Academic journal article Global Governance

The Political Geography of World Financial Reform: Who Wants What and Why?

Academic journal article Global Governance

The Political Geography of World Financial Reform: Who Wants What and Why?

Article excerpt

Since the devastating East Asian financial crisis of 1997-1999, we have seen many headlines and the formation of numerous blue ribbon and multinational commissions asserting the need to "reform" the world's "financial architecture," the latter phrase having replaced the more mundane "monetary and exchange rate arrangements." The purpose of this article is to demystify some of the major reform proposals and to understand which countries and interests back them. I suggest that the reforms proposed by a loose coalition of "financial stabilizers" make the most sense on economic efficiency grounds, but that the bargaining structure of the issue arena is such that the reforms most likely to be implemented are those of the "transparency advocates."

The current debate results from a series of high-profile financial crises in the 1990s. In 1992-1993, troubles in Western Europe's exchange rate mechanism (ERM) cost the German government at least $1 billion and the Swedish government as much as $26 billion and brought fame and wealth to financier George Soros, who correctly bet against the British pound sterling. In 1994-1995 the Mexican peso crisis and subsequent "tequila effect" devastated emerging markets throughout Latin America and other countries as far flung as Canada and the Philippines. And in 1997-1999, the East Asian financial crisis brought down Indonesia's Suharto after thirty years in power and rocked the economies of several of the much-admired Asian tigers. Less noticed outside financial circles was the eleventh-hour weekend rescue of Long Term Capital Management, a little known U.S. hedge fund, in fall 1998, just after the Russian financial crisis and just prior to the Brazilian one. The rescue relied on "voluntary contributions" of funds fr om major private U.S. banks but was urgently coordinated by Gerald Corrigan, president of the New York Federal Reserve Bank. These events spawned a flurry of commissions and studies.

What Is Financial Architecture?

Not unexpectedly, the definition of the beast is elastic. To multinational bankers and institutional investors, reform of the financial architecture means consensual global implementation of best-practice standards of accounting and reporting of national and corporate financial information in developing countries. To many members of the U.S. Congress, it means that the International Monetary Fund (IMF) and World Bank should slim down and stop wasting taxpayers' money. To Japan and many Western European governments, it means that the U.S. government should cease acting like a one-man band in responding to global financial crises. To finance ministers in very poor countries, as well as to many middle-class activists in the advanced industrial democracies, global financial reform means debt forgiveness for the set of highly indebted poor countries (HIPCs). And to incumbent policymakers in the so-called emerging market countries (EMCs) that have received the bulk of the expanded private capital flows of the 1990s and early twenty-first century, reform of the world's financial architecture usually implies creation of a global lender of last resort (LLR)--a lender with deeper pockets than the present IME, able to assist fundamentally sound economies threatened with external financial contagion. These are very different conceptions of the basic issue arena.

For purposes of this essay, the global financial architecture is an "international regime," designating a set of "principles, norms, rules, and procedures" in an international issue arena. (1) The international financial architecture consists of a loose set of multilateral agreements and understandings, both written and implicit, among a core group of powerful capitalist states, about the rules and norms that govern, and/or should govern, cross-border money and credit transactions of all kinds. The international financial regime includes but is not limited to norms and institutions governing exchange rate practices, regulation of all private cross-border financial flows, and management of the international financial institutions (IFIs), including the World Bank, IMF, and the regional development banks. …

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