Assessing International Financial Reform

Abstract

As is clear from the large number of financial crises that the world has experienced since the 1980s, the current international financial governance arrangements have not always functioned effectively. In fact, at least since the 1997 Asian financial crisis, there has been general agreement that the existing arrangements for international financial governance, often referred to as the “global financial architecture” needs to be reformed. This general agreement led to the formation of the G20 and, in 1999 to the creation of the Financial Stability Forum (FSF) in which financial regulators from the G7 countries and key international organizations meet to share information and coordinate their activities. However, over time, the attention paid to this topic has been inversely proportional to the wellbeing of the global financial system. Consequently, during most of the early years of the millennium, the topic was not high on the international agenda. This began to change as signs that the global political economy could be running into problems began to appear. There was an agreement at the 2006 International Monetary Fund (IMF or Fund) Annual Meeting to reform IMF governance. In 2008, the World Bank Group (the World Bank or the Bank) agreed to create a new seat for an additional African Director, although this has not been implemented. More recently the leadership in the Fund and the Bank each appointed a high level commission to study their governance - the Manuel Committee was appointed by the IMF and the Zedillo Commission by the World Bank. In addition, the G20 summits in 2008 and 2009 devoted considerable attention to reforming key financial governance institutions, in particular the IMF and the FSF, now reconstituted as the Financial Stability Board. These developments suggest that there could be changes in the international financial architecture in the short- to medium-term. This article assesses the actual significance of the reforms that have either recently been implemented or that are under consideration and the potential they might create for further international financial governance reform. In undertaking this evaluation, the article seeks to answer five questions: What standards should we use in assessing the adequacy of any set of arrangements for international financial governance? What are the problems with the current international financial architecture? What, in fact, has been achieved in terms of reforming international financial governance? What more can be achieved in the short run? And what more needs to be achieved, over the medium to long term, if we are to eventually have an effectively functioning international financial architecture?