Managed floating, however, faces an adding-up problem on the global scale. Not all countries can simultaneously manage the movements of their exchange rate and achieve their targeted rates. The exchange rate, by definition, is a multilateral phenomenon, and attempts by many countries to keep their currencies at an undervalued rate may end up in a race to the bottom - or in competitive devaluations - that would be as harmful for the world economy as in the 1930s. Moreover, given the size of international short-term capital flows and the inherent volatility of these flows, only those developing countries that are big and competitive enough to withstand strong and sustained attempts of the international financial markets to move the exchange rate in a certain direction will be able to manage the floating successfully. A small and open developing economy will hardly be able to continue fighting a strong tendency to appreciate over many years or even decades.
Multilateral or even global arrangements are clearly the best solutions to this problem. The idea of a cooperative global monetary system would be to assure, on a multilateral basis, the same rules of the game for all parties involved, more or less in the same way as multilateral trade rules apply to every party equally. That is why the main idea behind the founding of the International Monetary Fund in the 1940s was to avoid competitive devaluations. In a well-designed global monetary system, the need and the advantages of the currency depreciation of one country have to be balanced against the disadvantages to the others. As changes in the exchange rate, deviating from purchasing power parity, affect international trade in exactly the same way as changes in tariffs and export duties do, such changes should be governed by multilateral regulations. Such a multilateral regime would,among other things, require countries to specify their reasons for real devaluations and the dimension of necessary changes. If such rules were strictly applied, the real exchange rate of all the parties involved would remain more or less constant, as strong arguments for creating competitive advantages at the national level would rarely be acceptable.