This concern with looking afresh at the institutional fabric of the international monetary system was given fresh impetus with the events of 1997-98. The largely unpredicted arrival of currency devaluations, government financial crisis and systemic banking failure in a number of countries pointed to a set of common problems which if combined herald disaster. These problems include pegged exchange rates, government liquidity difficulties exacerbated by excessive short-term borrowing on international markets, and ill-supervised banking systems. In many instances these problems have been compounded by massive short-term corporate borrowing on international capital markets. Assessments of how these problems arose, and what to do about them, however, leads in two radically different directions, which I will call the technocratic and political views of reform.
Some analysts, such as Morris Goldstein, a former official in the International Monetary Fund (IMF),argue that the problems are largely of the crisis- countries own making. They did not manage their currency pegs astutely, given their deteriorating capital accounts; their government financing was not adequate; and most importantly, their banking systems were inadequately supervised and ill-served the economy. The Asian crisis is a much-needed wake-up call to national policy-makers and international investors alike, to put right government finances, banking systems and ultimately entire developmental trajectories in Asia. Since the role of global finance in this view is largely derivative — the crisis is a symptom of deeper national defects rather than a cause of them — reforming the international financial architecture means principally augmenting its oversight powers and providing better assistance to developing economies so they can in turn reform their economies along best practice lines elsewhere. It is a technocratic solution to the problem of reform.
Other analysts, such as Susan Strange, the late Professor of International Political Economy at the University of Warwick, argue that the genesis of the Asian crisis is rooted firmly in the increasing liberalization of global finance, and in particular in the ill-fated attempt to liberalize the capital account before gaining full control over domestic and international financial institutions active in the crisis-country. Losing control over capital movements would not be so significant, Strange argues, if money behaved rationally and responsibly, but it has never done so. Far too many other influences determine where, on what scale and for how long capital moves, and the determination of politicians and regulators not to regain control over money means that Asia will by no means be the last 'crisis'. It is mad money rather than bad management that lies at the root of the problem.
This analysis leads to a very different prescription for reforming the international financial architecture. For one thing, it sees a series of negotiated political bargains between powerful governments as the critical axis around which the this architecture hinges. Political bargains between Japan and the US on funding the American deficit, together with that struck between France and Germany over the launch of the euro, largely determine the context within which everything else plays out. To reform the international financial architecture in any meaningful way requires these countries, together with the UK, Canada and Italy, to sit down and agree on an agenda and on priority issues. Strange herself was very pessimistic about the possibilities of such a deal being negotiated, because she believed that the US would not acquiesce to the re-regulation of capital movements. Nonetheless, she offers a very clear political solution to the problem of reform.
The gulf between the technocratic and political views of reform is wide. This in itself should be unsurprising, for the issues to untangle and the consequences at stake are enormous in their own right. The main issue is what lies at the root of not one but several recent financial crises, and especially the question of whether they are linked by a common problem such as a regulatory gap, inadequate government financing, inappropriate currency peg, or more likely a volatile but disastrous combination that has been exacerbated by perhaps a poorly timed liberalization of the capital account. But what is at stake is equally significant, for the broader question of capital mobility and how to contain its more deleterious consequences requires considerable action at the international level, principally to strengthen certain aspects of the international financial architecture beyond simply an extended oversight capacity. How to do this provides the next political obstacle to consider.
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