An Enduring Need: The Importance of Multilateralism in the 21st Century, Remarks by Anne O. Krueger

IMF News, September 19, 2006

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Published: September 19, 2006

Overview and central thesis

Speech given by Anne O. Krueger, Special Advisor to the Managing Director, Singapore, September 19, 2006.
Central argument: multilateralism has been the key underpinning of the postwar international economic system and its extraordinary successes over the past sixty years, but its importance is increasingly underappreciated and threatened by preferential arrangements, the absence of a multilateral regime for private capital flows, and narrow national interests.
Emphasis on the multilateral institutions: International Monetary Fund (IMF), World Bank, and World Trade Organization (WTO/GATT).

The role and rationale for multilateralism

Multilateral frameworks reduce the risk that unilateral, self-interested policies will provoke retaliatory actions and global losses (lessons from the 1930s: competitive devaluations, high tariffs, Smoot-Hawley).
Multilateralism fosters nondiscrimination in international transactions (e.g., most favored nation—MFN—principle).
Key practical failures of unilateral or preferential measures illustrated:
- Trade sanctions are effective only if broadly supported or enforced.
- Voluntary export restraints (VERs) can be undermined by third-country expansion (semi-conductor and automobile examples).
- Anti-dumping and countervailing duty (CVD) measures often shift trade patterns and benefit third-country producers (example: Polish golf carts and Spanish entry).

Historical successes under multilateralism (postwar to late 20th century)

Immediate postwar conditions: most European and Asian economies devastated; average European tariff on manufactured goods imports stood at over 40 percent; only 4 countries in the world had full currency convertibility.
The "golden quarter century" (late 1940s through the 1960s):
- Rapid economic growth, with Japan achieving rates of economic growth of 7-9 percent in the 1960s.
- World trade grew at almost twice the rate of real GDP growth.
- By the end of the 20th century, tariffs on manufactured goods among developed countries had fallen from over 40 percent in the late 1940s to an average of less than 5 percent.
- Ocean shipping costs: added about 30 percent to f.o.b. value of exports in the late 1940s; that figure had fallen to 3 percent by the late 1990s.
- Air freight accounted for 40 percent of world trade in value terms by the late 1990s.
Social progress tied to economic integration:
- Life expectancy in India rose from about 39 years in the early 1950s to over 60 years at the time of the speech.
- Since 1960, life expectancy in the developing countries has risen at roughly double the rate in the richest countries; the gap fell from 30 years in the 1950s to around ten years at the time of the speech.
- Literacy and other well-being indicators improved dramatically in most countries.

Later developments, shocks, and institutional adaptation

1970s: end of the Bretton Woods fixed exchange rate system; flexible exchange rates helped absorb the 1973 oil price shock.
1970s–1980s: accelerated worldwide inflation, private capital flows recycled petrodollars to oil-importing developing countries, leading to the debt crisis of the 1980s.
Multilateral responses and adaptations:
- IMF and World Bank supported adjustment and restructuring (Brady Plan; Paris Club role).
- IMF shifted toward more emphasis on surveillance and support of economic policies in developing countries.
1990s: Uruguay Round and WTO; collapse of the Soviet Union and large-scale transitions required multilateral engagement; private capital flows to emerging markets mushroomed (private flows predominated by mid-1990s).
- Example: some East Asian economies used private capital inflows averaging almost 10 percent of GDP during high growth years.
Late 1990s: crises in Mexico (1994), Thailand/Indonesia/Korea/Malaysia (1997–98), Russia (1998), Brazil (1999) revealed vulnerabilities associated with more open capital accounts; led to policy learning (more flexible exchange rates, attention to debt sustainability, higher reserves).

Current state (as of speech) and key concerns

World real GDP had grown well in excess of 4 per cent annually for four years running and was projected to sustain this pace into 2007; all regions were sharing in the growth.
Three major, related threats to multilateralism:

1. Proliferation of preferential trading arrangements (PTAs), which are discriminatory and create vested interests against further multilateral liberalization.

Example: misperception that European integration rather than multilateral liberalization explained Europe’s success; author notes roughly 90 percent of Europe’s trade liberalization had been multilateral and around an extra 10 percent preferential within the continent.
PTAs can be "stepping blocks" or "stumbling blocks"—risk of trade diversion and erosion of support for multilateral rounds (e.g., reduced business support for the Doha Round).

2. Absence of a coherent multilateral regime governing private capital flows and treatment of foreign assets.

Most countries have extended uniform treatment to inflows and assets regardless of origin, but no formal international regime exists.
Fungibility of money undermines the argument for partial regimes that cover only foreign direct investment.

3. National-level behavior that prioritizes short-term or narrow interests over systemic health of multilateral institutions.

Examples: resistance to realignment of voice and representation in the Fund; political interventions favoring particular program outcomes or appointments that may weaken institutional effectiveness.

Policy implications and recommendations

Preserve and strengthen multilateralism:
- Recognize and defend the "public good" benefits provided by the multilateral economic system.
- Resist erosion of multilateral principles through proliferation of discriminatory preferential arrangements.
Develop a multilateral, nondiscriminatory framework for treatment of capital flows and foreign assets:
- Urgency due to the growing size and importance of private capital flows; less resistance now than if preferential treatment becomes more entrenched.
- Ensure uniform treatment across types of capital flows to avoid fungibility-based circumvention.
Promote institutional integrity and long-term interests:
- Support changes (e.g., voice and representation) that reflect the current international economy and strengthen institutions.
- Avoid political interventions that result in weak programs, favoritism, or appointments prioritizing diversity claims over merit.
Use multilateral institutions to disseminate lessons and support policy reforms (IFIs’ comparative advantage in facilitating adjustment and knowledge transfer).

Key numeric indicators and factual points (exactly as presented)

Speech date: September 19, 2006.
Postwar period successes described over "the past sixty years."
Average European tariff on manufactured goods imports stood at over 40 percent in the immediate postwar period.
Only 4 countries in the world had full currency convertibility (postwar).
Japan achieving rates of economic growth of 7-9 percent in the 1960s.
By the end of the 20th century, tariffs on manufactured goods among developed countries had fallen from over 40 percent in the late 1940s to an average of less than 5 percent.
European trade liberalization estimate: something like 90 percent multilateral and around an extra 10 percent preferential within the continent.
Ocean shipping added about 30 percent to the f.o.b. value of exports in the late 1940s; that figure had fallen to 3 percent by the late 1990s.
Air freight accounted for 40 percent of world trade in value terms (late 1990s).
Life expectancy in India rose from about 39 years in the early 1950s to over 60 years (at time of speech).
Gap in life expectancy between rich and poor countries shrunk from 30 years in the 1950s to around ten years (at time of speech).
Some East Asian economies utilized private capital inflows averaging almost 10 percent of GDP during the high growth years.
World real GDP had grown well in excess of 4 per cent annually for four years running and was projected to sustain this pace into 2007.

Source: Remarks by Anne O. Krueger, "An Enduring Need: The Importance of Multilateralism in the 21st Century," September 19, 2006.