An IPS Publication
Mapping Out Ways to Avert Global Financial Crises
Jul 16 (IPS) - When heads of states of the world's richest nations meet
in Okinawa, Japan at the Group of 8 Summit this week one of the items
on the agenda will be reviewing progress at guarding against future global
The increasing importance of private global capital markets and the fact that the world is still not fully knowledgeable about the ramifications of the new international financial structure make this an important aspect of the G-8 agenda.
In their report to the heads of states summit, G-8 finance ministers noted progress by the International Monetary Fund (IMF) to implement a framework for internationally agreed codes and standards to forestall and resolve crises.
The IMF is at the centre of the process to reform the global financial infrastructure and there is consensus within the G-8 that the IMF should play the central role in promoting macroeconomic and financial stability.
The G-8 finance ministers report commends ongoing efforts towards greater transparency by the IMF and multilateral development banks (MDBs).
It, however, stresses that the IMF take appropriate steps to ensure that the private sector plays a role in forestalling and resolving crises to promote responsible behaviour by private creditors.
"Efforts to bail out investors, no matter how well intentioned, run the danger of encouraging excessive risk-taking down the road by, in effect, over-compensating risk bearing," says US Federal Reserve chairman Alan Greenspan.
A Financial Stability Forum (FSF) which includes the G-8, the IMF, the World Bank, MDBs and other regulators was created last year to enhance global financial stability, improve the functioning of markets and reduce risk.
The absence of prudential rules for the owners of capital seeking maximum profit has often been blamed for significantly negating the benefits of free capital flows.
Developing countries complain that the push towards liberalising capital movements has not been matched by a parallel move to safeguard economies from the adverse consequences of market excesses.
In the absence of such rules to manage capital flows, small emerging market economies have become extremely vulnerable to volatility. While current reforms also need to safeguard the interests of smaller players, their voices remain muted. Only a handful of developing nations is part of the Group of 20 (G-20).
The G-20 was established by the G-8 late last year as part of moves to include developing countries in international financial issues. It consists of finance ministers and central bank governors of Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom and the United States.
The international financial system has taken a series of major shocks recently such as the Mexican collapse in late 1994. Episodes in East Asia in 1997 and subsequently the Russian and Brazilian crises all raised questions about the inherent stability of this new system.
In its latest assessment, the IMF notes that many developing countries are making efforts to enhance their financial stability by strengthening their banking sectors, adopting appropriate foreign exchange regimes and improving debt management. Many are also making substantial investments in the information they provide to financial markets.
"Developing countries are more susceptible and feel the impact of these crises most," says Amar Bhattacharya a senior advisor at the World Bank. "While the IMF is the lead agent in crisis prevention, the Bank is also assisting developing countries develop social safety nets, but it's the type of work that does not attract headlines. There is no quick fix to these matters."
During the last decade many open emerging market economies have become active participants on the global market and have often been exposed to a huge expansion in capital flows which their economic and financial systems were not prepared to absorb.
Private capital inflows into emerging markets quadrupled between 1990 and 1997 mainly targeted at Asian economies that had grown rapidly since the 1970s.
Speaking ahead of the Okinawa summit, Greenspan said there are no signs as yet that the globalisation process is about to stop or even slow down perceptibly in the immediate future.
"The consequent risks are unavoidable and the world has been unable to anticipate these crises nor have the capacity to put preventive, financial shock-absorbing measures in place, thereby lowering the probability of the onset of crisis," Greenspan says.
"We need to proceed expeditiously with the tasks of designing and implementing improvements in both the short-term and the long-term, buffers that have a reasonable prospect of protecting the international financial architecture in the years ahead."
According to the Bank for International Settlements (BIS) many of the imbalances and structural deficiencies that characterised the global economy in the last few years came no closer to being redressed over the last year and "in some respects they worsened".
"While microeconomic reforms have made several economies more competitive, there are concerns that their resistance to future financial or economic crises is still quite low," BIS, a central bankers' bank noted in its financial report released recently.
"Progress has been made in strengthening banks' balance sheets in several Asian countries. However, corporate restructuring appears to be taking more time." (END/IPS/EF/gm/da/00)
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