Reforming the International Financial Architecture

• Author: Alexander Swoboda

On May 28-29, the IMF's Research Department held a conference, "Key Issues in Reform of the International Monetary and Financial System," with a twofold purpose: to broaden the debate on international financial architecture to issues of international and financial reform more generally and to allow experts outside the usual policy forums, notably from academe, to contribute to that debate.

Interest in reform of the international monetary and financial system, like recent capital flows to emerging markets, comes in waves. It surges with crises and ebbs when calm, however temporary, returns. In that respect, the 1944 Bretton Woods conference, which laid the foundations of the postwar international monetary and financial system, was a rare exception to this pattern. That interest in reform should now surge again is not surprising in view of the succession of crises that started with the crisis in the European Exchange Rate Mechanism in 1992-93 and continued with the tequila crisis of 1995 and, within two years, the Asian, Russian, Long-Term Capital Management hedge fund, and Brazilian crises.

The issues that underlie the agenda for strengthening the architecture of the international financial system-the current buzzword for reform of the system-are not new. This is not surprising, given that the goals of the system remain the same: to foster efficiency in trade in goods and assets; to ensure the stability of the system; and to allow for an equitable, socially acceptable distribution of income and wealth. The questions that need to be answered in this context also remain the same: how to share the burden of adjustment; what is the desirable speed of adjustment, and hence the desirable scale of financing; and what anchor should be provided for the international monetary system, to mention just a few.

These perennial issues, however, arise in new guises with changing circumstances. The latter include, most notably, the revolution in the technology of telecommunications and information systems that has underpinned and stimulated financial market integration and capital mobility, as well as domestic and international financial liberalization. As a result, markets for goods, services, and assets are becoming ever more unified, and developing economies have increasingly been drawn into these globalized markets. And private capital flows have come to play a dominant role in the financing of current account imbalances in advanced countries and an...