International Institutions In A Global Economy

DOI: 10.1111/j.1752-5209.2006.0003.x

International institutions in a global economy
Paul Volcker1

Abstract. Global economic integration has increased tremendously. But the
political instinct to think globally has eroded. This is a particular problem in
the context of the world economy's worrying dependence on American
spending and Chinese saving and volatile exchange rates. We needheightened
international coordination on currencies and, in the long run, perhaps a global
currency.

A changing world

In the 1960s and early 1970s, when I worked in the US
Treasury, economic doctrine seemed pretty settled along
Keynesian lines, and international monetary cooperation
and multilateralism were strongly stressed. The framework
of fixed exchange rates was taken for granted ^ orperhaps
better described as an article of faith. The Bretton Woods
institutions ^ the IMF and World Bank ^ were enjoying
their heyday. It was, institutionally speaking, a pattern that
reflected the hopes and ideals of those who shaped a new
world order out of the shattering years of depression and
world war.
Fresh as those images may be for me, I suspect that for
most of you they seemhistorical artefacts with little
current relevance. We live in a world with a degree of
economic and financial integration surpassing anything
anticipated a generation ago. This is true of trade in goods
and services and, even more strikingly, of the enormous
international flows of capital that characterise today's
financial markets.
The opening up of markets and internationalisation offinance are in part a culmination of policies set out decades
ago, but the reality has exceeded reasonable expectations.
And what has force-fed the change ^ what has made it
practically impossible to contemplate reversing course ^
has been technological explosion. We have only begun to
come to grips with the policy and institutional implications
of an electronic world of efficient andinstantaneous
communication and information processing.
New paradoxes

What seems paradoxical is that this new reality of a globally
integrated financial system has been accompanied by
erosion in the political instinct to think multilaterally, to

coordinate national policies and to build consensus. In
particular, the role of the BrettonWoods institutions is both
unsettled and downgraded. Think,for instance, of the
proliferation of bilateral and regional trading arrangements, in concept antithetical to the principles behind the
General Agreement on Tariffs and Trade (GATT) and its
successor, the World Trade Organization (WTO). Moreover, the breakdown of pegged exchange rates has not been
replaced by a coherent new system: the Friedmanite vision
of freely floating exchange ratessmoothly adjusting to the
vagaries of national policies or underlying economic
realities has not been borne out.
The flow of international private finance, now dwarfing
lending by the official institutions, is another oddity; the flow
today runs more in the direction of developing country to
developed, emerging to emerged, than in accord with
textbook models of development. Perhaps the oddestthing
of all is the enormous net flow of private capital and
monetary reserves into the US dollar.The United States has
been absorbing about 80 per cent of the net flows of international capital; the world's largest developed economy is
also its biggest debtor, spending 6 to 7 per cent more than it
produces.
A retreat from multilateralism?

What has been going on? First, the apparent retreatfrom
multilateralism and international cooperation. It is
important to make clear that, even in the 1960s and early
1970s heyday, the actuality of cooperation often fell short of
the rhetoric. Now, paradoxically, in important ways the
practice of cooperation and coordination is ahead of what
is generally acknowledged. But that coordination is forced
at least as much by market needs as by...