International asymmetries and the design of the International Financial System
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Abstract This paper argues that the design of the international financial system should take into consideration three different problems that the current system faces: financial market instability; basic macroeconomic and financial asymmetries that characterize the international economy; and the additional problems generated by the incomplete and asymmetric nature of the current globalization process. It proposes a useful analytic distinction between truly systemic issues, which focus on world economic stability, and center-periphery issues, which are closely associated with the correction of existing international financial asymmetries. Based on this distinction, the paper proposes a broad agenda focused on institutional aspects as well as on the services provided by international financial institutions (IFIs). The first group includes an adequate structure of representation of developing countries and governance structure of IFIs, an active role for regional financial arrangements, and a strong defense of national autonomy and ownership of policies. In terms of services provided by IFIs, it focuses on the systemic issues and on two center-periphery issues: the need to provide greater room for anti-cyclical policies in developing countries, and the need to compensate for the strong concentration of private capital flows. This paper argues that current controversies capture only in a very partial way the central issues associated with the design of the international financial system. Put succinctly, the basic assumption of a 'level playing field' that underlies most discussions and proposals —i.e., that actors (e.g., nations) have an equal standing before the international financial system— is plainly mistaken. In broader terms, we argue that the changes in the international financial architecture must respond to three different problems that the current system faces: (1) financial market instability; (2) basic macroeconomic and financial asymmetries that are characteristic of the international economy which have mainly, though not exclusively, 'Center-periphery' (or North-South) dimensions; and (3) the additional problems generated by the incomplete and asymmetrical nature of the current globalization process. Viewed from the perspective of developing countries, the combination of market instability and basic asymmetries in the international order means that the current system poses either the threat of strong volatility and contagion effects, or that of marginalization from financial markets. On the other hand, most current proposals tend to emphasize the need to strengthen national macroeconomic and financial policies in recipient countries —i.e., the national financial architecture—, but are weak on the truly international aspects of the architecture required. It is true that inadequate policies are partly to be blamed for the problems that developing countries face, which are due to truly domestic problems (e.g., inappropriate macroeconomic policies or financial regulation) but also to pro-cyclical market pressure and international advice. However, market instability is clearly a broader phenomenon and is deeply rooted in the fundamental factors that determine financial volatility and contagion at the world level, including the great asymmetry between the sophistication of liberalized international financial markets and the institutions that regulate them. In such an environment, developing countries are particularly vulnerable to volatility and contagion and are expected to behave as 'business cycle/policy takers', transmitting internally the externally-generated boom-bust cycles of international finance. In this context, 'self-insurance' (or 'self-protection') through domestic policies is certainly necessary but has limited returns and is costly in the absence of an inadequate international financial safety net. The focus of discussion and proposals must thus be broadened to include the truly international aspects of the required architecture, in particular those that compensate for the asymmetries of the international financial system, as well as the structure of governance that characterizes existing institutions, the regional components of the financial architecture and national actions in the industrialized world that have global repercussions. The first section of the paper looks at the three basic problems that the international financial system faces. This leads to a discussion on the roles of international financial institutions and the essential elements of a meaningful international financial reform. The paper closes with a short section of conclusions.