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Taming Global Finance: A Better Architecture for Growth and Equity

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Contact: Brian Lustig (202) 331-5530 or Nan Gibson (202) 331-5546

IMF PROPOSALS FOR ‘NEW FINANCIAL ARCHITECTURE’ INADEQUATE FOR CURING GLOBAL INSTABILITY

New book recommends enacting capital controls, reforming the IMF, managing exchange rates, and coordinating macroeconomic policy

Washington, D.C. – The International Monetary Fund (IMF) proposals to reform the global financial system, being made public at the IMF meetings April 20-28, are inadequate and mask the inherent flaws of liberalized capital markets, according to a new book released by the Economic Policy Institute (EPI).

In Taming Global Finance: A Better Architecture for Growth and Equity, EPI visiting fellow and American University professor of economics Robert A. Blecker evaluates existing and potential policy options for reforming the global financial system. The book analyzes the costs and benefits of capital market liberalization, critically reviews the theoretical models underlying IMF adjustment policies in debtor countries, and provides an examination of alternative proposals for building a ‘new financial architecture.’

Blecker provides overwhelming evidence that capital market deregulation is a prime culprit in the ‘contagion’ of financial crises in the developing world since the Mexican peso collapse of 1994. He also concludes that capital market deregulation has failed to live up to its promise of stimulating economic growth and ensuring ‘sound’ policies.

“Liberalization has worsened economic instability in countries where unsustainable booms were fueled by speculative capital inflows and then cut short by panic-stricken outflows” writes Blecker. “Investors move funds into and out of countries in herd-like fashion, causing self-fulfilling bubbles and panics based on limited information and fickle expectations. The end result is a global economy that is less stable without being more efficient.”

The IMF, with the support of the U.S. Treasury, continues to prescribe harsh ‘rescue packages,’ which impose painful austerity on debtor countries while bailing out private banks from the consequences of their irresponsible lending practices. These policies are based on outdated economic models and have often worsened financial crises in the countries where they have been applied, Blecker finds.

U.S. and IMF officials have recently shifted to promoting more ‘orderly’ financial liberali-za-tion in developing countries, signaling that liberalization has been pushed too far in the past. The IMF’s proposals include greater transparency, supervision and regulation of banks, firms, and governments in developing countries. Blecker, however, concludes that the IMF proposals will not eliminate the inherent volatility of international capital markets or prevent global financial flows from destabilizing domestic economies.

The IMF approach to a ‘new architecture’ insists that developing countries keep their capital markets open to flows of foreign funds. But Taming Global Finance shows that liberalized capital markets impose the following four costs on developing nations and the global financial system:

  • speculative international investment based on inadequate information leads to bubbles, panics, and contagions in financial markets;
  • capital mobility constrains governments from adopting autonomous monetary policies;
  • the threat of capital flight often leads to contractionary or deflationary macroeconomic policies; and
  • the volatility of financial capital flows increases economic instability.

To make international capital flows promote more sustainable and more equitable global growth, and to prevent future crises, the author recommends a more comprehensive package of policy reforms in four critical areas:

  • Regulating capital movements — ‘Speed bumps’ such as capital controls, exchange controls, and transactions taxes (including a Tobin tax) can discourage speculative short-term capital flows, restore greater national policy autonomy, and encourage stable, long-term investment;
  • Reforming international institutions — Blecker recommends that the governance and policies of the IMF be reoriented by: replacing top leadership, instituting more democratic control, broadening its mission, tailoring crisis intervention policies to the needs of debtor countries, and shifting more of the adjustment burden onto creditors;
  • Managing exchange rates — Neither rigidly fixed nor free-floating exchange rates offer a panacea. The best way to stabilize exchange rates is through a compromise system of ‘target zones’ among the major currencies, with wide enough bands to allow moderate exchange rate fluctuations coupled with regular adjustments to keep them credible; and
  • Coordinating macroeconomic policy — Better coordination among G7 countries is needed to support the exchange rate targets and promote more rapid global growth through more balanced trade and full employment.

For more information, contact:

Economic Policy Institute:
Nan Gibson (202) 331-5546
Brian Lustig (202) 331-5530

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The Economic Policy Institute is a nonprofit, non-partisan economic think tank
based in Washington, D.C. Founded in 1986, EPI seeks to widen the debate about policies to achieve healthy economic growth, prosperity and opportunity in the U.S.

To order copies of Taming Global Finance, contact EPI at 1-800-EPI-4844 or order online.