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The Future of the International Monetary System

Edited by Marc Uzan

Is the international financial architecture debate over? Not according to leading experts gathered together in this impressive volume who try to identify the key trends that will fashion the international financial system in the years ahead. As history has shown, the evolution of the international monetary system is a slow process. However, the authors argue that we may be entering a new era in which a combination of factors will have lasting consequences on the functioning of the international monetary system and the future role of the IMF.
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Chapter 8: Is democracy incompatible with international economic stability?

David Leblang


David Leblang* INTRODUCTION One of the enduring triumphs of the Bretton Woods system is the recognition by its founders that policymakers in industrial democracies are answerable to both domestic and international constituencies. The founders purposely built a flexible system to allow democracies to work, to provide elected politicians room to balance domestic monetary autonomy and exchange rate stability. Consequently, and at least for a time, the Bretton Woods system allowed both democracy and international economic stability to flourish. With the 60th anniversary of the agreement approaching in 2004 we observe democracy spreading to an ever-larger number of countries; yet we also see a growing number of international financial crises. As discussions about the future international financial architecture intensify it is timely to re-examine the relationship between domestic policy autonomy and international economic stability. One of the key differences in the international economic environment when the Bretton Woods era is compared to the present day concerns the degree of capital mobility. During Bretton Woods, capital markets were relatively segmented and policymakers could meet constituent demands without being overly concerned about the consequences of policy on exchange rate stability. With the growing integration of capital markets, policymakers do not have as much flexibility; expansionary monetary policy used for redistribution, for example, often places downward pressure on the exchange rate. This does not mean, however, that democratic politics are incompatible with international economic stability. The relative transparency and predictability of the policy process in democracies may provide markets with confidence in...

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