Opinion pieces and speeches by EPI staff and associates.
THIS PIECE APPEARED IN THE HAMILTON (ONTARIO) SPECTATOR ON MAY 4, 1999.
The Time Has Come for IMF Reform
by Robert A. Blecker
The latest proposals for a “new architecture” for the global financial system, unveiled this past week at the International Monetary Fund (IMF) meetings in Washington, are both too little and too late for bolstering international prosperity.
They are too little, because the modest improvements currently under
consideration will not be adequate to prevent future financial crises or to make
capital flows support more equitable and sustainable economic growth. And they are too late, because the need for even such modest reforms should have been clear to policy makers long before the Mexican and Asian downturns exposed flaws in the current system. Now that the currency crises have abated — and while the afflicted economies are still mired in recessions — it is time to implement real reforms.
The official proposals, which were discussed at joint meetings held by the IMF,
the World Bank, and the G-7 finance ministers this spring, are limited mainly to calls for greater transparency of financial data and improved supervision of banks by national regulatory authorities. Certainly, better information about countries’ finances and enhanced monitoring of investors’ risks could help to prevent some of the mistakes that have led to financial crashes in the past. But greater transparency and surveillance alone will not enable most countries to control the huge flows of speculative capital that have proved so destabilizing in recent years.
The new buzzword at the IMF and the U.S. Treasury is “orderly capital market
liberalization,” meaning that developing nations need to phase in domestic reforms in preparation for opening their capital markets. While this may be better than disorderly liberalization, it still presumes that capital market liberalization is the goal, and the only question is how best to achieve it.
This is a wrongheaded approach to economic policy, which confuses the means and the ends. The overriding objective of economic policy should be to achieve more balanced, sustainable, and equitable economic growth that raises living standards for the majority of the population. Capital market liberalization should be adopted only if it is a useful and effective means toward this end.
Yet, recent findings (corroborated, in part, by IMF’s own Research Department) show convincingly that capital market liberalization is associated with heightened vulnerability to financial crises, but not with increased long-term growth. Therefore, it makes no sense to put such a high priority on keeping capital markets open in the design of a new financial architecture.
Of course, no set of policies would command such powerful support from finance ministries, central banks, and international organizations unless it benefited someone. Large banks and other wealthy investors (including managers of mutual funds and hedge funds) seek the freedom to move their money into and out of countries at a moment’s notice, in order to maximize their own gains, without restrictions or prohibitions. And when these players assume too much risk and their investments turn sour, they want to be bailed out at public expense.
If the IMF approach to global financial reform is inadequate, what then is required? First, the IMF needs to reform itself. This would include more democratic control and accountability, a broader mission of promoting global prosperity and equity, and crisis intervention policies that bail out countries instead of creditors. The new talk of making lenders share more of the pain by accepting reduced or delayed payments is a step in the right direction, but needs to be translated into action in future rescue packages.
Second, “speed bumps” such as capital controls, foreign exchange restrictions, and reserve deposits on short-term investments are needed to discourage speculative capital flows, restore greater national policy autonomy, and encourage stable, long-term investment. One specific proposal that deserves renewed consideration is Nobel laureate economist James Tobin’s idea of a tax on foreign exchange transactions, which would discourage short-term currency speculations.
Finally, sustaining rapid global growth with balanced trade and full employment requires macroeconomic policy coordination, especially between the U.S., Europe, and Japan. In particular, the G-7 countries need to coordinate their monetary policies to lower interest rates and to manage their exchange rates in order to prevent currency instability. Japan and the European Union need to lead the way, by using fiscal and monetary stimuli to revive their sagging economies and bolster global demand.
Implementing these broader reforms of the financial architecture now will ensure a more stable and equitable global economy in the 21st century.
[ POSTED TO VIEWPOINTS ON JUNE 24 ]