Emerging Market Financial Crises and the Second Reform of the International Financial Architecture

The second reform of the IFA followed an unprecedented expansion in financial globalization from the mid-1970s until the mid-1990s that encompassed both advanced and emerging market economies. This period of financial globalization was encouraged by the onset of floating exchange rates among the major advanced countries, the removal of capital controls in these countries, and the liberalization of their domestic financial markets. The growth in international financial flows involved at first large banks in the major financial center countries of Europe, Japan, and North America during the 1970s and 1980s and then spread to private portfolio capital (bonds and equity) and foreign direct investment in the 1990s (see figure 2.3). These two periods of sharp upswings in the flow of foreign capital, followed by major reversals, were later repeated in the run-up and aftermath of the current financial crisis. The volatility of these flows has been a continuing problem for the stability of the international financial system.