Washington during the first week of October was host to a series of intensive meetings between the finance ministers and central bank governors of both the G7 and the G22 (a group of newly industrialised countries that have established themselves as major players in the world economy). Although the agenda of last year's meeting was topped by the "causes and ramifications on the world economy of the financial crisis in Asia," the latest series of meetings, held under the umbrella of a special committee formed by the IMF and World Bank, marks a turning point in the attempt to understand what went wrong and how to keep it from happening again.
Perhaps the lapse of some 15 months since the financial crisis broke out in Asia, sending shock waves through Russia, Japan and Latin America before threatening financial markets at the centre of the industrialised world, even Wall Street, has made possible a deeper and more objective examination of these events. Certainly, the flood of studies produced in academic and business circles over the past year has given rise to the growing conviction that the events were not merely, as many had suggested, a purely "Asian crisis", the causes of which could be uprooted through a thorough spring-cleaning of that continent's economic household.
Rather, there is now clear evidence that the international financial system is, in itself, highly unstable, In fact, some would say it is now in a state of utter chaos. This has largely been the result of the enormous volume of "over the borders" investments, particularly in the form of short-term "hot investments", "hot money" and "hedge funds". Such ventures are speculative by nature, in that they seek markets that show potential for rapid financial accumulation, with scant regard for the development goals and financial stability of countries with nascent financial markets. The studies also indicate that the IMF programme for remedying the crisis was not commensurate with the scale of events, and that, in many cases, it simply exacerbated the crisis in Asia and Russia.
This may well be the first time in modern financial history that the credibility of the IMF has come under assault from traditional and "semi-official" circles. It is sufficient, in this regard, to refer to the article by Martin Fieldstein, a former senior US administration advisor, which appeared in Foreign Affairs (March-April 1998), or the recent article by former US Secretary of State Henry Kissinger, published in the International Herald Tribune on 5 October 1998 under the title, "The IMF's remedies are doing more harm than good". The general thrust of criticism in Washington is that the IMF must revise both the conceptual foundations of its policies and the conditions it places on debtor countries, that it must be more transparent in its dealings and that it must pay greater attention to the social effects of its programmes and recommendations.
The transition to a market economy is a highly complex process, and one which can be extremely dangerous if the institutional, cultural and social particularities of the country in question are not respected. This has clearly been the source of Russia's recent woes.
This point was forcefully argued by S. Tanigaki, the Japanese deputy minister of finance, during the meetings of the special committee in Washington. He said: "The IMF must acknowledge that there are many types of market economies, and that every type must reflect the particular history, culture and society of the country concerned. Furthermore, it should observe the particular phase of economic development through which that country's national economy is passing." This criticism by an official Japanese spokesman effectively signaled the downfall of the ready-made prescription for economic liberalisation, which had long maintained that there was only a single model for a market economy: the "Western model", which has had the luxury of a span of three centuries to establish and consolidate its institutions and mechanisms.
The deliberations of the past year have also concluded that the international financial system must be restructured in order to accommodate recent developments in institutions and mechanisms dictated by the era of "globalisation". In particular, there has been increasing recognition that current international financial regulatory procedures are inadequate to the challenges of globalisation, and that new, more stringent standards must be found that will be fair to the interests of both industrialised and developing countries.
However, this acknowledgment, alongside many positive initiatives, has not prevented considerable contention between conflicting interests and ideologies, particularly as regards the most appropriate mechanisms for curbing the detrimental effects of the rapid influx and sudden collective outflow of large volumes of short-term investments to and from the developing countries.
France and the UK, for example, lean towards a fundamental revision of the current bases regulating international financial relations. The French have proposed transforming the "temporary special committee" that was created to investigate the crisis into a kind of ministerial council that would assume the actual running of the IMF in a manner that would ensure greater cooperation between the major industrialised countries and the developing world.
They also have suggested that the IMF, under such management, should play a more active role in monitoring the movement of cash reserves and the volume of short-term foreign currency loans to public and private sector companies.
Britain struck a more radical note when it suggested that consultations should be set in motion to prepare for an expanded global conference in the manner of the Bretton Woods Conference that laid the foundations for a new international financial and economic system in the wake of World War II and the collapse of the gold standard.
Japan, for its part, has proposed the creation of an Asian Monetary Fund, which would ensure that funds would be available to Asian countries without these countries having to submit to the often uncongenial conditions stipulated by the IMF.
The US objected vehemently to the Japanese proposal. In order to sidestep US opposition, Japan then unofficially declared the Miyazawa initiative. Named after the Japanese minister of finance, the initiative expresses a commitment to offer financial assistance to the countries of east and southeast Asia up to a ceiling of $30 billion. At the same time, the Japanese Import Export Bank has either bought or backed the government bonds of these countries, a measure that will enable debtor countries in Asia to continue to service their debts to the Japanese banks, which in turn will help alleviate the crisis in the Japanese banking system.
The structural deficiencies in the global financial system have thus succeeded in placing radical reform on the official agenda of the world's major industrial powers. If the Asian crisis has taught us anything, it is that it is now time for the G7 to bring on board other parties to participate in the formulation of the new architecture for the global financial system. Third World countries in particular should be addressed, and among the prime candidates for this process is the G15, in which Egypt plays a pivotal role.
The task before us involves more than merely averting the dangers of a universal economic slump. Rather, it entails laying secure foundations for financial stability in international financial transactions in order to ensure that the "globalisation" process is not distorted to suit the whims of financial adventurers, investment funds and currency exchange speculators in their pursuit of rapid fortunes at the expense of people's interests and aspirations to development and progress. Everyone must participate in the designing of global financial policies; these must not be the monopoly of a handful of "priests" who alone are empowered to dictate the remedies.
*The writer is professor of economics at Cairo University.
