The Future of the International Financial Architecture

Peter G. Peterson and Carla A. Hills

From Foreign Affairs, November/December 1999

Article preview: first 500 of 7,163 words total.

Summary:  The global financial turmoil that began in Thailand in 1997 has forced the international community to reevaluate the institutions, structures, and policies aimed at crisis prevention and resolution. In September 1998 President Clinton suggested that a distinguished private-sector group assess the need for reform of the international financial architecture. With this concern in mind, the Council on Foreign Relations sponsored the Independent Task Force on the Future of the International Financial Architecture, cochaired by Peter G. Peterson, chairman of both the Council and the Blackstone Group and secretary of commerce during the Nixon administration, and Carla A. Hills, CEO of Hills & Co. and U.S. Trade Representative during the Bush administration.

THE FUTURE OF THE INTERNATIONAL FINANCIAL ARCHITECTURE

A Council on Foreign Relations Task Force

The global financial turmoil that began in Thailand in 1997 has forced the international community to reevaluate the institutions, structures, and policies aimed at crisis prevention and resolution. In September 1998 President Clinton suggested that a distinguished private-sector group assess the need for reform of the international financial architecture. With this concern in mind, the Council on Foreign Relations sponsored the Independent Task Force on the Future of the International Financial Architecture, cochaired by Peter G. Peterson, chairman of both the Council and the Blackstone Group and secretary of commerce during the Nixon administration, and Carla A. Hills, CEO of Hills & Co. and U.S. Trade Representative during the Bush administration.

Morris Goldstein, former deputy director of research at the International Monetary Fund and now a senior fellow at the Institute for International Economics, served as project director and author of the report. Task force members are listed on page 171.

The following is an edited executive summary of the task force report. A full-length version of the report and dissents can be found on the Council on Foreign Relations Web site, at www.cfr.org.

When Thailand was forced to devalue its currency in July 1997, no one could have foreseen the turmoil that would follow. Over the succeeding two years, financial crises swept through the developing world like a hurricane. Indonesia, South Korea, Malaysia, the Philippines, Hong Kong, Russia, and Brazil were among the hardest hit, but few developing countries emerged unscathed. In the crisis countries, currencies and equity prices plummeted, economic growth turned into recession, wealth evaporated, jobs were destroyed, and poverty and school dropout rates soared. Private capital flows to emerging economies nosedived, while industrial countries saw their export markets shrink. Last fall, after Russia's debt default and devaluation and the near collapse of a large hedge fund (Long Term Capital Management, LTCM), international financial markets seized up for nearly all high-risk borrowers, including those in the United States. Global growth slowed sharply. In some quarters, doubts arose about the market as the engine of prosperity. Confidence in the official institutions that manage financial crises was shaken. No wonder, then, that President Clinton, speaking before the Council on Foreign Relations in September 1998, characterized the crisis as "the greatest financial challenge facing the world in the last half century."

Financial crises are nothing new. In the past 20 years alone, more than 125 countries have experienced at least one serious bout of banking problems. In more than half these episodes, a developing country's entire banking system essentially became insolvent. And in more than a dozen cases, the cost of resolving the crisis was at least a tenth -- and sometimes much more -- of the stricken country's annual national income. The U.S. savings-and-loan crisis of the late 1980s cost taxpayers about 2 to 3 percent of U.S. national income. The debt crisis of the 1980s cost Latin America a "lost decade" ...

End of preview: first 500 of 7,163 words total.