Privatization of intergovernmental monetary system

The international monetary and financial system has become increasingly privatized. It was designed originally to allow the expansion of private transactions that accompanies a vigorous and expanding world economy. However, the official framework and underpinning of the system have failed to keep step with the total volume of transactions, so that the capacity of governments to influence variables such as exchange rates, interest rates, and the magnitude and direction of international capital flows, has progressively diminished. At the same time, such important variables as levels of liquidity, patterns of expenditure, and the degree of expenditure expansion and contraction in the system as a whole, are determined primarily, and at times exclusively, by private decisions. Thus, governments, most of which would not contemplate being without influence on such matters in their own domestic economies, have allowed themselves to lose influence on these variables in the international sphere. This, in turn, has reduced their capacity to shape the evolution of their own national economies.

The process of privatization, including, in particular, the growth of Eurocurrency lending, has had a major impact on developing countries. Private flows other than direct foreign investment have risen from less than 20% to more than 40% of the long-term financing of the current account deficits of non-oil developing countries, while the share of official flows fell from 60% to 40%. This new pattern of financial flows meant that those developing countries deemed creditworthy by private capital markets were able in the mid-1970s to secure a substantial volume of external financing and to pursue adjustment policies requiring large sums of new investment and the phasing of adjustment over an extended period of time. But the many developing countries that commanded little or no access to private capital markets, such as the least developed and most other low-income countries, continued to depend on the Bretton Woods institutions, regional development banks, and bilateral donors for payments and development financing. Flows from such sources grew in the 1970s and eased the adjustment process; but they failed to keep abreast of needs, thereby severely constricting the policy choices open to those countries. Indeed, a shortage of foreign exchange confronts many low-income countries with the choice of either abandoning projects under way or lowering capacity utilization.

Recently, flows from private capital markets have fallen off; indeed, banks have been attempting to reduce their exposure in a number of developing countries through such means as reducing short-term credit lines, thereby accentuating the liquidity, and financing shortage. The functioning of the private capital markets has thus made all groups of developing countries increasingly dependent on the official institutions. The size and policies of these institutions have become of key importance in determining the development prospects of all categories of developing countries.