Understanding and Reforming the Global Financial Architecture in New Era

The 1990s have seen a spate of currency and financial crises affecting emerging-market countries, the frequency and severity of which have raised serious doubts about the stability of financial markets facing these countries as they open their economies and integrate with the rest of the world. This in turn has sparked the search for a new financial architecture which would reduce the degree of instability in the system and improve its capacity to handle instability when it arises. This paper will focus on suggesting some measures to develop a new and effective financial architecture. The 1990s have seen a spate of currency and financial crises affecting emerging-market countries, the frequency and severity of which have raised serious doubts about the stability of financial markets facing these countries as they open their economies and integrate with the rest of the world. This in turn has sparked the search for a new financial architecture which would reduce the degree of instability in the system and improve its capacity to handle instability when it arises. Recognition of the potential instability in the system was slow in coming, despite early warnings. The ERM (Exchange Rate Mechanism) crisis of 1992 was a pointer to what lay ahead, but it did not generate calls for systemic reforms because it was primarily a currency crisis and the industrialized countries affected did not experience a generalized financial crisis with disruptive effects on the real economy. Two years later, when the fiftieth anniversary of the Bretton Woods Agreement was celebrated and the functioning of the international financial system was subjected to in-depth examination, there was relatively little concern about instability. The developing countries raised familiar concerns about the system's inability to assure an adequate flow of resources for development and structural adjustment, but the dominant view among industrialized countries was that the system was functioning well and no major changes were needed. The urgency to put a new architecture in place increased sharply after the collapse of Long Term Capital Management (LTCM). The frequency and severity of financial crises in the 1990s prompted the search for a new financial architecture.