In the next few days the International Monetary Fund and the World Bank will be holding their annual meetings. It is hard to recall a more difficult moment, perhaps the most complex these institutions have had to face, comparable only to the first few years of their existence. When they met in Hong Kong a year ago, the Asian crisis had already begun; since then it has developed into 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 of the Asian economies are facing a sharp contraction in production. In fact, the present crisis unfortunately is coming more and more to resemble the crisis in Latin America during the 1980s. Meanwhile, shock waves in financial markets have propagated to other parts of the world. Latin America has already experienced four tremors; the last, in August and September, approached earthquake intensity.  

In the light of this situation, the main item on the agenda must be world economic recovery. That will require two types of immediate action. The first is for the Group of Seven to adopt a concerted plan to give out expansionary signals, in order to counteract the threat of global deflation. This was apparent 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 give a clear signal in that direction. But subsequent actions have been disappointing. Even the correct decision by the United States Federal Reserve to reduce interest rates was less encouraging than it might be, not only because the reduction was very modest (just one quarter of a percentage point), but also because the size of the cut was determined solely on the basis of conditions in the United States economy. This made it clear that the decisions of the central bank of the world's main economy would continue to be guided more by national than by global interests. 

The second immediate action to be taken is to adopt effective mechanisms to ensure that resources are available to manage emergencies, especially when the root causes are international rather than national, as is currently the case in Latin America. As long as the financial markets perceive that the International Monetary Fund lacks the necessary funds, and is precariously dependent for those funds on the willingness of the United States Congress to disburse them, the problems will persist. 

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

A serious discussion must be instituted, involving all agents, from both developed and less developed countries, about thorough-going reform of the international monetary institutions, or the "international financial architecture", as it has come to be known. Reform should address at least five areas. First of all, there is a need for effective global macroeconomic coordination that extends beyond the Group of Seven countries and involves the developing world. Second, there is a need for an International Monetary Fund of adequate size, with redefined rules of access, perhaps automatic under pre-determined conditions, and greater activism in crisis prevention. Third, regulation and supervision should be extended to insufficiently regulated activities in the industrialized countries (speculative investment funds and some institutional investors), and uniform standards should be set for regulating and supervising financial activities on the international level, following the path taken by the Bank of International Settlements. Fourth, controls should be established on international capital mobility, possibly including taxes or prudential regulations on some capital flows, especially of the short-term variety. Lastly, clear, pre-set standards need to be established for renegotiating the external liabilities of the countries in difficulty.

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