In the next few days theInternational Monetary Fund and the World Bank will be holding their annual meetings. Itis hard to recall a more difficult moment, perhaps the most complex these institutionshave had to face, comparable only to the first few years of their existence. When they metin Hong Kong a year ago, the Asian crisis had already begun; since then it has developedinto a truly global financial crisis. The effects on Asia have be profound and prolonged.Hopes that the crisis would be short and the recovery speedy have been dashed, and many ofthe Asian economies are facing a sharp contraction in production. In fact, the presentcrisis unfortunately is coming more and more to resemble the crisis in Latin Americaduring the 1980s. Meanwhile, shock waves in financial markets have propagated to otherparts of the world. Latin America has already experienced four tremors; the last, inAugust and September, approached earthquake intensity.  

In the light of this situation, themain item on the agenda must be world economic recovery. That will require two types ofimmediate action. The first is for the Group of Seven to adopt a concerted plan to giveout expansionary signals, in order to counteract the threat of global deflation. This wasapparent to all when, following President Clinton's address in New York on 14 September,the Finance Ministers and Central Bank Governors of the industrialized countries did givea clear signal in that direction. But subsequent actions have been disappointing. Even thecorrect decision by the United States Federal Reserve to reduce interest rates was lessencouraging than it might be, not only because the reduction was very modest (just onequarter of a percentage point), but also because the size of the cut was determined solelyon the basis of conditions in the United States economy. This made it clear that thedecisions of the central bank of the world's main economy would continue to be guided moreby national than by global interests. 

The second immediate action to betaken is to adopt effective mechanisms to ensure that resources are available to manageemergencies, especially when the root causes are international rather than national, as iscurrently the case in Latin America. As long as the financial markets perceive that theInternational Monetary Fund lacks the necessary funds, and is precariously dependent forthose funds on the willingness of the United States Congress to disburse them, theproblems will persist. 

Nevertheless, beyond emergencymeasures, international financial institutions need to be fundamentally redesigned. Theinstability of the past year and a half has demonstrated once again, with particular forcethis time, the great asymmetry between an increasingly sophisticated and dynamicinternational financial market and the existing institutional arrangements, which areinadequate to regulate it. The crisis has shown, in other words, that suitableinstitutions are lacking to deal with financial globalization. Over the course of time,individual countries have painfully learned that without appropriate regulation andsupervision of financial intermediaries and without a central bank that can act as"lender of last resort", sooner rather than later they will suffer financialcrises entailing enormous costs. Latin America has seen large financial crises that havecost 40% or 50% of a country's gross domestic product and "middling" crises thathave cost 15% to 20%. This lesson, however, is only now being learned on the internationallevel.

A serious discussion must beinstituted, involving all agents, from both developed and less developed countries, aboutthorough-going reform of the international monetary institutions, or the"international financial architecture", as it has come to be known. Reformshould address at least five areas. First of all, there is a need for effective globalmacroeconomic coordination that extends beyond the Group of Seven countries and involvesthe developing world. Second, there is a need for an International Monetary Fund ofadequate size, with redefined rules of access, perhaps automatic under pre-determinedconditions, and greater activism in crisis prevention. Third, regulation and supervisionshould be extended to insufficiently regulated activities in the industrialized countries(speculative investment funds and some institutional investors), and uniform standardsshould be set for regulating and supervising financial activities on the internationallevel, following the path taken by the Bank of International Settlements. Fourth, controlsshould be established on international capital mobility, possibly including taxes orprudential regulations on some capital flows, especially of the short-term variety.Lastly, clear, pre-set standards need to be established for renegotiating the externalliabilities of the countries in difficulty.

As long as there is no internationalframework of this nature to endow the international financial world with greaterstability, Governments must remain free to set prudential regulations on capital flows inand out of their countries. Looking to the future, of course, they will need to constructfiscal, monetary and foreign exchange mechanisms that are more effective in preventingcrisis. And during times of crisis they must continue "doing their job", thatis, applying the combination of fiscal, monetary and foreign exchange policies mostconducive to internal and external equilibria. But if this crisis has demonstratedanything, it is that such efforts, though essential, are not enough.