Over time the advantages of capital flows, particularly in the private sector, became apparent, and in a world without capital controls, it is possible to maintain independent monetary policies only by allowing exchange rates to float. So the Bretton Woods system eventually proved unsustainable, and today most advanced industrial countries have floating exchange rates and free movement of capital. Private capital flows now dwarf official flows. And “imbalances” can apparently persist almost indefinitely. The US current account deficit, now almost 7% of GDP, has been over 3% ever since 1999. Australia has run a persistent current account deficit since 1973. Accordingly, the international institutions have shifted the focus of their attention from current to capital account flows and to the fragility of national balance sheets. Those changes have meant that, over time, the post-war settlement has become less relevant. But the need for international institutions has increased. Our own standards of living are now, more than ever, affected by decisions elsewhere. And many people already feel they are losers from globalisation. The number of workers in the world trading system has more than doubled in a short period, with inevitable consequences for real wages of the unskilled in the industrialised world. Governments are having to work harder to explain what the principle of comparative advantage means to people in their daily lives. In fact, most people are winners from globalisation. China is now the second largest buyer of Australian exports.

Moreover, not everyone has a floating exchange rate and an inflation target, and countries that try to prevent adjustment of their real exchange rates have exacerbated the problem of spillover effects. Businesses in every country are conscious of how quickly their plans can be disrupted by unpredictable swings in exchange rates, asset prices and commodity prices. When those spillovers are sufficiently large and widespread, countries will want to engage with each other in a multilateral setting to discuss how they should be resolved. (b)  What commitments are needed? Before the collapse of the Bretton Woods system, the specific commitments made by countries to each other were very clear: fixed exchange rates and capital controls. In the wake of the collapse of Bretton Woods, the members of the IMF attempted to re-define their commitments. But the exercise of defining what practical commitments were needed focussed primarily on exchange rates and had rather little effect in practice. Two broad commitments are particularly important. First, countries should make public commitments about their targets for macroeconomic policies – fiscal, monetary and financial. That still allows countries considerable discretion in their choice of policy framework – for example, whether to adopt a fixed or floating exchange rate. Second, policy frameworks must be consistent across countries. Policies which try to prevent changes in real exchange rates in response to changes in fundamentals, or lead to an unsustainable build-up of external debt, are properly the concern of the international community. (c)  What tools are needed?