Reforming the international financial architecture: consensus and divergence

This paper reviews the current controversy on the reform of the international financial architecture. The paper first identifies some basic assumptions that must be taken into account in any meaningful reform. Then it identifies basic areas of consensus among different analysts: the need to maintain expansionary policies in industrialized countries as long as the current uncertainty prevails; to develop adequate contingency financing for countries in difficulties; to improve the institutional framework in which financial markets operate; to create appropriate mechanisms to internalize the externalities generated by national macroeconomic polities; and to design internationally sanctioned standstill provisions to ensure appropriate sharing of the burdens of adjustment. Next, it identifies certain areas of divergence and presents some proposals to overcome them: the need to use SDRs more actively as a financing mechanism during crises; to reach agreements on the coverage of IMF conditionality, restricting it to the macroeconomic policies that were its purview in the past; to preserve the autonomy of developing countries to manage the capital account; to maintain the freedom of countries to choose the exchange rate regime; and to strengthen regional institutions. It ends with a brief look at some complementary issues associated with the prevention and management of financial crises, which is the main focus of the paper.