Political resolve

It is at the level of political resolve that the largest obstacle to reforming the international financial architecture exists. There currently exists no consensus around the process of reform among the governments of the G-7 countries. While they may all agree, to varying degrees, of the existence of a problem — the symptom of which is ongoing financial turbulence in Asia, Russia and Brazil — the splits among the G-7 countries (and indeed beyond them) about what to do about this go very deep indeed. The fault lines can be surveyed in three dimensions.

First, there is a strong intransigence on the part of the US to entertain any initiatives that would either reduce the scope of capital market activity generally or compromise the freedom of American banks in particular to move capital across borders. This intransigence is not shared by other members of the G-7, much less the governments of the main emerging market countries, and constitutes an crucial impediment to containing the spread of financial contagion. The principal reason for this is simple enough to ascertain: the US government and economy reap substantial benefits from extensive capital market activity and capital mobility, while the associated costs for the US in particular is relatively low. The US is virtually alone among the G-7 countries in standing to lose a direct benefit from reform (although it would of course make certain collective and/or indirect gains).

Second, there is a significant fault line running between centre and periphery on the issue of reforming the international financial architecture. With the singular exception of the 1992 ERM crisis, every significant financial crisis of the recent past has occurred on the periphery of the global financial system. In fact, the argument could be made that the periphery has paid the costs of financial crisis while the centre has reaped the rewards in the form of ever higher stock markets and company profits. Assembling the requisite political resolve among the G-7 countries in the absence of economic and political vulnerability is indeed asking the impossible: it demands altruism in a world ruled by self-interest (individual and collective).

The final fault line is also cast widely across the G-7 countries, and involves a general reluctance to refashion the broad balance of power between public and private institutions within the global financial system. Although there is some support outside of the UK and US to at least consider the possibility of curtailing capital mobility world-wide, there is no political resolve to ask what markets can do for governments to support them in their anointed tasks. Instead, the political and regulative mind-set remains 'what can governments do for markets to make them more efficient, transparent, effective, etc...'. While this remains the case the scope for reforming the international financial architecture will continue to be limited to technocratic tinkering on the margins. While this may be effective so far as it goes, it is unlikely either to reduce the incidence of financial crisis or contain its spread.