Navigating Stormy, Uncharted Waters

Michel Camdessus

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1998
• eBook ISBN: 9781557757623

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Toward a New Financial Architecture for a Globalized World

The Group of Seven/Group of Eight Summit will be held in Birmingham next week. High on the Summit agenda will be the issue of how to renovate the architecture of the international financial system in the face of the tremendous changes under way in the global economy. The Asian crisis has been so unexpected in many of its aspects, so broad, so cruel in its human consequences that—even before the crisis has run its full course—the leaders of the world want to embark on the design of a new architecture. This is certainly the right thing to do, and the venue of this meeting could hardly be more fitting. Like many other cities in advanced countries, Birmingham has experienced the forces of change in the global economy firsthand—from the loss of traditional industries to the challenge of finding new employment opportunities. Moreover, two centuries ago, this city was at the heart of the Industrial Revolution, an era that, like our own, was a time of extremely rapid change. At that time, intellectuals of all schools of thought used to meet frequently in Birmingham—every full moon, I understand—and bring their reflections to bear on the challenges of their new world. This was the so-called Lunar Society, which included such personalities as Matthew Boulton, James Watt, Erasmus Darwin (grandfather of Charles), and William Small—a friend of Benjamin Franklin and Thomas Jefferson, all with wide-ranging interests, all sharing a sense of optimism and responsibility for building a better world. Imagine what a blessing it would be if the G-7/G-8—our new Birmingham group—were to be inspired by such an example when dealing with their pressing agenda!

As a modest preface to their work, I would like to share with you my personal views on the need for change the Asian crisis reveals, the building blocks available for a new architecture, and the work already under way at the IMF and, in the best traditions of Chatham House, to fly a few kites and suggest some further steps for the longer term.

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Change Is Needed

As in the days of the Industrial Revolution, we are now at a defining moment of human history. The question before us is straightforward: how to utilize the full potential of globalization to improve the living standards of all—particularly the poorest—while containing the risks it entails, such as those we have seen materialize so brutally in Asia, and those at least equally pernicious, even if less spectacular, of the continuous marginalization of the poorest countries. What kind of new architecture of the global system could achieve this? The response must be deduced from a proper analysis of the most recent crises.

Contrary to what we saw during the debt crisis of the 1980s, the problems in Asia were not almost exclusively macroeconomic in nature; even if these countries suffered, all of them, from some deficiencies in this respect, by and large they had long track records of successful economic management. Rather, in a context dramatically changed by a major realignment between the dollar and the yen, and important differences in short-term yields, three other factors helped trigger the crisis:

• the weakness of their public and private banking and financial structures;
• an unsustainable accumulation of short-term financing—particularly of interbank lending, which Alan Greenspan refers to as the Achilles’ heel of the international financial system—which made countries particularly vulnerable to a sudden shift in market sentiment;
• and, last but not least, deep-seated problems of governance, corruption, and what U.S. commentators call “crony capitalism.”

Together with the macroeconomic problems, these three major factors had to be addressed for our response to the crisis to be pertinent. If you examine our programs with Thailand, Korea, and Indonesia, you will see that we have tried to deal with these factors, and they will have to be taken into consideration in the future in whatever efforts are undertaken to avoid the recurrence of crises. But even that will not suffice. In view of the enormous human and economic cost of the Asian crisis, no wonder we hear many radical suggestions as to how to avoid such losses in the future. There are calls for us to do a better job of predicting and preventing crises, addressing their social impact more effectively, stopping speculators and properly regulating this “casino economy,” seeing to it that investors bear the full costs of their mistakes, stabilizing the international monetary system, providing for more political accountability of our institution, etc., etc.

We cannot deny the basic justification of these—at times vociferous—calls for change. No doubt there are at least some elements of validity in each of them. Taken together they tell us that, at this stage, world public opinion expects its leaders to design and build a new, common house with an audaciously modern architecture, and not limit themselves to some plumbing and interior decorating of the old mansion.

But, as responsible architects, let us start by recognizing the building blocks at hand. Indeed, they are substantial.

Seven Building Blocks

The first of these building blocks is the tremendous potential for growth and prosperity globalization provides countries fully integrating into the global economy. Formidable sources of dynamism are there, engendered by new information technologies and unifying financial markets. The question, then, is how to discipline and channel these forces so that growth will be sustainable and more broadly shared and the fundamental desire for greater equity will be more fully satisfied.

The second building block is integration. By integrating themselves into the mainstream of the globalizing world economy, the poorest countries will avail themselves of a most powerful instrument of acceleration of development, while, if they preferred to do it alone, they would expose themselves to the risks of marginalization, abandoning several generations to economic stagnation and poverty.

The third building block is the universal consensus on the importance of an increasingly open and liberal system of capital flows in order for globalization to deliver on its promises.

The fourth building block is what we could call the “golden rule” of transparency, now truly seen as the key for modern management, economic success, and rational behavior of global markets.

The fifth is good governance, which is equally essential for strong economies and properly functioning democracies. No doubt, competing for excellence in governance is the modern face of states-manlike responsibility.

The sixth building block could be a set of standards and codes of best practices; this could require a few words of elaboration. More and more we observe an emerging recognition that the global markets still suffer from the kind of anarchy that afflicted our domestic financial markets here in Europe during the nineteenth and the beginning of the twentieth centuries—that is, until various scandals and crises led to the creation of such institutions and rules as securities and exchange commissions, banking supervision, accounting standards, disclosure and prudential rules, and so forth. Our challenge today is to disseminate these good practices in emerging markets and to establish similar checks and balances in global markets. This could appear an impossible task, as many will pretend that the absence of rules or regulations of any kind has been at the very origin of the developments of these markets. The world community is now coming to a different view, and looks forward for the definition of international standards and codes of good practices, which would be progressively disseminated by the IMF through its surveillance, and could help limit the excesses of an international “casino economy.”

Last, but not least, the seventh building block is the option for the multilateral approach to handle problems that are now more and more global in nature. And the key instruments of such an approach will have to be the Bretton Woods institutions themselves. Let me be immodest for a moment. The experience they have accumulated, the quality of their staff, and their demonstrated ability to address new economic challenges promptly and efficiently make them a major asset of the world community and a central pillar of a new architecture, provided they continue adapting themselves, reforming themselves, to this new world. And suggestions for self-reform are in abundant supply.

These seven building blocks have been neglected or unevenly utilized for too long. Assembled in the right way, they could offer a rock-solid foundation for a new financial system. Assembling them, nevertheless, will be hard work, each of them implying that vested interests or perverse practices be challenged. Thus, notwithstanding our sense of urgency, we are heading here for an evolutionary change: Athena in her helmet will not spring full-grown from the head of Zeus! And, as with all transitions from one era to another, we can expect risks and uncertainties to persist for some years to come. This makes it all the more urgent to get to work on this new architecture right away.

Initial Steps for a New Architecture

In fact, a number of significant steps are already under way. At its April meeting, our governing body, the Interim Committee (of Ministers and Central Bank Governors of IMF member countries), set the broad agenda for the IMF’s own work—and its work with others—for the near future. Five areas have been given priority by member governments;

• The central role to be played by the IMF in crisis prevention through its surveillance and its role in encouraging members to strengthen their macroeconomic policies and financial sectors.¹

• The Interim Committee suggests that the Fund intensify its work in surveillance of financial sector issues and capital flows, and focus on the risks posed by potentially abrupt reversals of capital flows, especially those of a short-term nature. The Fund is also asked to examine ways to strengthen the monitoring of capital flows, a major and difficult undertaking indeed!

• Drawing on the lessons from the Asian crisis, and the frustration that confidential warnings from the Fund were not always heeded, the Fund has been asked to develop a “tiered response,” whereby countries that are believed to be seriously off course in their policies are given increasingly strong warnings. Addressing an audience in this country, where football is a way of life, or in my own country in advance of the World Cup, I do not need to emphasize how important it is to know exactly when the referee has shown a yellow card and how many yellow cards are permitted! We also have the red card in our Articles of Agreement, but using this card could precipitate the crisis we seek to avoid. So we prefer to use the yellow card.
• The Interim Committee also called upon the IMF to help members strengthen their domestic financial systems by encouraging them to develop supervisory and regulatory frameworks that are consistent with internationally accepted best practices, as well as strengthened standards for bank and nonbank institutions. Here you will recognize, of course, the “standards and good practices” building block. Work in this area is already in progress in various forums. A notable example is the Basle Committee’s Core Principles for strengthening banking regulation and supervision, which the IMF is now helping to disseminate to member countries. We will now work with other relevant institutions that could be responsible for developing similar standards in areas such as accou...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Foreword
• Crisis in Emerging Market Economies: The Road to Recovery
• Toward a New Financial Architecture for a Globalized World
• The IMF and Good Governance
• Rebuilding Confidence in Asia
• Africa: A Continent on the Move
• Footnotes