Jomo Kwame Sundaram is assistant secretary general for economic development at the United Nations and research coordinator for the G24 Intergovernmental Group on International Monetary Affairs and Development. In 2007 he was awarded the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. --Book Jacket.

Instability has become global and systemic. Strengthening international institutions and arrangements would reduce the threat of crises and allow those that do occur to be better managed. These proposals take the developing world into account.

Papers presented at a conference in London in May 1999.

The Global Credit Crisis of 2008-09 has underscored the urgency of reforming the international financial architecture. While a number of short-term reforms are already in train, this paper contemplates more ambitious reforms of the international financial architecture that might be implemented over the next ten years. It proposes routinizing the expansion of IMF quotas and the conduct of exchange rate surveillance. It contemplates an expanded role for the SDR in international transactions, which would require someone-like the IMF-to act as market maker. It considers proposals for reimposing Glass-Steagall-like restrictions on commercial and investment banking, something that will have to be coordinated internationally to be feasible. Other proposals would require banks to purchase capital insurance; here the question is who would be on the other side of the market. Again there is likely to be a role for the IMF. Then there are arguments for a new agency or institution to deal with cross-border bank insolvencies. Any such entity will require staff support, which might plausibly come from the Fund. Finally, some insist that international colleges of regulators are not enough-that it is desirable to create a World Financial Organization (WFO) with the power to sanction members whose national regulatory policies are not up to international standards. A WFO will similarly need staff support, of which the IMF would be one possible source. All this of course presupposes meaningful IMF governance reform so that the institution has the legitimacy and efficiency to assume these additional responsibilities. The paper therefore concludes with some conventional and unconventional proposals for IMF governance reform.

This paper briefly surveys the progress made in various areas of reform of the international financial architecture since the outbreak of the East Asian crisis, and explains the principal technical and political obstacles encountered in carrying out fundamental changes capable of dealing with global and systemic instability. It ends with a brief discussion of what developing countries could do at the global, national or regional level to establish defence mechanisms against financial instability and contagion.

After an introduction on inconsistency in the international financial system, section 2 of this paper focusses on the role of financial markets in emerging economies and on the lessons from recent crises. It seeks to explain why, under current international financial arrangements, both borrowers in emerging markets and lenders in industrial countries have had a strong incentive to resort to government guarantees as a way of encouraging capital flows. It then considers how such behaviour worked to increase the moral hazard inherent in the system. Section 3 sets out broad outlines of proposals for a comprehensive, market-based approach to reform of the international financial architecture. It lays out several broad avenues for change in emerging-market countries: financial sector strengthening, improvements in macroeconomic policy implementation, associated changes in exchange rate regimes & monetary policy targets, and a consistent program of financial market deepening & capital account liberalization. It also considers the role that governments & private-sector lenders in industrial countries can play in strengthening the international financial system and in mitigating the effects of crises. Section 4 discusses a set of reforms for the International Monetary Fund & other international financial institutions that would reinforce the proposals in section 3. It also discusses how possible changes in arrangements for private-sector involvement in the prevention & resolution of financial crises fits into a comprehensive market-based approach to reform of the international financial architecture. The final section summarizes the main conclusions.

This volume is a report prepared for the 1999 Commonwealth Finance Ministers Meeting. Arguing that contemporary crises are very different from traditional balance of payment problems, it identifies issues in crisis resolution and proposes a new governance structure.