Adding stability to a flexible world economy

Exchange rates have been going up and down like elevators. This movement, along with a number of other disturbing economic signs, is upsetting stability in the world economy.

In a free-enterprise speech, President Reagan urged finance leaders at the annual meeting of the International Monetary Fund (IMF) and World Bank to ``look with open minds at ways of promoting stable exchange rates and ensuring sound money.'' He spoke of coordinating policies to restore stability to exchange rates.

One specific source of instability among the large industrial countries, according to Jacques de Larosi`ere, is the erosion of commodity prices, which has hurt developing countries when they need increased export earnings to grow and to service their debts. ``In a world that is increasingly interdependent, it is proving more complex than ever to cope with these problems,'' said Mr. de Larosi`ere, the IMF's executive director.

A solution lies in firm adherence to a stable monetary policy and strengthened commitment to international cooperation. ``Economic policy coordination among industrial countries is no longer a matter of theoretical preference,'' the outgoing director said. ``It is instead a prerequisite for growth with stability.''

Since 1973, the world international monetary system has been operating with fewer rules. The system of fixed exchange rates between national currencies, established by a conference in Bretton Woods, N.H., in 1944, was abandoned. Gold lost its modest role in the system. US hegemony over the world economy gradually eroded as Europe, Japan, and the newly industrialized nations developed greater economic power.

Further, the Japanese yen and the West German mark joined the United States dollar, and, to a lesser extent, the British pound as pivotal currencies.

This ``nonsystem,'' as it has been called, gave the world great flexibility to deal with the energy and debt crises of the past decade. But it also resulted in enormous swings in currency values, inflationary booms, and deflationary busts.

As a result, many of the world's financial leaders are yearning for some way to bring greater stability to the system.

One popular idea is surveillance. The IMF and its member nations plan to strengthen an organized system of examining the fundamental policies and trends in key nations to see if they are conducive to stability.

Financial leaders have been talking about what indicators to review. There is, however, little willingness to make policy shifts automatic should such a review indicate fiscal, monetary, or other policy changes are needed. National leaders do not want to give up their freedom to make domestic policy decisions according to political needs.

Another debate revolves around tighter control of exchange rates.

There has been movement in this direction on an ad hoc basis because of the plunge in the dollar's value during the last year. The Europeans have just agreed to attempt to prevent its further slide.

Moreover, British Chancellor of the Exchequer Nigel Lawson seemed to hint that he might bring the pound into the European Monetary System (EMS) soon when he told the press Tuesday this would not happen ``today.''

The more theoretical debate among the ministers is whether an EMS-type system, though probably looser, could be extended to include the US and other industrial nations. Under such a system, governments would intervene in the foreign-exchange markets to keep the value of their currencies within a broad band.

Curiously, the West Germans, who opposed this, have expressed more sympathy for it. The French, who have advocated this target rate system, backed off.