Commentary Type

Modernizing the International Financial Architecture: Big Outstanding Issues

Outline of a presentation at the inaugural session of the Centro Brasileiro de Relacoes Internacionais
Rio de Janeiro, Brazil


The author expresses his gratitude to Barry Eichengreen and Morris Goldstein for comments on a previous draft.


The first public presentation I ever made in Brazil was one of a series of lectures held to celebrate the 25th anniversary of BNDE (as it then was) in 1977. I used the occasion to develop a scheme aimed to replace the commercial bank sovereign lending that had emerged to recycle the oil surplus in the 1970s by what I argued would have been a much less dangerous mechanism, in which the ultimate lenders would have bought long-term indexed bonds issued by a consortium of developing countries (Williamson 1977). I still believe that there was much to be said for this proposal, and that its prompt adoption just might have avoided (or at least mitigated) the debt crisis.

Be that as it may, it is quite clear that such a proposal would be even less likely to win support today than it was in 1977. The reason is that it took it for granted that foreign borrowing should be undertaken by sovereigns, who would use the resources to invest in their parastatals. Today most of us believe that there is not much scope for parastatals in a well-run economy, since, except in very special circumstances, private enterprise can be expected to perform better. As a corollary, there is not much scope for sovereign borrowing: most foreign borrowing is best left to the private sector.

Let me digress for a moment. When I say "most of us believe", I refer to those who subscribe to what I once labeled-to my subsequent regret - the "Washington consensus." I regret my choice of terminology in part because I do not believe that there was anything special about the extent to which views had coalesced in Washington; actually I think it more interesting that a similar intellectual evolution had occurred among the economists and policymakers in many developing countries. But my choice of term invited the interpretation that ideas emanating from Washington were being imposed on developing countries, which is not total fantasy but is nonetheless vastly exaggerated by those who have lost the intellectual war. I regret my choice also because the word consensus failed abysmally in nurturing consensus; my phrase instead became a battle-cry of those wanting to re-fight the battles that seemed to me to have been decisively settled. To serve this purpose, my original meaning had to be caricatured. So instead of being used to partition those ideas of the Reagan-Thatcher years that had survived their political demise (like privatization and a recognition of the positive role that markets can play) from those that had disappeared with them (like a fixed rate of growth of the money supply or the notion that redistributive taxation amounts to plunder), the term became used to signify an extreme commitment to neoliberal ideas that would certainly not command a consensus in Washington or anywhere else except a few right-wing think-tanks. It is doubtless too late to restore the term to its original meaning, but I would at least ask of those who use the term in this populist way that they have the integrity to recognize that others have used it differently.

To return to the main theme, we now live in a world where economic activity is overwhelmingly conducted in the private sector. In particular, international capital flows involve predominantly private actors. The task of modernizing the international financial architecture may be viewed as one of adapting public institutions to this fact of life. The need to do this has been highlighted by the series of highly damaging financial crises that have afflicted many emerging markets, including Brazil, in recent years.

Crisis Prevention

Most observers agreed that misguided macroeconomic policies (large budget deficits, inflationary monetary policies, and exchange rates that became overvalued as a result of failure to devalue enough to offset inflation) interacted with a deterioration in the global environment to cause the debt crisis of the 1980s. I will leave a discussion of exchange rate policy until later, but fiscal and monetary policy had been transformed almost everywhere by the 1990s. Both Mexico and East Asia were paragons of fiscal virtue (although Brazil and Russia were not). High inflation had been eliminated in all the crisis countries, even Russia and certainly Brazil. I would like to think that there is universal agreement that avoidance of future crises will require continued fiscal and monetary discipline, except that my past experience in attempting to proclaim a consensus (which indeed included fiscal discipline as its first element) has made me wary. It seems that one should not take it for granted that everyone is in favor of motherhood and apple pie. Nevertheless, let me be bold enough to assume that the need for constant vigilance in maintaining macro discipline is already accepted.

The fact is that the crises in Mexico and East Asia happened despite what the IMF calls "sound" macro policies. In Mexico it was pretty clear that the peso was overvalued, but there is little reason to think this was a factor in East Asia, except in Thailand. What turned out to be desperately wrong in East Asia was the financial system, which had problems of very high debt/equity ratios and bad loans made to "cronies" even before the crisis, and became hopelessly insolvent after devaluation magnified the local currency value of loans from abroad denominated in foreign currencies. This has led to an impressive international effort in the past two years to develop a set of international standards of minimum best practice covering a whole range of aspects of the financial system.1 The Financial Stability Forum, a group created to oversee this effort and centered at the Bank for International Settlements in Basel, has decided that 12 of these standards are key, covering data dissemination, banking supervision, insurance supervision, securities regulation, bankruptcy, corporate governance, accounting, auditing, payment and settlement, market integrity, fiscal transparency, and the transparency of monetary and financial policy (Goldstein 2000). A number of those standards are already in place, and work on others is continuing.

The next task has to be to secure the implementation of these standards in emerging market countries. This will involve a pretty major effort on the part of the countries involved, and at least some of the countries are complaining that the speed with which they are being expected to introduce this veritable revolution is unrealistic. A major technical assistance effort to help is warranted. In addition, it is important to have incentives for them to make the necessary effort. So far the main incentive takes the form of IMF surveillance, which has been extended from its traditional macroeconomic focus to include the preparation of Reports on the Observance of Standards and Codes (ROSCs), of which about 15 have so far been completed and another 20 are under preparation. But there is discussion of whether incentives should not take more concrete forms, such as better ratings from the credit ratings agencies, which would lead to lower borrowing costs; lower risk weights for bank loans under the revised Basel Capital Accord to countries implementing the standards; and preferential access to IMF credit, in terms of quantities or speed of access or interest rates, or all three, in a crisis. In my opinion it is desirable to provide incentives in all of those ways. Doing this would require that the Fund Board's deliberations of Article IV consultations, and ROSCs, be sharpened so as to offer an overall assessment of compliance that could trigger changes in borrowing costs, risk weights, and entitlements to draw from the IMF, which will doubtless prove politically sensitive.

We are now reaching the part of the crisis prevention agenda that is still in progress or outstanding. In addition to the issue of providing countries with incentives to bring themselves up to the standards being established in the codes, I see three other topics: an anti-contagion facility in the IMF, the role of capital inflow controls, and the reform of lending practices. Let us start with an issue already in progress.

The IMF established in April 1999 a facility that was supposed to help prevent contagion, called the Contingency Credit Line (CCL). This was intended to provide semi-automatic access to credit to countries hit by contagion that have good macro policies, are complying with the agreed international financial standards embodied in the codes discussed above, and have good relations with their private creditors (Goldstein 2000).

So far no country has applied for a CCL (although Mexico recently showed some interest in applying). Two reasons have been advanced to explain this failure to use the facility. One is that the financial terms are too demanding, with a commitment fee payable when the application for coverage is approved, and the same interest rate as that on the Supplementary Reserve Facility (which is to be the main instrument for lending to countries in crisis that have not pre-qualified for the CCL) payable when money is drawn. That gives no financial incentive to pre-qualify. Allied with the fact that the entitlement to draw is not quite automatic even if contagion hits, that leaves no obvious positive incentive. However, a financial incentive is quite likely to be provided soon, with abolition of the commitment fee and a lowering of the interest rate to less than that on the SRF. But there is a second reason that may explain the lack of interest in the CCL, which is the ambiguous signal that applying for it would send to the markets. These might see an application as signifying weakness (a need to establish a line of defense) rather than strength. Reinforcing that concern is the certainty that if the IMF subsequently felt obliged to disqualify a country, that would send it into crisis. If this is the true explanation, a working CCL will require replacement of the provision that countries apply for the CCL by one that they are automatically granted access to it in case of need if they satisfy certain standards, without ever going through the process of applying and being approved. (But even this would leave the problem of an adverse signal being sent should the IMF ever find it necessary to declare a country no longer qualified to draw.)

A second outstanding issue concerns the possible use of capital controls to discourage excessive capital inflows when times are good. The logic of focusing on inflows is that the accumulation of a large stock of short-term debt obligations is central in making a country vulnerable to crisis, and that it is much easier to limit the stock that enters in good times than to curtail what is wanting to flee in the midst of a crisis. The IMF has backed away from its general advocacy of rapid capital account liberalization prior to the Asian crisis in favor of a more carefully sequenced approach, but the question now is whether it should go further and actively urge members to implement controls when capital inflows are excessive. Most of us would not want to see a regression to old-fashioned administrative prohibitions, but the question is whether there is a role for price-related measures. The precedent here is Chile in the 1990s and its encaje (also Colombia and Malaysia). The encaje was intended both to limit the total size of the capital inflow (or, equivalently, to permit an increase in the interest differential) and to increase the maturity of such debt as Chile did contract. There is general agreement that it was successful in the second objective, but there has emerged a substantial literature purporting to demonstrate that it failed in the first objective. I have argued elsewhere (Williamson 2000) that the case made in that literature is flawed, and that in fact Chilean-style capital inflow taxes can provide a useful instrument to emerging markets suffering excessive capital inflows. It is an instrument that I believe the Fund should actively urge its members to use when threatened by excessive inflows.2

The final issue, which has so far received far too little attention in the global debate on new architecture, concerns the desirability of reforms in the lending practices of those who supply capital to emerging markets. If one believes, as I do, that the frequent crises in emerging markets are primarily due to the preference of the lenders for lending in a form (short-term loans denominated in their own currencies) that is ill-suited to the needs of the borrowers, and that encourages a boom-bust pattern of lending, then this ought to be at the core of the reform debate (where I tried unsuccessfully to put it in my 1977 presentation). Yet so far the debate here has been largely restricted to how to alter the requirements for risk weights on bank loans embodied in the Basel capital adequacy rules, so as to diminish the incentive for bank lending to be short-term. We ought to be far more ambitious, with the objective of shifting the burden of risk to the lenders (who will, it must be understood, expect higher average returns to compensate). This means not just encouraging FDI, but also steps like fostering portfolio equity in the form of closed-end funds, eliminating out-dated restrictions that prohibit some long-term investors placing funds in emerging market bonds, giving financial incentives to the managers of institutional investment companies to take a longer-term view, and adjusting risk weights so as to give an incentive to lend in local currencies (Williamson forthcoming).

The agenda for crisis prevention may be summarized as:

  • macro discipline

  • standards and codes for the financial sector, and incentives for emerging market countries to implement them

  • a CCL with an automatic right to draw by countries satisfying certain standards

  • active encouragement by the IMF for the use of price-related measures to limit capital inflows in inappropriate forms and excessive quantities

  • a switch in the form of lending from short-term loans to instruments that effectively place much of the risk on the lender.

Crisis Management

If the above agenda were to be implemented in its entirety, perhaps there would be no more crises, or at least no more crises of the general character of those we have learned to know and hate. Since full implementation is a pipe-dream, we need also to consider how crisis management could be improved. Here too there has already been some action, but much remains to be done.

The actions that have already been taken consist of a modernization of the IMF's lending facilities. One element of this is the introduction of the CCL, already discussed above. Another was the introduction of the Supplementary Reserve Facility (SRF) in the midst of the Asian crisis, a facility designed to lend larger sums for shorter periods at higher interest rates than has been traditional in Fund lending. In my view those changes were exactly what was needed in a facility designed to meet capital account crises. In addition, the Fund earlier this year abolished a number of facilities that had outlived their usefulness and were virtually unused in recent years.

Far more drastic changes have been demanded by some of the Fund's critics, such as the majority of the International Financial Institution Advisory Commission (IFIAC, better known as the Meltzer Commission) created by the US Congress to advise on reform of the international financial insttitutions. The Meltzer report proposed abolishing conditionality and replacing it by pre-qualification on the basis of four criteria concerned primarily with the banking system (an open door to foreign banks and adequate bank capitalization, including a component of subordinated debt, plus publication of statistics on sovereign debt and "a proper fiscal requirement"). It also proposed that all lending be at a penal interest rate and that the maturity of loans be cut to 120 days, with the possibility of only one rollover. These proposals have not resonated.3 Critics, including the US Treasury and the minority on the Meltzer commission, have ridiculed the proposal to replace conditionality by pre-qualification as one that would have precluded IMF involvement in the Asian or Brazilian crises, and the 120-day maturity as too short to give any hope that a country would be able to resolve a crisis if everyone knew that the IMF support was destined to disappear so quickly. It is one thing to welcome a CCL that would give automatic access to countries that had pre-qualified, it is quite another to agree that this should be the only way of accessing Fund resources. One cannot be quite sure what a President Bush with a solidly Republican Congress might try to do, but otherwise the Meltzer proposals can be considered dead.

The long-running debate about the appropriate content of IMF conditionality also got a new lease on life from the Fund's handling of the Asian crisis. Critics charged that fiscal policy was initially too contractionary; that the higher interest rates intensified the financial crisis without doing much to support the currencies; that many of the structural conditions imposed were irrelevant to resolution of the macro crisis confronting the region and took the Fund into areas where it lacked any professional expertise; and that it insisted on bank closures without credible accompanying assurances that those closures were the end of the process so that depositors could safely leave their deposits in other banks. The Fund has now conceded that the first and last charge were justified, but the other two remain contentious. It would take far too much of my limited time to give you my own position on those issues.

However, the response to capital account crises has to be focused primarily on debt restructuring that will make it possible for the victim to service debt on the contractually agreed terms, rather than on conditionality as it has traditionally been interpreted. That leads to the new emphasis on what is called private sector involvement (PSI). The question here is whether private lenders should be expected to take a hit and/or play a role in providing additional financing when a country gets into crisis, and, if so, how this should be accomplished. The issue is not quite new: it arose in the early years of the debt crisis, in the form of official attempts to get the banks to engage in "new lending" (a euphemism for recycling part of their interest receipts). It re-emerged when the Brady Plan was tabled, in the form of how to persuade the banks to pick one of the options rather than to try and insist on their contractual rights. Then we entered the brave new world of the 1990s where lending was voluntary and it was hoped the issue had gone away. The Mexican bailout was big enough to avoid any need for PSI. But when the Asian crisis came along there were many people in the United States who were convinced that the excessive lending in East Asia had been encouraged by the fact that investors had not lost anything in Mexico; in other words, that the Mexican bailout had fostered borrower moral hazard. There is actually not a shred of empirical evidence that this is true, but that did not prevent people believing it, and this conviction provided the intellectual foundation for the Meltzer commission. Moreover, there are many of us who believe that, even if moral hazard has not been a factor up to now, it would inevitably become one if IMF bailouts were always big enough to prevent private lenders suffering when a crisis occurred.

Policy has consciously sought to secure PSI in several recent crises. In Korea, the banks had their arms twisted to transform their overnight inter-bank loans into 3-year loans. Since the interest rate was jacked up and a sovereign guarantee was added in the process, the banks have not been inclined to complain in retrospect that they suffered any hardship (though that does not mean they did not resist the initial request to participate). In Brazil, the banks were persuaded to roll over their inter-bank lines and their trade credits. The IMF and the Paris Club have also been demanding that bonds be restructured in parallel to the provision of official debt relief and restructuring of bank loans. This has happened in Ecuador, Nigeria, Pakistan, Romania, and Ukraine. As of now, however, efforts to secure PSI have remained ad hoc and time consuming, with the result that crises are prolonged and severe.

The policy question is what sort of initiatives might help to ensure that PSI can be achieved rapidly when needed without frightening lenders to the point of excessively curtailing the supply of capital to emerging markets. Two proposals are under discussion. The first is to include collective action clauses4 in developing country bond contracts. When this proposal was first mooted, we heard dire predictions from some of the New York-based lenders, echoed by some of their clients, that any attempt to include such clauses would bring lending to a halt. Then someone realized that about one-third of such bonds, namely most of those signed in London, already include such clauses (which is why Pakistan, for example, succeeded in restructuring its bonds in 1999). Eichengreen and Mody (2000a,b) therefore examined whether the inclusion of such clauses had resulted in higher interest rates to the borrowers, as per the prediction. It turned out that the impact was modest and also, interestingly, that the direction of impact depended upon the borrower's creditworthiness. Countries with poor credit ratings did indeed have to pay somewhat more to borrow with the added security of collective action clauses, presumably reflecting borrower concern that a lack of willingness to pay might lead them to abuse the clauses, even when ability to pay was present. But countries with good credit ratings actually paid less, presumably reflecting borrower recognition that the clauses would reduce the cost of restructuring debt (and the possible interruption in debt service payments while this happened) in the remote event that the countries should encounter a position of inability to pay so that restructuring proved necessary.

Given the facts as we now understand them, the policy implications are pretty obvious. There may still be a case for urging the industrial countries to lead by example by inserting such contracts in the bonds they themselves issue, as Britain and Canada have done. But the main message is for the borrowers: they should issue bonds in London rather than New York, unless and until New York modifies its standard bond contract. Countries that refuse to do this should expect to be treated more harshly when they go to the IMF. The IMF has already taken one modest step in this direction, by treating the presence of collective action clauses as one factor that will qualify a country for access to the CCL.

The other policy proposal designed to facilitate PSI that is under discussion is to give the IMF the right to impose or approve a standstill on debt service payments. This is intended to combat a panic withdrawal of investors such as devastated East Asia in late 1997. If a run is caused by pure panic, then some argue that simply interrupting the run will allow time for everyone to have second thoughts and adjust their collectively irrational behavior. The issues are who should have the right to declare a standstill and (a neglected issue until now) whether the standstill should cover interest as well as amortization. Most of those who have addressed the topic have concluded that it would be legally difficult to have the IMF actually declare a standstill, wishing instead to give it the right to endorse a standstill declared by a member (a right which it already exercises de facto when it lends into arrears).

But of course it is difficult to identify cases of pure panic where there was no weakness in the fundamentals. Most panics happen when investors recognize that a country has some weakness that had not been previously recognized, and that will suffice to prevent all its debts being serviced on the contractually agreed terms given that other lenders have also recognized the weakness. In that circumstance it is individually rational to try and get out before others do, and it would remain individually rational to do that when any standstill was lifted if the contractually agreed terms were unmodified. This suggests that the purpose of a standstill is not to allow time for investors to think again, but to allow time for debts to be restructured to a form that can indeed be serviced on the revised contractual terms. These revised terms may not involve any sacrifice in present value by the investor, as they did not in Brazil or Korea; an extension in maturities may well suffice. It is not important to know ex ante, before the standstill is imposed, whether debt restructuring will require a write-down for the creditors or a simple extension of maturities; in either event panic should lead to a standstill while the country negotiates both with the IMF and its creditors.5 Provided the country is negotiating with its creditors in good faith, the Fund should be prepared to feed the country working capital while the standstill is in place, but it would only make major disbursements in association with a resumption of debt servicing in the context of a debt restructuring acceptable to its creditors.

One must expect capital account crises similar to those of recent years to be the predominant form of crisis in future, at least for the emerging market countries. The main outstanding issue in how to manage those crises is how to involve the private sector in their resolution. Note that the sort of solution I have sketched above, in which a country is expected to react to a panic by declaring a standstill while it renegotiates its debt profile, normally with a view to extending maturities, would strengthen the incentive for lenders to shift to longer-term lending, so as to be less vulnerable to restructuring. That would be even more true if standstills applied only to amortization and not to interest payments. And, as argued in the previous section, longer maturities would make crises less likely. Thus I believe my approach to crisis resolution to be consistent with my proposals for avoiding crises.

The Exchange Rate Regime

I cannot end a paper on the future international financial architecture without adding a few words on the subject of the exchange rate regime, a topic where I believe what currently passes for conventional wisdom is thoroughly wrong-headed.

That conventional wisdom says that countries should adopt one or other of two extreme regimes, either fixed rates backed up by a currency board or free (or lightly managed) floating, but should not do anything in between. The logic is that intermediate regimes are more prone to get countries into crisis, and crises are, as we have already agreed, things that are better avoided. Argentina and Brazil are held up approvingly as two countries that have seen the light of day and opted for one or other of these two extremes, Argentina by adopting a currency board in 1990 and Brazil by floating in 1999.

I do not deny the charge that intermediate regimes are more crisis-prone than either of the extremes. However, I would argue that this is a matter of degree rather than of kind. Currency boards can generate crises, even if none has yet been overwhelmed by one, as I am sure your Argentinian neighbors can attest. And no less than four floating currencies - the dollars of Australia, New Zealand, and Singapore, and the South African rand - were under the sort of pressure that can end in a crisis when the near-bankruptcy of LTCM saved the situation in September 1998 (see the Report of the Market Dynamics Study Group in Financial Stability Forum, 2000.) But what is ignored is that there are benefits from intermediate regimes as well as costs.

What I usually cite in this connection is the ability that an intermediate regime (including heavily managed floating in this category) offers to curb the misalignments to which both fixed and floating rates are prone. But I recently read a story in the Wall Street Journal which made me realize that there might be other benefits as well. The story was about the Central Bank of Brazil, which, according to the story, had intervened in the foreign exchange market without sterilizing the monetary impact and in that way opened up the possibility of a bright future for Brazil. Now the editorial page of the Wall Street Journal is not what I regard as a reliable source of economic insight, and the idea that a single act of monetary policy can change a nation's destiny is hype, but the policy being lauded nonetheless struck me as excellent tactics. I note that Brazilian interest rates have subsequently fallen, I believe to the lowest level for many years. All that would have been precluded had Brazil followed the malign neglect of the exchange rate that is supposed to go along with the policy of at-most-lightly-managed floating which the IMF seems to think it now pursues.

According to Calvo and Reinhart (2000), there is nothing very special about Brazil in this respect: most of the developing countries that claim to be floating in fact exhibit what they term "fear of floating", i.e. they manage their rates. That is very sensible, but it does pose problems. First, the policy is not transparent. That means there is both a lack of accountability and difficulty in using informed public debate to correct an errant policy. Second, it raises the possibility that there may be actions at cross purposes between different countries managing their rates. Admittedly this danger is less with developing countries than it would be if the main industrial countries were to manage their rates, but I am not sure it is negligible. Third, it means foregoing the possibility of providing a focus for private speculation that might help to enlist the private sector in stabilizing exchange rates. So I would prefer a more structured intermediate regime - but, as long as explicit intermediate regimes are precluded by the conventional wisdom, what Brazil appears to be doing makes the best of a bad situation.

Argentina's situation appears to me to be a lot more difficult. I am not opposed to currency boards in all times and places: in fact, my guess is that most of the small Caribbean and Central American countries would, and in due course probably will, do themselves a favor by dollarizing. But Argentina is not a small economy, or an open economy, or one near the United States, or one that trades heavily with the United States, or one whose shocks are similar to those that hit the United States; in short, it satisfies none of the conditions for an optimum currency area with the United States. It was understandable that it should adopt a currency board to escape from its desperate situation in 1990; the tragedy is that it did not use its subsequent period of strength to exit from that regime gracefully and give itself the extra flexibility that it needs. I would be the last to urge Argentina to risk its hard-won stabilization by casually devaluing or floating, but I do believe that it needs to start thinking very hard about its longer-term monetary future. Now that Brazil and Argentina have both stabilized successfully and securely, a European enthused by the euro inevitably wonders whether they should not start thinking in terms of monetary union with each other. Obviously there will be a transitional problem in forming such a union, but what is an institution like Centro Brasileiro de Relacoes Internacionais (CEBRI) for if not to think about how to tackle such a problem?

The Role of CEBRI

So let me conclude by saying a few words about the challenges that will confront this institution which we have gathered here today to inaugurate. I take it that its purpose will be to provide Brazil with the intellectual muscle that it will need in order to play the active role in international economic affairs to which its government at last appears resolved to commit it. This is a development which many of us who have in the past regretted Brazilian reticence on the world stage will heartily welcome.

Thinking just of the issues we have discussed this morning, there will be ample scope for an active Brazilian role. To start with, Brazil should aim to combat the danger that the project to reform the international financial architecture will be allowed to lapse as the memory of crisis recedes. When a crisis explodes, everyone can see there is a need for reform, but no one has thought what needs to be done. By the time the issues have been worked through, the sense of urgency has vanished and nothing much happens. If this familiar cycle is not to be repeated, some of the countries that were victims of the most recent crisis will need to keep the pressure on even after the good times have returned. What better country than Brazil, and what better institution than CEBRI to remind the Brazilian government of what still needs to be done?

I have argued that there is still a big agenda, covering all the most difficult issues, out there. Emerging market countries need both incentives and technical help in implementing the set of minimum standards that are being internationally agreed. The IMF needs to be persuaded to take a positive view of price-related techniques designed to limit excessive inflows of short-term capital when the times are good. The lenders need to be made to recognize that they bear a large part of the responsibility for emerging market crises because of the inappropriate way in which most flows are channeled, and to introduce reforms in their financial markets that will remedy this. Borrowing countries need to float their bonds in London rather than New York until New York revises its standard bond contract to include collective action clauses. And the international community needs to agree on the rules of the game that will legitimate a standstill imposed by a country exposed to financial panic.

Then of course CEBRI has to figure out how to achieve monetary union between Brazil and Argentina. After that, perhaps it can help liberate the world from the "two corners" exchange rate dogma. And that is only the agenda on the finance side!


Calvo, Guillermo, and Carmen Reinhart. 2000. "Fear of Floating". Mimeo.

Eichengreen, Barry. 2000. "Can the Moral Hazard Caused by IMF Bailouts Be Reduced?" Mimeo.

Eichengreen, Barry, and Ashoka Mody. 2000a. "Would Collective Action Clauses Raise Borrowing Costs?" NBER Working Paper no.7458. January.

Eichengreen, Barry, and Ashoka Mody. 2000b. "Would Collective Action Clauses Raise Borrowing Costs?: An Update and Extension" World Bank Working Paper no. 2363. June.

Financial Stability Forum. 2000. Report of the Working Group on Highly Leveraged Institutions. Presented to the meeting of the Financial Stability Forum on 25-26 March.

Goldstein, Morris. 2000. "Strengthening the International Financial Architecture: Where Do We Stand?" Paper presented to a KIEP/NEAEF conference on "Regional Financial Arrangements in East Asia: Issues and Prospects" in Honolulu on August 10-11.

Meltzer, Allan H. (chairman). 2000. Report of the International Financial Institution Advisory Commission. Washington.

Williamson, John. 1977. "Transferencia de Recursos e o Sistema Monetario Internacional". In J. Williamson et al, Estudos Sobre Desenvolvimento Economico (Rio de Janeiro: BNDE).

Williamson, John. 2000. Exchange Rate Regimes for Emerging Markets: Reviving the Intermediate Option. Washington: Institute for International Economics.

Williamson, John. Forthcoming. Curbing the Boom-Bust Cycle: The Role of Wall Street. Washington: Institute for International Economics.


1. Those who disparage the progress made in reform in the past two years should contrast what has been accomplished in this field already with the results of a previous effort at international monetary reform, that undertaken by the Committee of 20 in 1972-74. This spent two years in agreeing an "Outline of Reform" that was pure social science fiction, full of aspirations like "the exchange rate mechanism will remain based on stable but adjustable par values" and "the SDR will become the principal reserve asset" that bore no relation to what was feasible or to any agreed steps toward implementation.

2. Incidentally, I was careful in my original formulation of the "Washington consensus" to limit my endorsement of capital account liberalization to FDI. It is therefore with some incredulity that I sometimes read that the Washington consensus has collapsed because the IMF has backed away from urging rapid capital account liberalization. I have to remind myself that the term is used by others in a quite distinct sense to what I originally intended.

3. It also suggested that loans should be allowed up to a country's annual tax revenue, which would have allowed Brazil to borrow $139 billion! For 120 days!

4. This is the term given collectively to clauses allowing a bondholders' meeting to be convened to consider a debt reconstruction, rules allowing interest and amortization terms to be modified by a qualified majority of bondholders, sharing clauses, etc.

5. I am here differing somewhat with Eichengreen (2000), whose superb analysis of both collective action clauses and standstills is in my view marred by an assumption that a standstill alone would suffice if the problem is "a destructive creditor grab race", while he sees a standstill as having merely a supportive role where debt restructuring is the priority. In contrast, I see both a standstill and restructuring as needed in both cases, with the critical difference concerning the terms of the necessary restructuring.

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