International Financial Governance under Stress: Global Structures versus National Imperatives

By Geoffrey R.D Underhill; Xiaoke Zhang | Go to book overview

1

Reform of the international
financial architecture: what
has been written?

JONATHAN STORY

The financial crises of the 1990s, following two decades of financial market liberalisation and ever growing capital flows, have prompted a passionate debate about ‘globalisation’ as the successor world system to the Cold War. The background to these crises is a story well told, stretching from the breakdown in the Bretton Woods system in the 1960s, the confirmation of the dollar as the world’s reserve and transaction currency, the recycling of funds following the rise in oil prices, and the expansion of the financial marketplaces in London and New York. This in turn prompted a scramble among developed countries to open their securities markets to institutional investors, who demanded the liberalisation of capital controls as the price for their presence. Liberalisation of capital movements then spread to developing countries.1 Initially, resistance was loud, but as time passed and US hegemony became entrenched, even major financial meltdowns – such as the devaluations of the Italian lira and pound sterling in 1992, or the collapse of the Mexican peso in late 1994 – attracted only temporary attention. By the mid-1990s, confidence in dominant policy prescriptions reigned supreme. Asia’s financial crash therefore came as a shock, the equivalent for economists of the Soviet Union’s collapse for sovietologists, all the more severe in that it was unpredicted and its severity unanticipated. The crisis started with the devaluation of the Thai baht in July 1997, spread to Indonesia where General Suharto’s regime was coming to a close and ricocheted into Taiwan, South Korea and Malaysia before spreading to Brazil, South Africa and then Russia.

Unlike previous meltdowns, this chain of events revived a long-dormant debate on the world’s financial architecture, conducted this time principally among economists, and mainly in the United States. It therefore tended to be skewed in that politics – domestic or international – was given a back seat, or granted a walk-on role to provide light relief to a supposedly technical problem. It also meant that US opinions weighed disproportionately in the balance, seeming to reinforce the view of the post-Cold War decades as representing a unipolar moment in world affairs. Caricaturing only slightly, reform of the world financial

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