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Radical reforms of the international financial architecture were urgently discussed following the outbreak of currency and financial crises in East Asia and other emerging market economies in the late 1990s. By the time the Argentine and Turkish crises erupted in 2000–1, the broad contours of the post-Asian crisis global financial architecture were set. The reforms had been limited to a focus on technical deficiencies in the functioning of markets. The Introduction and several chapters in this volume argued that this pattern of governance reflected the preferences of an alliance of powerful transnational market players and the official national and multilateral agencies of financial and monetary governance based in advanced industrial countries, economies which had hitherto avoided most of the consequences of financial instability experienced by developing economies. A range of chapters also argued and presented evidence that the current financial architecture lacks effectiveness and suffers legitimacy problems on both the input and output sides of the equation, and that limited participation on the input side was related to ineffectual and illegitimate policy output.
The post-2001 period of relative calm ended with the outbreak of the sub-prime crisis in 2007. This serious crisis at the heart of the global financial system, occurring despite the reform of the financial architecture and beginning in the most robust financial systems, should stimulate urgent reflection on the nature of contemporary financial governance.
The new Basel capital accord (B-II) promulgated by the Basel Committee on Banking Supervision (BC) was intended as a centrepiece of the financial architecture reforms that followed the crises of the 1990s (for the broader context, see Part I of this volume). B-II established a new approach to measuring capital adequacy of internationally active banks in a context of consolidated supervision of increased cross-border banking activities. Its impact will be felt well beyond the BC's G10-member financial institutions. In addition, the BC continues to set a broad range of global standards for financial regulation and prudential supervision. While B-II is ostensibly, in part at least, about creating a more level playing field among internationally active banks, this chapter provides evidence that the impact of B-II will be far from neutral on competition among different types of banks and, crucially, on the cost and availability of capital for developing countries. Furthermore, we demonstrate how B-II's inherent pro-cyclicality has an especially large impact on developing countries. Combined with B-II's reliance on rating agencies, biases against small and medium enterprises, and high costs of implementation for developing countries (see also chapter by Ocampo and Griffith-Jones in this volume), its potentially distorted impact on competition and pro-cyclicality considerably hampers B-II's effectiveness as a global supervisory standard to provide financial stability. Arguably, B-II and the market-based approach to financial supervision which the BC promoted from the 1996 Market Risk Amendment to B-I were central factors behind the emergence of the global financial crisis.
The bitter winds of financial crisis have once again swept global markets, this time beginning at the core of the system, Wall Street. Whether blame be assigned to private greed, public policy lapses, or both, vast sums of public money and shareholder capital have been wiped out in the otherwise noble cause of preventing systemic breakdown. Vulnerable citizens once more count the costs to the real economy. As massive liquidity has been made available to private financial institutions on exceptionally permissive terms, it has been difficult not to notice the striking contrast with the management of earlier crises based in the emerging markets. When they were in the dock, the emphasis was on the conditionality of the terms of rescue; with Wall Street and the City in trouble, the terms of rescue have been much more open-ended.
As growing uncertainty combined with these apparent double standards, the crisis has reopened debate on the global financial architecture, public policy and regulation. Global financial integration and the governance of the global monetary and financial system stand at a crossroads after over thirty years of market-oriented cross-border integration and development preceded and indeed exacerbated a financial crisis on a scale not seen since the 1930s. This ongoing process of integration, regularly punctuated by crises and instability, raises analytical, normative and policy dilemmas which challenge our current understanding of financial and monetary governance.
Producing a volume on financial governance just at the outbreak of the worst financial crisis since the Great Depression proved to be both a daunting and exciting task. While the onset of crisis raised the salience of work on financial governance considerably, both editors and contributors might be forgiven for a sense of exhaustion related to the hot pursuit of a moving target. This has meant that the purpose of the volume has evolved rather rapidly over the past three years. The volume began life as an analysis of the record and historical experience of the ‘new international financial architecture’ developed in the wake of the emerging market crises of the 1990s and early 2000s. The analysis yielded the conclusion that not all was functioning as effectively as the architects believed. The aim was to challenge the apparent complacency of the period of calm following the Argentine default, and to stimulate new thinking based on the understanding and reading of the evidence that all was not well and that fundamental flaws in global financial governance required urgent attention.
By August 2007, when an early version of the manuscript was ready and much of the research findings had been discussed in workshops, it became clear that the usual crisis rumblings but of unusual force were beginning deep below the fine edifice constructed by the architects.
Early in the new millennium it appeared that a long period of financial crisis had come to an end, but the world now faces renewed and greater turmoil. This 2010 volume analyses the past three decades of global financial integration and governance and the recent collapse into crisis, offering a coherent and policy-relevant overview. State-of-the-art research from an interdisciplinary group of scholars illuminates the economic, political and social issues at the heart of devising an effective and legitimate financial system for the future. The chapters offer debate around a series of core themes which probe the ties between public and private actors and their consequences for outcomes for both developed markets and developing countries alike. The contributors argue that developing effective, legitimate financial governance requires enhancing public versus private authority through broader stakeholder representation, ensuring more acceptable policy outcomes.
For global finance, the year 2008 may prove to be a watershed. The collapse of Lehman Brothers on 15 September of that year brought the global financial system to the brink of meltdown, and much of the world has been experiencing the deepest recession for more than half a century. Only the timely intervention of public authorities prevented a rerun of the 1930s depression. A consensus formed around the unsurprising conclusion that global financial governance was in need of reform – both to ensure a more effective and coordinated crisis response and to prevent a rerun in the future. At least ex ante, the London G20 Summit in April 2009 and the Philadelphia follow-up held in the autumn of 2009 were hailed as stepping stones to an overhaul of the global financial architecture. Many observers saw an opportunity for wholesale reform, which had been so conspicuously absent after the crises of the late 1990s and early 2000s, as Helleiner and Pagliari have argued in Chapter 2.
The speed and drama of the crisis have meant that the contributions to this volume ran the risk of obsolescence before they could be published. The crisis might well have ushered in sufficiently dramatic change as to relegate many of the institutions, norms and practices analysed in this book to the dustbin of history.
Geoffrey R. D. Underhill, Professor of International Governance Department of Political Science and the Amsterdam School for Social Science Research of the University of Amsterdam,
Xiaoke Zhang, Research Fellow Amsterdam School for Social Science Research of the University of Amsterdam
The Asian crisis was the world economy's closest shave since the Latin American debt crisis of the early 1980s and, arguably, since the Great Depression of the 1930s. A combination of currency and financial crises which erupted in east Asia during mid- and late 1997 rapidly developed into a global disturbance, engulfing not only most Asian newly industrialising economies but also Russia, South Africa and some Latin American countries. These systemic disruptions were major, but were not the only examples of financial volatility in recent years. The Asian crisis has been followed by further difficulties in Turkey and Latin America, and at time of writing it remains to be seen what the full effects of 11 September 2001 will be. Indeed, more than seventy financial and monetary crises of different proportions and characteristics have occurred in both developed and developing countries over the past two decades. Large and growing amounts of public money have been committed to tackling the financial crises and their socioeconomic consequences.
A common background to these developments is the intensifying process of global financial liberalisation and integration. Starting with the introduction of floating exchange rates and financial market deregulation from the 1970s onwards, the global monetary and financial system has undergone a radical transformation. Whereas national governments were once effective at shaping socioeconomic policies and development strategies in line with the imperatives of domestic political stability and legitimacy, there is now an increasingly market-oriented and integrated global system.
Persistent episodes of global financial crises have placed the existing system of international monetary and financial governance under stress. The resulting economic turmoil provides a focal point for rethinking the norms and institutions of global financial architecture and the policy options of public and private authorities at national, regional and transnational levels. This volume moves beyond analysis of the causes and consequences of recent financial crises and concentrates on issues of policy. Written by distinguished scholars, it focuses on the tension between global market structures and national policy imperatives. Accessible to both specialists and general readers, the analysis is coherent across a broad range of theoretical and empirical cases. Offering a series of reasoned policy responses to financial integration and crises, the volume grapples directly with the institutional and often-neglected normative dimensions of international financial architecture. The volume thus constitutes required reading for scholars and policy-makers.