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Systemic issues of the international
monetary and financial system
Contribution to the informal review session
on Chapter VI of the Monterrey Consensus
Mojmir Mrak
University of Ljubljana
New York
11 March 2008
Objectives of the presentation
To present new trends in
international finance after the Monterrey
Consensus with an important influence
on international monetary and financial
 Objective A:
– Substantially increased role of emerging
economies in the global economy
– Growing current account imbalances
– New generation of financial crises
– Continued marginalisation of IFIs,
especially of BWI
Objectives of the presentation (II)
 Objective
B: To discuss a selected number
of systemic issues (old and new) that are
of high importance for the international
monetary and financial system
– Instability of exchange rates
– Current account imbalances
– Reform of IFIs, especially of BWI
– Financial crises prevention and management
A/1. Substantially increased role of
emerging economies in global economy
EE economies are growing in recent years much
faster than developed economies; their share in global
economy increased to over 50% in PPP terms
Source: Economist, 15 November 2007
EE exports equivalent to 45% of the world exports
 EE have strongly influenced global demand for food,
energy and raw materials
A/1. Substantially increased role of EE
in global economy (II)
Since 2003, EE market index has jumped more than
fourfold in $ terms (America’s S&P index has, for
example, increased for 70% only)
 Certain “decoupling” of EE from developed ones has
been happening (exports to other EE grows much
faster than to developed; high increase of domestic
consumption and investment)
 EE as group run a BOP surplus; however, there are
large differences between two groups
– EE with large BOP surpluses (they are strong net capital
exporters and have large foreign exchange reserves; this
group is rather resistant to shocks
– EE with BOP deficits (more dependent on foreign capital);
this group is more vulnerable to potential shocks
A/2. Growing current account
In recent years, CA imbalances have increased
substantially in nominal terms and as % of GDP
Source: Raghuram Rajan . Current account imbalances, hard landing or soft landing, 2005
Very large CA deficit of the US (over 6 % of GDP);
large CA surplus of emerging Asia, Japan and oil
exporting countries; Euro zone CA roughly in balance
with large deficits / surpluses in individual countries
A/2. Growing current account
imbalances (II)
In the past, CA deficit of the US was mostly
associated with surpluses in Europe and Japan; now,
EE are important creditors of the US
 CA imbalances are complex subject, but their
increase from 2000 onward is a combination of the
following savings / investments trends:
– Growing insufficiency of savings in the US caused mainly
by highly increased budget deficits
– Persistent surplus of savings over investment in emerging
Asia (strong fall of investment after the Asian crises
accompanied by stagnated savings); China an exception
– Surplus of savings over investment in oil exporting
countries caused by an increase of oil prices
A/3. New generation of financial
While the 1980s and 1990s crises were crises of EE,
the current crisis is largely the developed world
event; even more, EE are for the first time considered
as a kind of a “safe havens”
 While the 1980s and 1990s crises were geographically
concentrated on a country / region, the current crisis
is spread across the globe and with a strong spill over
into global slow down
 While IFIs had rather important role in managing
EE crises in the 1980s and 1990s, this is not the case
during the current crisis
A/3. New generation of financial
crises (II)
While the 1980s and 1990s crises were addressed with
practically no involvement of central banks from
developed countries, this time they have been key
players in managing the crisis
 Entirely new players, such as sovereign funds, have
entered into the crisis resolution process this time
while others, such as rating agencies, have performed
an increasingly contradictory role
 While EE were the main victims of 1980s and 1990s
crises, in the current crisis this role is being taken
over by financial institutions in the developed world
(losses of over 400 bn are being mentioned)
A/4. Continued marginalisation of
IFIs, especially of BWI
A growing number of member states has prepaid
existing obligations to both BWI in recent years due
to their improved economic standing (some of them
have substantial BOP surpluses) and/or good access
to international capital market
 Steep decline of new commitments of BWI in middleincome countries; also some regional banks find it
more and more difficult to continue lending to this
group of countries (EBRD in Central Europe)
 As a consequence, financial problems have emerged
in some of the IFIs, especially in the IMF (deficit of
400 mn $ / year)
B/1. Instability of exchange rates
 Key
facts and problems
– Since the BW system’s break up, we live in a world
of flexible exchange rates; the rates are to be
determined through coordination of foreign
exchange policies
– Coordination of exchange rate policies has been
conceptually accepted, but in practice it has not
been working well (a clear confirmation are
growing CA disequilibrium)
– Being aware of this fact, IMF Board has recently
adopted a new decision on exchange rate
surveillance which formally opens the way for the
Fund to play a more productive role
B/1 . Instability of exchange rates (II)
 What
may be done to address this issue
– It is of utmost importance that the multilateral
exchange rate surveillance procedure of the IMF
starts to be implemented in practice
– For this, full political commitment and support
from the membership at large and in particular
from the large members with substantial CA
disequilibrium would be needed
– It remains to be seen whether such a political
commitment is to be achieved; there are some
indications that do not confirm this
B/2. Current account imbalances
 Key
facts and problems
– Symmetry in BOP adjustment is a characteristic of a
good international monetary / financial system
– In contrast to the “gold standard” system, the
current international system does not have a
mechanism for automatic BOP adjustment
– As a consequence, BOP adjustment process today is
strongly asymmetrical
 There
is no real pressure on CA surplus countries to adjust
(they simply pile foreign exchange reserves); there is also
no pressure on the US as the country with the largest BOP
deficit and debt
 On the other side, strong pressure on CA deficit countries
B/2. Current account imbalances (II)
 What
may be done to address this issue
– Expenditure changing policies through changing the
level of macroeconomic aggregates
 CA deficit
countries, especially US, through reduction of
consumption and an increase of savings
 CA surplus countries through an increase of consumption
(China) and / or a decline of savings
– Expenditure switching policies through the already
mentioned multilateral exchange rate surveillance
process of the IMF
 CA deficit
countries through exchange rate depreciation
 CA surplus countries through exchange rate appreciation
B/3. Reform of IFIs, especially of BWI
 Key
facts and problems
– Mission problem in the changing worlds; The BWI
have largely lost their relevance for all but lowincome members; EBRD faces challenges upon EU
accession of 10 Central European states
– Governance problem; Governance structures of
BWI continue to be largely unadjusted to
structural changes in the global economy (voting
rights, executive boards structures) though certain
changes should not be neglected
– Other problems; They, for example, include
funding problems (IMF case), or credibility
problems (BWI after the failure of the
Washington consensus)
B/3. Reform of IFIs, especially of BWI
 What
may be done to address mission problem
issue; Efforts should be intensified to articulate
new roles for IFIs in the changed global
– IMF; (i) multilateral foreign exchange surveillance,
(ii) funding role of the institution
– WB; (i) concentration on low-income countries; (ii)
strengthening of its “knowledge bank” concept, and
(iii) policy advise to middle-income countries
– EBRD; (i) in should remain an independent IFI for
transition economies with strong cooperation with
the EIB
B/3. Reform of IFIs, especially of BWI
 What
may be done to address governance
problem issue; LDC / EE must get a stronger
say in both BWI; this is absolutely necessary
for legitimacy reasons
– Continued adjustment of quotas in favor of LDC /
EE in the IMF (to be agreed as soon as possible)
– Basic votes in the IBWI should be increased so as
to reflect a similar share that these votes had when
these institution were created
– No veto power for any individual member state
– Number of LDC / EE constituencies should
increase vis-a-vis the EU member state
B/4. Financial crises prevention and
 Key
facts and problems
– Financial flows are increasingly globalised while
their control remains largely under national
– Role of IFIs in managing crisis situations is today
smaller than it was a decade ago
– Inadequate risk assessment of complex structured
– Weaknesses in supervision of financial transactions
– Conflict of interest in activities performed by the
rating agencies
B/4. Financial crises prevention and
management (II)
 What
may be done to address this issue
– Chances for a kind of a global financial reform are
now smaller than a decade ago (now, crisis is
focused on developed countries; role of IFIs in the
management of the current crisis is very limited)
– Domestic reforms in developed countries are of
crucial importance for crisis prevention and
management (similar as were the reform in EE
during the crises in 1980s and 1990s)
– There is a strong need to improve cooperation of
among national regulators and to encourage them
to adopt common standards, like the Basel II, in
various areas (bank liquidity, valuation of complex
debt structures, activity of credit rating agencies)