The International Financial Architecture: What’s New? What’s Missing?

Shortly after the Mexican crisis of 1994-95, the major industrial countries undertook to strengthen the international financial architecture. They sought to reduce the risk of future crises by increasing the availability of information about economic conditions in emerging-market countries and strengthening the financial systems of those countries. They sought better ways to manage future crises, including ways to involve private-sector creditors in crisis management.

In this book, Peter B. Kenen reviews the reform effort and assesses the results. He shows how the effort was influenced by the Asian, Russian, and Brazilian crises. He compares the results of the effort with the more radical recommendations of outside experts and of the Meltzer Report, and examines the implications of the reform effort for the role of the International Monetary Fund (IMF). Kenen finds that there have been useful innovations but calls for bolder efforts aimed at five objectives: (1) increasing the usefulness of IMF surveillance by focusing it sharply on the sustainability of national policies, exchange rates, and debt profiles; (2) narrowing the scope of IMF conditionality by ceasing to treat acute crises as opportunities to achieve fundamental reforms; (3) providing incentives to foster financial reform in emerging-market countries and, in the interim, encouraging them to limit short-term foreign borrowing by their banks and corporations; (4) using the IMF’s resources more effectively by making less money available but disbursing it more rapidly; and (5) enlisting the private sector in crisis management by introducing roll-over clauses into short-term debt contracts and collective-action clauses into long-term debt contracts.

Peter B. Kenen (1932-2012) was Senior Fellow in International Economics at the Council on Foreign Relations and Walker Professor of Economics and Finance, Emeritus, at Princeton University. Kenen’s publications include The International Economy (2000), Economic and Monetary Union in Europe (1995), and International Economic and Financial Integration. He was a member of President Kennedy’s Task Force on Foreign Economic Policy and the Economic Advisory Panel of the Federal Reserve Bank of New York. Kenen has served as consultant to the Council of Economic Advisers, the Office of Management and Budget, the Federal Reserve, the US Treasury, and the International Monetary Fund.