Summit report: Toward civilizing world financial markets

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New international monetary architecture far from being a reality
Source: The New Straits Times

TALKS concerning a new international monetary and financial architecture
continue this week, though it is still far from becoming a reality. The
only upside is
that there is a realisation that the present system, with its almost complete
surrender to market players, just will not do anymore.

If there is one thing good, if it can be described as good, arising from
the Asian
financial crisis and its subsequent shockwaves, is that it has provided the
impetus
for strengthening the system.

At the current International Monetary Fund/World Bank spring meeting in
Washington the emphasis seems to be moving from debating the need for change,
to how to implement the change.

"Now is the time to go from broad decision to more specific action," IMF
managing
director Michel Camdessus told reporters at the outset of the meeting on
Wednesday.

There had already been various discussions for a long time in many fora on the
subject and many formulas had been thrown in, he said.

At the current meeting, IMF's Interim Committee, which is looking into the new
system, will try to push the agenda forward taking a two-pronged approach -
reforming individual economies and secondly, the international market place.

The underlying agenda in the new architecture - a much bandied phrase since it
was introduced about a year ago following the Asian crisis - is to create a
system
that could better serve the needs of people everywhere. As it is, the rush for
liberalisation in the name of globalisation, had not benefitted everyone as
it should
ideally have.

"(There is a need for) a good standard code of practice to make the
international
markets as civilised as the domestic markets in advance economies, and
involving
the private sector more in the effort," said Camdessus.

It is generally accepted that domestic markets in the developed world are
quite
efficient in policing and supervising their participants. But the very
players promptly
discard the market discipline as they exploit weaknesses in the international
marketplace.

Foreign investors were once showering money to every emerging economy in the
form of short-term capitals that were as easily pulled out when confidence
wavered,
leading to massive instability.

They were some others who were making their money in the currency markets,
and with leveraged positions influenced the market directions that often
led to
depressed currencies.

While some of them do get burnt along the way, they also took the economies of
many nations on a downward spiral, a ride some are only beginning to recover
from.

In reforming individual economies, countries are to make themselves more

transparent, as well as to better supervise and regulate their banking
systems.

In the recent crisis, the spillover of problems from the banking system of
emerging
economies had proven to have the potential to disrupt the financial system
of other
economies.

In the marketplace, among others, the new architecture would look into the
roles of
the private sector. There is a recognition that the private sector needs to
bear
some responsibility for their actions, including taking their share of
losses from bad
investments.

In the recent Asian financial crisis some lenders did not suffer any losses
for bad
investments for they were promptly paid by countries upon receiving financial
assistance either from the IMF or bilateral arrangements.

That essentially removed the risk of bad business judgment. The issue of moral
hazard is expected to figure prominently in the new monetary and financial
architecture.

The new system would also be more people-friendly, making sure that any
structural adjustments in individual countries or the global economies
would not
cause much social dislocations.

The IMF, for example, was criticised for demanding major concessions in
Indonesia and Thailand requiring cuts on subsidies and the closing down of
businesses that affected a large section of the population.

"Ultimately, regard for the human costs involved during adjustments is
essential if
adjustments are to be successful ... there is a need to better monitor the
situation
of the poor," said Camdessus.

Therefore, it is interesting that the World Bank, whose role is essentially
to help
uplift social standards particularly in the developing world, would take
part in the
formulation of the new architecture.

The work towards the new financial and monetary architechture would also be
aided by an improving global economic environment.

IMF Economic Councillor and director Michael Mussa said global growth forecast
for this year was 2.3 per cent.

There was some fear last October that there was to be a meltdown in the
financial
markets following Russia's defaulting on its debt obligations and devaluing
its ruble
as well as the precarious situation of the Brazilian economy that was
threathening
the whole of Latin America.

Mussa said the improving forecast for the United States, Canada, Australia,
South
Korea, Thailand and Malaysia was enough to offset the expected weak growth for
Japan and several European and Latin American countries.

"... (also) capital flows to emerging market countries more generally
appear likely
now to recover from their lows following Russia's default and devaluation
late last
summer," he said.

In summarising the current state of the world financial health, Camdessus
likened

it to the three acts in the theatre.

1998 was the beginning of the tragedy, especially in the third quarter when
there
was a real fear of a global financial meltdown. This year, the world is
living and
coping with the effects of the problems of the previous year.

(Copyright 1999)
_____via IntellX_____
Publication date: 7:31 am
© 1999, NewsReal, Inc.
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