The Political Geography of World Financial Reform: Who Wants What and Why?

Abstract

Since the devastating East Asian crisis of 1997-99 we have seen many headlines, and the formation of numerous blue ribbon and multinational commissions, asserting the need to the world's financial architecture, the latter phrase having replaced the more mundane monetary and exchange rate arrangements. The purpose of this essay is to demystify some of the major reform proposals, and to understand which countries and interests back them. I suggest that the reforms proposed by a loose coalition of financial stabilizers make the most sense on economic efficiency grounds, but that the bargaining structure of the issue arena is such that the reforms most likely to be implemented are those of the transparency advocates. The current debate results from a series of high profile crises in the 1990s. In 1992-93 troubles in Western Europe's Exchange Rate Mechanism (ERM) cost the German government at least $1 billion and the Swedish government as much as $26 billion and brought fame and wealth to financier George Soros, who correctly bet against the British pound sterling. In 1994-95 the Mexican peso crisis and subsequent tequila effect devastated emerging markets throughout Latin America and other countries as far flung as Canada and the Philippines. And in 1997-99 the East Asian crisis brought down Indonesia's Suharto after thirty years in power, and rocked the economies of several of the much-admired Asian tigers. Less noticed outside circles was the eleventh hour weekend rescue of Long-Term Capital Management, a little known American hedge fund, in Fall 1998, just after the Russian crisis and just prior to the Brazilian one. The rescue relied on voluntary contributions of funds from major private U.S. banks, but was urgently coordinated by Gerald Corrigan, president of the New York Federal Reserve Bank. These events spawned a flurry of commissions and studies.