strengthen the international investment regime would be to create a new role for international corporate citizens.

Corporations should be given a strong say in the dispute settlement procedures of the new World Trade Organisation and in other aspects of its operation. Corporate citizens not only have a detailed knowledge of different regulatory environments, but they also have broader interests than those of any one country or government. Thus, they should be brought more directly into the evolving trade process.

Expect many more such proposals, as the system undergoes its most comprehensive rethink in almost 50 years.