ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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The World Crisis: Reforms to Prevent a Recurrence

The current financial crisis started in the financial sector of what was thought of as the country with the most sophisticated financial system, and that has spread almost universally and with startling rapidity by virtue of either financial or trade interdependence or both. Preventing a recurrence of such a crisis - which is a quite different exercise to overcoming the present crisis - demands reforms to the financial system. The question discussed in this essay is: What reforms? What needs to change? Preventing a recurrence requires a three-point programme: a reversal of the past policy of encouraging bank mergers and its replacement by a vigorous anti-trust policy directed at the banking sector; a determination to make monetary policy anti-cyclical (aided by the adoption of asset-price indicators); and reform of the regulatory system. There are a large number of reforms that are desirable, but the key ones are addition of macro-prudential regulations to the existing system of purely microeconomic regulation, and the penalisation of maturity mismatches in the financial system.

Why Capital Account Convertibility in India Is Premature

At this stage, full capital account liberalisation promises no large benefits while it increases the risk of things going badly wrong. Variations in the flow of short-term capital, like bank loans, give rise to pro-cyclicality of the capital account, which provides the main mechanism by which free capital flows create problems. For the next 10 years at least, many other liberalising reforms need to take priority over capital account liberalisation.

IMF and Fiscal Policy

The principal reason that critics of IMF programmes fear a deflationary bias is the negative effect that it is expected to have on short-run growth rates. The third report of the Independent Evaluation Office has two different findings on whether such a bias exists. It finds that average growth rates did not decline in programme years as compared to non-programme years, with some exceptions. The other finding is that there is no evidence that IMF programmes have an adverse impact on health and education spending. There may, in fact be a modest positive impact.

The Washington Consensus and Beyond

The term `Washington Consensus', which emerged in 1989 as a by-product of a historically unusual degree of consensus that Latin American countries needed to stabilise, to open up their economies to trade and FDI and to liberalise, has proved controversial right from the start. Most opponents of the Washington Consensus appear to have used the term in recent years to mean universal application of the neoliberal interpretation of the term. Perhaps this usage was to some extent legitimised by the fact that at least for a period in the 1990s some of the Washington institutions - the IMF and key agencies of the US government like the Treasury - did indeed urge parts of this extended agenda, most damagingly a pace of capital account liberalisation that most people agree in retrospect to have been precipitate. But even if the Washington Consensus is absolved of responsibility for provoking crises, it is true that outcomes in Latin America have disappointed in the last decade, including in many countries that have stabilised, liberalised, and opened up. This suggested that the time was ripe for taking another look at the policy agenda of the region. The results of this effort are being published in After the Washington Consensus: Restarting Growth and Reform in Latin America [Kuczynski and Williamson 2003]. The focus is on Latin America, but the history of the Washington Consensus suggests that one needs to ask if the thoughts could be of wider relevance. Obviously they will need amending to suit the circumstances of a particular country. The author has classified the new reform agenda into four big themes: crisis-proofing; completing (and, where necessary, correcting) the `first-generation' liberalising reforms that constituted the core of the Washington Consensus; complementing them with `second-generation' (institutional) reforms; and broadening the reform agenda to include a concern with income distribution. This paper is devoted to sketching these four themes.

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