New international financial architecture

Abstract

Since the abandonment of the Bretton Woods monetary system in the early 1970s, the world has not really had a monetary “system.” Rather, countries have followed their own approaches to managing their currencies. Some have allowed a relatively free float with little official intervention. Others have tied themselves to the dollar or some other currency or to a basket of currencies. The rigidity of these linkages has varied. Some countries have used currency boards and abandoned independent monetary policy entirely whereas others have followed an active intervention approach. Crawling pegs and varying degrees of managed floating have also been part of the currency mix. In the process, flawed policies and shortsighted decisions have led the world to deal with one crisis after another - the Mexican crisis of 1994-95, the Asian crisis of 1997, the Russian crisis of 1998, the Brazilian and Ecuadorian crises of 1999 and, most recently, the Turkish and Argentine crisis of 2001-02. The IMF’s role in this has been is ambiguous. That institution was created in 1944 to oversee the workings of the Bretton Woods system of fixed exchange rates, arrangements that ended abruptly in 1971. Could the IMF—now an institution without its original mission—become a world central bank in some new international currency system? Or will it remain a relatively weak institution, constrained by limited resources, complex and arcane procedures, and cumbersome decision-making? The wave of financial crises that began in 1997 in Asia that spread to many other emerging markets --and were on the verge of spilling over to the developed world, viz.the U.S.—led to a broad consensus that it was time for some serious fundamental reforms in the international financial system. Particularly after 1997 and 1998, the idea that existing institutions and mechanisms, based on a design made in the mid 1940s, were incapable of preventing and managing crises, in the fast-changing 21st century, and that a significant reform --as well asstrengthening-- of global financial governance was urgent, became dominant. Besides the aim of achieving international financial stability, an equally important objective, to which less attention has been given, is the provision of sufficient capital flows, both private and public, to different categories of developing economies. These flows can complement domestic savings to accelerate growth of middle and low-income countries. The remainder of this study is aligned as under: The next section talks about the IMF, its mandate as foreseen by its founding members in 1944 and its evolution over the years. In that section, we shall also talk of the financial architecture that is in place today. Following that, we shall briefly overview the current economic scenario facing the international community today and the various events that have shaped it in its current form. Finally, keeping the above in mind, we shall discuss the challenges before the world that it faces in the light of the current economic scenario and how a new financial architecture can be developed to prepare the world for the worst, if not prevent it.