The lack of stabilising factors within the present international financial system was forcefully demonstrated by the Asian crash and the immediately following crises in Russia and Brazil. These shocks led to calls for an International Financial Architecture, and to activities of high level working groups. However, once this shock was overcome, the need for change was also seen as less pressing, even though the underlying problems continue to exist, strongly suggesting better not to wait for the next big crisis to resume discussions on how to avoid it.

This contribution presents four proposals to make the international financial system more stable, to improve the regulatory environment of capital flows, and to abolish destabilising market distortions. While not pretending to be a full fledged new architecture, these reforms would already bring about substantial improvements.

Speed bumps decelerating international capital flows

Measures to deal with excess volatility and speed of capital flows are needed. Unfortunately, measures so far increased speed and volatility. The risk weight given by the Basle Committee to short run flows to banks outside the OECD region, or regulatory changes necessary to allow institutional investors to invest in Mexican tesobonos before 1994–5 illustrate this trend. By contrast proposals to decelerate capital flows have been shunned so far. The IMF has forced member countries in need of resources to liberalise further, even though rather far-reaching capital controls are membership rights under its own Articles of Agreement.