Strengthening the World Financial System is Easier Said than Done
Sir, Now that President Clinton has instructed his officials to devise new plans for strengthening the world financial system, we can expect a plethora of proposals in the financial press. Before letting the bull run wild in the china shop, may I suggest a series of questions that should be directed towards any reform proposals.
First, do the proposals for preventing future crises go beyond bland statements about “strengthening the financial system” to make specific recommendations? For example, does it explain exactly how the legal, regulatory and financial systems would be developed? How long will it take to build the requisite administrative capability and what should nations do in the interim? And, what conditions should be fulfilled before capital account liberalization takes place and what form should it take?
Second, does the proposal provide guidance in curing crises rather than solely relying on developing new measures to prevent them? These new measures are unlikely to be fail safe, and with financial contagion any crisis is unlikely to be local in its consequences. Doctors are trained in both prevention and cure. Financial doctors would be well advised to do likewise.
Third, how would any new institution or organization induce its member nations to comply with best practices? Put bluntly, how would the proposal deal with Japan (a nation that hasn’t followed best financial and macroeconomic practices)? What teeth does the proposed institution have? And would are the likely implications for national sovereignty?
Fourth, how would decisions be made in any new organization? Does the proposal reconcile the demands for participation by a large number of interested parties with the fact that only a highly responsive decision making process could keep up with global financial markets that are open twenty four hours a day?
To date I have seen no proposal that comes close to satisfactorily answering these four questions. It appears that it is easier to castigate the current international financial architecture than to devise a coherent replacement.