Forging New Global Alliances: Emerging Markets and Advanced Economies

Abstract

Forging new global alliances or new legal and institutional frameworks through international cooperation could help solve the 2007–2009 financial crisis by addressing the most vulnerable aspects of the current financial system and infrastructure. These aspects are liquidity, which is at the heart of the stability of the financial system; trust and transparency, with better disclosure of banks’ institutional arrangements for risk management, risk models, and techniques; and consolidation of the infrastructure of financial markets. At the same time, international cooperation, although difficult to achieve, could reduce the volatility of emerging markets and their overdependence on foreign currency loans that lead to increased defaulting. In this controversial search for solutions, it is important not to slip into another extreme—de-globalization—or to erect a new “Berlin Wall” of protectionism that would separate the advanced economies from their emerging counterparts. Group 20 leaders meeting in Washington (November 2008) and London (April 2009) started the movement in the right direction by including emerging markets in the Financial Stability Forum, agreeing to provide more seats for emerging economies in the International Monetary Fund and World Bank, and increasing the role of emerging markets in the decision-making process. But this is just the beginning of a long journey toward recovery for the world economy, a journey that includes strengthening the role of the International Monetary Fund in policing financial issues, revamping financial regulation, and restoring market confidence.