International Financial (Monetary) System
The role of international financial system is always considered very crucial in the scenario of global finance markets (Jean Tirole, p128, 2002). There have always been different opinions of the economic experts about strengthening the role of the international financial system aligned with the emerging trends of global market and to provide balance of adjustments and finance to different developed and developing countries of the world so that the financial integration could contribute towards the economic stability of the countries.
The financial crisis wave in 1990s further added to the appetite of reforming the international monitory system as its role remained very controversial during different financial crisis. The financial crisis faced by Mexico, Thailand, Korea, Indonesia, Russia and Brazil during the time period of 1994 to 1999 gave birth to many questions and concerns regarding the role of international monitory system and debates over the need of the policies of international financial system were also accelerated when the world witnesses the setbacks of these financial crisis (Stanley Fischer, p1, 2002).
There are many reforms and supportive programs and policies formulated and enacted by IMF and these policies and programs also draw different impacts of the economies of the different countries. These reforms are an important topic of discussion for the experts all over the world and the financial experts use to give different arguments in the favor and against of the reforms of the international financial system. This paper is aimed at discussing the opinions and arguments held by different experts in the perspective of reforms of international financial system.
In this regard the paper describes the context that gave birth to the need of the reforms in the international financial system and then discusses some arguments in the favor and against these reforms. The Context of Reforms in International Financial System The financial crisis raised during the 1990s draw some major impacts on the world economy. Though Asian countries were the main receivers of these impacts however the economic experts believe that the entire global witnessed the impact of these financial crises (Jean Tirole, p128, 2002).
These crises started a long debate over the role of International Monitory fund and experts started arguing that there is great need of improving the IMF programs through the reforms in its policies. The trend of capital flow to the emerging markets created the situation of global capitalism crisis and the need of reforming the International financial was realized with more intensity after the crisis that began with ERM – European Rate Mechanism crisis of 1992-93 and the tequila crisis of 1994-95.
In the same decade the world economy witnessed some more financial crisis in forms of Asian, Russian, Brazilian crises and LTCM. (Stanley Fischer, p1, 2002) After facing the set backs of these financial crisis the economies all over the world realized that there is an essential requirement of strengthen the architecture of the international financial system (Jean Tirole, p128, 2002).
The world community raised many questions regarding the role of international financial system that if the intention of the international monitory system is to foster the trade of gods and assets in order to promote prosperity and growth and to achieve an equitable income and wealth distribution then what policies will work best for balanced share of burden of adjustment and what speed of the adjustments would be suitable for the world economy so that an appropriate scale of financing could come in front of the world.
(Ricardo, p31, 2003) The rapid advancements in the technologies also give momentum to the people’s desire of making some fundamental reforms in the policies of international finance system because the recent advancements in information and communication technology not only draw significant impact on the international trade patterns but also facilitated the integration of the financial markets that is well supported by the trade liberalization policies also (Michel, p2, 1999).
The trade liberalization policies and agreements have made the international markets more unified and the advanced economies of the world are witnessing the dominant role of the private capital flow due to which there is an imbalance created in many of the developing countries (Stanley Fischer, p1, 2002). Thus all of the issue built a pressure on the International Monitory fund to take some actions in order to make the situation better, balanced and acceptable for most of the economies of the world.
The international Monitory Fund also noticed the demand of the situation and the Research department of IMF arranged a conference to examine the institutional and policy requirements of the new situation and to discuss the key issues that were needed to be addressed in the reforms of international finance system (Sebastian et al, p817, 2003). The conference held on 28-29th May 1999 at the head quarter of IMF made two major contributions in this regard.
First of all the emerging situation of the global financial markets was discussed in the perspective of increasing financial integrity, its effects on the economies of different countries and the role of IMF in maintaining balances between adjustments and financing. Secondary the economic experts belonging to different academia and private sectors also participated in the debate and commented on the key issues. In this way the experts view were collected from the people outside the usual policy forums.
It was agreed in the conference that the new situation demands the changed role of the developing countries and it is very necessary that these countries must strengthen their economies by improving the prudential regulations of their financial institutions. Moreover the role of the IMF in the financial crises occurred during 1990s in different economies of the world was also discussed and there were many policies of IMF that were favored as well as criticized by the participants (Michel, p2, 1999).
Thus it is found that there are some reforms also made in the international financial system with the objective of preventing more financial crisis and also to minimize the set backs of the crises faced by different economies of the world. At the same time it is also found that there are different types of opinions regarding the reforms in the international financial system and the economic experts widely favor as well as criticize these reforms at different platforms. The following discussion describes the arguments of the economic and financial experts regarding the reforms of the international financial system.
Arguments against Reforms of International Financial System The reforms in the international financial system were widely apsaised as well as criticized by the economic experts from all over the world. Jean Tirole (2002) while analyzing the role of international financial system in the global financial crises wrote in his book that most of the reforms of the international financial system are meant to prevent the European countries’ economies and to make the role of the international financial institution supportive for the development and stability of the European economy.
He further argues that most of the reforms in the international monitory system are targeted to treat the symptoms and not the fundamentals due to which these reforms have often failed to reconcile the financial conditions of the economies of different developing countries. In this regard it is very important that the regulators of the international financial system must identify the main factors behind the market failures and then design their policies giving priority to the principles of corporate governance, liquidity provision, and risk management of corporations (Jean Tirole, p128, 2002)
Dr. Eisuke Sakakibara (1999) revealed that the critics of the reforms in the international financial system argue that the packages introduced by the international monitory system are important contribution to the moral hazards and these packages have worked for the encouragement of the expectations of the governments of the emerging markets that even if they will follow some faulty polices they can still survive and operate successfully in the market.
On the other hand the private investors have given the impression through these reforms that that they will indirectly receive the benefits from the large scale official financing so they can invest in the emerging markets to take the advantage of the situation. Some of the critics of the IMF reforms also believe that there is frequent provision of large scale financing in the merging markets of the world due to which the experts are identifying lack of credibility in the official warnings that call for the private sector contribution in the finance crises resolution process.
(Peter and Alexander, p2, 2000) Along with the above criticism the experts against the reforms in the international monitory system also argue that there are so many polices attached with the reform of international financial system and the countries struggling with the set backs of financial crises have to fulfill many of the policy conditions of IMF to get its financial assistance. As a result these countries face even more challenging situation because to get the assistance of IMF they are overburdened with the conditions and policies implemented by IMF (Peter and Alexander, p2, 2000).
In the same way Dr. Eisuke Sakakibara (1999) pointed out that the critics of the reforms in the international monitory system also believe that the governments of the countries facing the financial crises are given wrong conditions by IMF and they are informed that in order to attain the financial assistance from IMF they have to tight their fiscal policies as well as monitory policies.
These are the conditions that draw negative impacts on the economic conditions of these countries because they are already facing the crises due to which there is sharp reduction in their output and at the same time there is also rise in the unemployment in these countries. So in this critical condition the policies and conditions of IMP work for more instability of the economies of these countries because the governments of these countries have to accept the given conditions if they want to secure the financial assistance from international financial system.
In this way the counties have to pay high cost to IMF. Richard C. Cook (2007) pointed out some of the major flaws in the reforms of the international financial system and identified that at present there is large amounts of credit taken by the governments of the countries that they sue for speculations and do not make any positive use of this money to the producing economies. As a result the security is minimized and when there are large funds borrowed by the countries, the credits providers get high margin of profits on their investments regardless of the fact that the value of the investment goes down.
Thus the present reforms of the international financial system are not beneficial for the developing economies as well as for those countries that have faced financial crises during the last decade. But there is essential need that the regulators of international finance system must decide that what goods and services are desired by the consumers and then only these should be produced in order to prove the international financial institution a public good for the economies of the world.
In this regard the market forces, government and their representative must jointly decide the main features of their market because this is the only way that can led to the successful survival of these forces in the market place. Yung and Wang (2001) pointed out that there are many economic experts especially those belonging to the East Asia that share the view that the financial crisis of the 1990s were also contributed by the structural deficiencies of the international financial system.
Moreover the reforms in the international monitory system have further created the imbalance as these reforms not exactly addressed the main reasons and problems behind the financial crisis. Due to this reason the critics argued that despite the fact that the reforms in the international financial system are meant to reduce the degree of instability and to improve the crisis management capacity of the institution but still the governments and economies of the Easy Asian countries have seen little benefits resulting from the reforms in the international financial system.
Thus there is still need of formulating the policies and reforms that can effectively work for the improvement in the situation for all of the economies as right now the Asian economies are not witnessing the positive effects of the reforms of the international financial system.
