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15 - Combating pro-cyclicality in the international financial architecture: towards development-friendly financial governance

Published online by Cambridge University Press:  02 December 2010

Geoffrey R. D. Underhill
Affiliation:
Universiteit van Amsterdam
Jasper Blom
Affiliation:
Universiteit van Amsterdam
Daniel Mügge
Affiliation:
Universiteit van Amsterdam
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Summary

Introduction

As noted in several earlier chapters (e.g. the Introduction by Underhill, Blom and Mügge; Chapters 3 by Baker and 9 by Tsingou), developing countries have had relatively little influence on the development of the existing international financial architecture. Whether the term is actively used or not, there is an odour of policy capture by private interests circulating around public decision-making processes in financial governance (e.g. Chapter 6 by Claessens and Underhill; Chapter 2 by Helleiner and Pagliari), indicating a lack of input-side legitimacy within the current international financial architecture. This limited input legitimacy has contributed to building a system which is far from development-friendly, particularly for the poorest countries. This in turn limits the output-side legitimacy (i.e. the effectiveness) of global financial governance from the standpoint of a wide range of developing economies (see Chapter 4 by Cassimon, Demetriades and Van Campenhout). This limited output legitimacy is particularly visible in the highly pro-cyclical, market-based nature of the system, limiting policy space for developing countries and enhancing the possibility of costly bubbles and crises. This chapter argues that one of the major functions of an effective international financial architecture should be to mitigate the pro-cyclical effects of financial markets and to open ‘policy space’ for counter-cyclical macroeconomic policies in the developing world. The chapter goes on to provide recommendations to enhance the development-friendliness of the international financial architecture in this respect.

Type
Chapter
Information
Global Financial Integration Thirty Years On
From Reform to Crisis
, pp. 270 - 286
Publisher: Cambridge University Press
Print publication year: 2010

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