When East Asian countries came under speculative attacks in 1997, some of these countries were not able to defend themselves and subsequently had to seek the IMF financial assistance and accept its stabilization programs. These crisis-hit countries were criticized for not having restructured their financial, corporate, and public sectors along the lines suggested by the Washington consensus. This failure was singled out as the main cause of the crisis and understandably, these crisis-hit countries were subject to heavy doses of structural reforms. The East Asian crisis became contagious, even threatening the stability of major international financial centers. The severity and contagiousness of the East Asian crisis underscored the importance of and renewed interests in reforming the international financial system.

Numerous proposals have been put forward. The G-7 led reform, however, has concentrated its efforts on reforming the financial and corporate sectors of developing economies, while by and large ignoring the problems of the supply side of international finance.

As was in the Mexican crisis of 1994-95, the appetite for radical reform of the international financial system has receded considerably in the wake of global recovery. The ongoing debate on the future direction of the international financial reform in fact suggests that most of the problems that beset the international financial system are likely to remain unchanged. This pessimistic outlook arouses deep concern in developing countries that they will remain vulnerable to future financial crises even if they faithfully carry out the kinds of reform recommended by the IMF and the World Bank. Given this reality, developing countries may have to develop a defense mechanism of their own by instituting a system of capital control and adopting an exchange rate system that lies somewhere between the two corner solutions.

Abstract

1. Introduction

2. Reform of International Financial Institutions (IFTs)

3. International Standards and Codes

4. Bailing in the Private Sector

5. Exchange Rate Regimes and Capital Controls

6. Regional Financial Agreements

7. Concluding Remarks

References