Book Reviews

The International Financial Architecture What's New? What's Missing?

Peter B. Kenen

Institute for International Economics, Washington, 2001, xiv + 186 pp., $20 (paper).

Since the 1994 Mexican crisis, there has been a rigorous debate about how to reform the international financial system. The reform process itself is dynamic in that it affects the international community's approach to new crises, but it is also reshaped by the problems new crises pose. As an expert in international finance, Peter B. Kenen is ideally suited to assessing recent developments in this process, and he makes a wide-ranging contribution to the debate.

First, he provides an extensive summary of the Mexican and Asian (199798) crises, both of which were instrumental in setting the reform agenda. He highlights the basic differences between the two crises and explains how the differences shifted reformers' attention from the problems of the public sector to those of the private sector. Kenen also carefully reviews the leading explanations of why these crises took place.

Discussing some of the fundamental issues associated with crisis prevention and crisis management, Kenen explains in detail how different parties have approached the reform of the international financial architecture. He notes that, although the problems pertaining to the reform are very complex, the issues and alternatives are not presented in a sophisticated framework. The examples he provides to make his point are insightful. During the Asian crisis, for example, some claimed that there was no need to change domestic economic policies because the major source of the crisis was investor panic. Kenen challenges this view and suggests why policies had to be modified. First, he says, creditor panics are responses to adverse changes in economic conditions. Second, to prevent creditor panics from causing damage, countries must send a strong message to international markets in the form of policy changes.

Kenen's other contribution is his extensive account of the evolution of the reform process, which he divides into three periods of about two years each. The first period, which included the Halifax and Lyon summits, started in 1995. The second period, covering the Denver and Birmingham summits, ran from 1997 to 1999. The third period, which included the Köln and Okinawa summits, started in 1999. As Kenen documents the results of these meetings, he also highlights the major objectives of the reforms. He explains the roles of the international organizations, which have begun changing some of their practices in response to feedback received from the international community.

Finally, Kenen provides an extensive list of suggestions for improving the functioning of international financial markets. His recommendations range from changing some IMF policies to formulating new measures that would improve domestic financial sectors in emerging market countries. He emphasizes the importance of involving the private sector in resolving crises and considers this to be the major challenge facing the reformers.

The debate over the reform of the financial architecture has reached new heights, and it is highly possible that the recent debt crisis in Argentina has brought us to the fourth phase of the reform process. Kenen's book nicely draws the big picture of the debate, carefully analyzes different views on each major issue, and provides valuable insights into the missing components that should be addressed next. It is certainly a useful reference for those interested in the reform of the international financial system.

M. Ayhan Kose

Economist,

IMF Research Department

Takeo Hoshi and Anil K. Kashyap

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