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GLOBALIZATION AND THE INTERNATIONAL FINANCIAL SYSTEM

Economic globalization has given rise to frequent and severe financial crises in emerging market economies. Many other countries have been unsuccessful in their efforts to generate economic growth and reduce poverty. This book provides perspectives on various aspects of the international financial system that contribute to financial crises and growth failures, and it discusses the remedies that economists have suggested for addressing the underlying problems. It also sheds light on a central feature of the international financial system that remains mysterious to many economists and most noneconomists: the activities of the International Monetary Fund and the factors that influence its effectiveness. Drawing on the views and proposals of leading scholars, Dr. Isard offers policy perspectives on what countries can do to reduce their vulnerabilities to financial crises and growth failures, as well as a number of general directions for systemic reform. The breadth of the agenda provides grounds for optimism that the international financial system can be strengthened considerably without revolutionary change.

Peter Isard is a Senior Advisor at the International Monetary Fund, where he has spent nearly twenty years in the Research Department and now teaches in, and helps manage, the IMF Institute. From 1972 through 1985, Dr. Isard held research and managerial positions in the International Finance Division of the Federal Reserve Board. He has published numerous articles on the behavior of exchange rates, strategies for monetary policy, and directions for reforming the international financial system. His book Exchange Rate Economics (Cambridge University Press, 1995) is widely acclaimed.

to my father, Walter Isard,
who inspired me to study economics
and strongly encouraged me to write this book

Globalization and
the International
Financial Systme

WHAT’S WRONG AND WHAT CAN BE DONE

Peter Isard
International Monetary Fund

PUBLISHED BY THE PRESS SYNDICATE OF THE UNIVERSITY OF CAMBRIDGE
The Pitt Building, Trumpington Street, Cambridge, United Kingdom

CAMBRIDGE UNIVERSITY PRESS
The Edinburgh Building, Cambridge CB2 2RU, UK
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http://www.cambridge.org

© Peter Isard 2005

This book is in copyright. Subject to statutory exception
and to the provisions of relevant collective licensing agreements,
no reproduction of any part may take place without
the written permission of Cambridge University Press.

First published 2005

Printed in the United States of America

Typefaces Sabon 10/13.5 pt. and Melior     System LATEX 2_e   [TB]

A catalog record for this book is available from the British Library.

Library of Congress Cataloging in Publication Data
Isard, Peter.
Globalization and the international financial system : what’s wrong and what
can be done / Peter Isard.
p.   cm.
Includes bibliographical references and index.
ISBN 0-521-84389-8 – ISBN 0-521-60507-5 (pbk.)
1. Financial crises – Developing countries. 2. Developing countries –
Economic conditions. 3. International Monetary Fund. 4. International finance.
I. Title.
HB3722.I83   2004
332′.042 – dc22       2004049269

ISBN 0 521 84389 8 hardback
ISBN 0 521 60507 5 paperback

Contents

List of Figures, Tables, and Boxes

FIGURES

List of Abbreviations

Acknowledgments and Disclaimer

This book was written during a leave of absence from the International Monetary Fund. I am grateful both to the IMF and to the Economics Department of the University of Maryland, which provided comfortable office facilities and an enjoyable and fruitful working environment.

    Much of the book’s material draws on contributions from other economists, who are extensively referenced throughout. Valuable comments and suggestions were provided by a number of colleagues at the IMF, including Andy Berg, Graham Hacche, Olivier Jeanne, Thomas Krueger, Jaewoo Lee, and Jeromin Zettelmeyer. I also gratefully acknowledge the questioning and feedback received from faculty and graduate students at the University of Maryland, the constructive suggestions provided by two anonymous referees, and the excellent assistance received from Ioannis Tokatlidis in putting together the figures and tables and from Nahid Mejid in preparing the manuscript. Special thanks go to my wife, Maggie, and children, Ben and Harsha, for bearing with me during prolonged periods of writer’s distraction.

   The analysis and opinions in this book are those of the author and, unless otherwise indicated, do not necessarily reflect the views of the IMF or others on its staff. The manuscript was submitted in October 2003; data have been updated through the end of 2003 or early 2004, but the book includes only a few references to material that has become available since October 2003. I have made considerable efforts to avoid factual errors and to provide balanced perspectives on the issues addressed, but the nature of the undertaking suggests that some sins of commission or omission will no doubt be discovered, for which I accept full responsibility.