Friday, January 11, 2008

The case for a new global financial order

The subprime mess in the US is slowly being seen as the failure of the existing global financial architecture. While the domestic financial systems of the rest of the world are monitored constantly, US seems to have been exempt from the process. It is now being debated whether or not it is a result of the lack of oversight / monitoring over the US system that led to this state of affairs.

The piece written by Rajrishi Singhal is very educative in this context. Take a look at it here. But some points worth our excerpting:

Following the Asian financial crisis, finance ministers and central bankers from 22 ‘systemically significant’ countries (including India) met in Washington DC in April 1998 to examine the functioning of the international financial system. This grouping has over time evolved into an important international forum. This grouping felt that the global capital markets and financial system could be further strengthened through action in five broad areas:

  • · Enhancing transparency and accountability
  • · Developing and assessing internationally accepted standards
  • · Strengthening domestic financial systems
  • · Involving private sector; and
  • · Modifying IMF’s financial facilities as well as other systemic issues for coordinated management of international financial crises.

While there were accusations of ‘crony capitalism’ hurled at the Asian economies, in the case of LTCM the US ensured that a group of rogue traders were bailed out under the garb of protecting the larger financial system. This time round too, the Fed has been flooding the market with liquidity to provide intemperate banks with not only additional capital, but also keep the inter-bank loan market afloat. Even the ECB (European Central Bank) pumped out half a trillion dollars to hydrate the European inter-bank market.

Only 10 years ago Korea was lectured about ‘structural change’ largely involving fiscal and monetary austerity. Post the Asian crisis, the term ‘bailing in’ the private sector – that is, ensuring that private investors also take a hit – became a buzzword. All this seems to have been forgotten now by the US and the developed world. The existing financial architecture seems designed purely for monitoring the emerging or developing economies.

It is in this context that two of the emerging developments need to be given a further thrust. One is the engagement of the five largest emerging economies – India, China, Brazil, Mexico and South Africa – with the developed economies for an enlarged role, the Heiligendamm Process. Second, is the reform of the voting rights in IMF and World Bank in favour of the developing and low-income countries.