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BLUEPRINT FOR A BOLD NEW FINANCIAL ARCHITECTURE
A Commentary
By Hubert Neiss
Director of the Asia and Pacific Department of the International Monetary Fund (IMF)
Sydney Morning Herald
November 9, 1998

Reproduced with permission of the Sydney Morning Herald

While the global economy is not out of the woods, in the past few weeks it has at least had a respite from the bleak news that has shaken confidence worldwide.

The volatility that has consumed emerging markets has eased, while many currencies have stabilised - and strengthened. And Brazil is adopting a fiscal reform program that should reassure Latin America.

Even Asia's economies appear to be through the worst: foreign-exchange reserves are rising, current account surpluses are growing and interest rates have fallen sharply. Thailand and Korea are expecting economic growth again next year, and even Indonesia is seeing the first signs of improvement.

That's the message the deputy managing director of the International Monetary Fund, Stanley Fischer, will bring to meetings this week with the Treasurer, Peter Costello, and senior officials and academics, on a three-day visit to Australia.

The improvements have been a long time coming and there has been understandable impatience in the world community, especially because of the painful human toll in those countries hit by the global contagion.

So, it is appropriate to assess the steps taken so far to restore stability, and to examine the proposals aimed at preventing such crises recurring.

Last month's annual meeting of the IMF produced a new international commitment to transform the lessons of the past 16 months into reforms. An important consensus emerged on two parallel themes: the need for a rapid response to the global crisis, and a resolve to strengthen the international financial system.

But dealing with a systemic crisis is not easy. The first task was to achieve accord on the very need for a co-ordinated response, and the Washington gathering succeeded in crystallising a new sense of urgency.

As a result, the annual meeting brought agreement on the need to reinvigorate world growth - one of the most important steps that the developed countries can take to pull emerging-market countries out of recession.

Following the annual meeting, the United States cut interest rates for the second time in just a few weeks, and European policy makers began to move in the same direction, with Italy, Spain, Sweden and Denmark all announcing rate cuts.

Japan has also acted, with the Diet passing a long-awaited law that should accelerate the task of restructuring the Japanese banking industry - US$500 billion ($795 billion) of public funds will be made available to the effort. Moreover, the Japanese Government has renewed its commitment to tax cuts and public spending, and it has offered US$30 billion in aid to Asia's battered economies.

Perhaps most importantly as a vote of confidence in the international effort to confront the crisis, the US Congress has approved US$18 billion in funding for the IMF.

This sent a message to financial markets that Washington recognised the seriousness of the global crisis and was willing to shoulder its share of the burden. This will release IMF funding to other countries, and put about US$90 billion at the fund's disposal to address future crises.

Most recently, the global contagion has been lapping at Latin America, and a key question during the annual meeting was how the international financial community would deal with it.

Fortunately, Brazil is making a serious effort to address its economic problems, not only for its own sake, but for Latin America's. The Brazilian authorities have announced a three-year program of fiscal and structural reforms, and have received the full support of the IMF and other members of the international community.

But rebuilding confidence will involve more than responding to the immediate crisis. There is a need to rethink the practices and regulations that have governed global markets.

The IMF's annual meeting also addressed this crucial area with proposals that have come to be called the new international financial architecture. The idea is shorthand for measures defining how countries are expected to monitor and discipline themselves, how banks and borrowers are expected to interact, how markets are expected to behave, and even how the IMF should operate.

The key elements of this approach include:

* Greater private and public sector transparency and new standards of corporate governance. The IMF is ready to play its part by increasing the amount of information it makes public and by monitoring the implementation of the standards, whether devised by itself or by other professional bodies.

* Increased scrutiny of economic policy by national governments and multilateral organisations.

* A commitment to financial sector reform to bring markets and banking systems up to international standards and to enable countries to adjust to the complex demands of the global market.

* Plans to involve the private sector in preventing future crises and keep it involved - on a voluntary and co-operative basis - in the solutions the next time problems erupt. This notion of "bailing-in" investors and creditors is bound to be complicated.

In devising these new policies, the IMF and the international community will draw upon the lessons from Asia's recent experience, as well as events in Russia.

Many of the issues that the new international architecture addresses are being faced right now in Thailand, Korea and Indonesia, so the progress made and roadblocks encountered will be instructive. In essence, there is a simultaneous effort to solve the crisis and build the new architecture.

The task of reorientating the global financial system will not be easy. The IMF is aware of the criticism levelled at its programs because of the human cost. In Indonesia, programs have been set up to provide subsidised rice and other essentials to the poor.

In Korea, the IMF has been instrumental in urging the Government to put in place a social safety net. Thailand also has strengthened its safety net. The goal of fiscal and monetary policy has shifted decidedly towards expansion in all countries. And the IMF stands firmly behind the World Bank's effort to temper the impact of the crisis on those least able to cope.

After the traumas of the past year, it's clear that there are no easy prescriptions. And many of the long-range proposals will take time to come to fruition. But there is no alternative.

The job is to make sure that the economic advances the world has experienced in recent years can be maintained into the new century.