Three Years after Asian Crisis, Policymakers Are Still Arguing over Reform ; NEWS ANALYSIS: A Stronger Global Financial Authority Is Still Needed
Diane Coyle Economics Editor, The Independent (London, England)
IT IS NEARLY three years since the first signs of the turmoil, that turned into the global financial crisis, emerged in Thailand and the other developing economies of south-east Asia. The crisis prompted widespread demands for a fundamental overhaul of the international "financial architecture" and reform of institutions like the International Monetary Fund and World Bank.
With the dust as settled as it ever gets in the financial markets, a recent conference held at the Bank of England addressed the question of whether the architecture has been strengthened enough to prevent, or if not, resolve, future tempests like that of 1997-98. With participants ranging from academics to policymakers such as Eddie George, Governor of the Bank of England, and Laurence Meyer of the United States Federal Reserve, to financial market practitioners like George Soros, there was little unanimity.
Much attention has focussed specifically on the roles of the International Monetary Fund and World Bank, both heavily criticised for their handling of the crisis. In an overview of a research programme he has run for the past eight years, David Vines of Oxford University pointed out that the two institutions combine a number of very different functions.
The IMF, for example, assesses macroeconomic policies in the developed countries as well as the developing ones. In the case of the former, the Fund's annual Article Four reports help make governments aware of the international spill-overs from national economic policies.
But, for the developing countries, IMF reports are more often a source of technical policy advice the countries do not have the resources to generate for themselves. IMF analysis is a sort of international public good. In addition, the Fund allows the G7 countries to put resources into establishing better economic policies in developing countries without overt political interference.
His paper concluded: "The Fund presents a case of a quasi-public institution set up to solve one set of public policy problems which, having acquired a set of capacities and competences, is then drawn into the resolution of other problems, the solutions for which are far from well understood."
One particular disagreement is the extent to which the IMF should act as a "lender of last resort" in future crises, having a more automatic, less ad hoc role in bail-outs like those in south-east Asia. Some critics think it should, to avoid a period of damaging uncertainty at a fragile stage of any crisis; in which case it would need massively bigger financial resources of its own.
Others argue this would simply create a huge "moral hazard" problem, whereby private investors would slosh money carelessly into emerging markets in the expectation of an automatic bail-out. For now, the Fund is left dangling dangerously between the two alternatives, and there is no consensus about how crises should be worked out in future. …