Much of the chapter by Roubini is a very useful survey of the analytical foundations of the crisis resolution and private sector involvement (PSI) debates. But I do have some points which I want to add by way of a new perspective.
The chapter divides the PSI debate into three parts: crisis prevention, crisis response and crisis resolution. An innovative feature in the approach taken in the chapter is that, instead of looking at what private sector involvement should be, it starts out by looking at a world without the official sector. I think that is very instructive because it highlights clearly the kinds of market failures that you have to deal with and asks what kind of combination of interventions from the public and private sector are needed.
But before turning to crisis resolution, I want to talk a little bit about private sector involvement in crisis prevention. This is an area where there has been a lot of progress, in particular in terms of adoption, assessment and implementation of international standards. We have also seen a lot of progress in terms of the emphasis placed on improved transparency. And we have seen progress in terms of surveillance by the IMF and by others - for example, in terms of an emerging consensus on exchange rate arrangements that are less risk-prone.
Much of this effort, though, has been confined to the official sector. There has been relatively little engagement with the private sector in these discussions, with a few notable exceptions in the international standards area. So one question that I would pose is: what kind of involvement would we like to see of the private sector at the crisis prevention stage? For example, I would argue that better market incentives are absolutely central if standards and codes are going to have an impact on debtor country behaviour. To date, although there has been some progress, it has not been nearly enough. The official sector needs to ask itself what role they see standards and codes playing in guiding future private sector lending decisions through market incentives.
Second, let us consider private capital flows. The contradiction here is not that there is too much capital flowing to emerging markets, but that there is too little. Yet, given the variance in capital flows, there is a serious question about whether coming to this trough of water is really worth it