segunda-feira, 5 de janeiro de 2009

From management to governance

The International Monetary System ought to move from management to governance if systemic crises such as the ones that happened in the 1990’s and the one that is happening right now are to be avoided. The very complex and unavoidable nature of globalization requires some kind of governance system for the International Monetary System.

Financial exchanges and flow taking place around the world have increased enormously since the collapse of the Soviet Union in 1991, in this financial development phase of globalization. During the last two decades, the world has experienced not only a significant increase in the flow of people and goods, but also in the flow of capital and financial services.

On this subject, two leading scholars (Spero & Hart) mention the “globalization of world markets grew, in part, out of the same forces that had created financial interdependence” (Spero & Hart: 42). In such a world, financial events in Asia can significantly affect the economies of Europe or the Americas, as illustrated by the Mexican Peso crisis of 1994, the Asian financial Crisis of 1997-1998, the Russian financial crisis of 1998 and the collapse of Long-Term Capital Management. For Spero & Hart, “the financial crises of the 1990s revealed serious structural problems regarding the safety and soundness of the global financial system”.

In order to reflect the new realities of the world economy, moving away from management towards governance will have to include the needs and the issues faced by developing nations.

Spero & Hart share this view. For them, “in a world where monetary power is more widely dispersed, governance will depend not on the preferences of a dominant power but on the negotiation of several key players, primarily the United States, the European Union, and Japan.” (Spero & Hart: 59). They go on to assert, “Governance also will depend on incorporating new economic powers that may emerge in the twenty-first century, such as China, India and Brazil” (ibid.)

In this process of renewal, institutions such as the IMF and the World Bank will have to be rebuilt. The World Bank, created during the Bretton Woods conference to help with the reconstruction of post-war Europe, no longer reflects the reality of the world economy. According to another commentator, Sebastian Mallaby, “the world’s premier development institution has come perilously close to losing touch with the needs and realities of developing countries” (Mallaby).

The IMF, also created during the Bretton Woods conference, is in serious financial trouble and has to reinvent itself or risk becoming irrelevant. After a series of financial crises in the 1990s, pundits from the left and right alike have challenged the legitimacy of the Fund. According to Jeffrey Sachs, “The world needs effective international institutions more than ever, yet the legitimacy of the IMF is at a low ebb in many parts of the world” (Sachs).

As the world moves into a new age of more complex and interdependent monetary connections, a new system will have to be implemented to guide the many monetary transactions that take place every day around the world.

The dollar can no longer be the sole currency for monetary actions, which would tie the hands of governments and make an international mess out of domestic monetary policies. A good example of how this happens can be found in China, where the reluctance of the Chinese government to let the Yuan appreciate against the dollar to support rocketing Chinese exports, has led to the Chinese accumulation of a staggering 1.7 trillion dollars in foreign reserves. This unprecedented accumulation threatens the very foundation upon which the modern monetary system is built: the stability of the greenback.

Monetary flow has gotten out of control lately and a system of governance is now more required than ever. The odd thing about the current international monetary order is that no one really knows “what would happen if...” because there has never been a similar monetary order.

There has been a large general consensus, however, as to the need to establish some mechanisms of governance, for predictions of varying economists tend to converge on one aspect: monetary and financial crises will become more frequent and more threatening. In the Age of Globalization, no country can hide away from turbulence elsewhere, not even the truly mighty ones.

Mallaby, S., “NGOs: Fighting poverty, hurting the poor”, in Foreign Policy; Sep/Oct2004 Issue 144, p50-58.

Sachs, Jeffrey D., “The FP Memo”, in Foreign Policy; Jul/Aug2004 Issue 143, p60-64.

Spero, J. E., and Hart J. A., The Politics of International Economic Relations. 6th ed. Belmont, CA: Thomson/Wadsworth, 2003.

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