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Trade and Development Report 2001

Global Trends and Prospects, Financial Architecture

image of Trade and Development Report 2001

The world economy is staring into a dangerous precipice; many see uncomfortable parallels with the period between the two world wars. Excessive financial liberalization has created a world where global private financial flows have broken free from multilateral supervision and regulation. Systemic instability and recurrent crises have followed and so far international policy makers have failed to find effective answers. This disturbing scenario provides the backdrop to the Trade and Development Report 2001. Part one of the report sets out to answer some key questions about the health of the world economy while part two takes a hard look at efforts to reform the international financial architecture.

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Crisis management and burden sharing

There is a growing body of opinion that effective management of financial crises in emerging markets requires a judicious combination of action on three fronts: a domestic macroeconomic policy response, particularly through monetary and fiscal measures and exchange rate adjustment; timely and adequate provision of international liquidity with appropriate conditionality; and the involvement of the private sector, especially international creditors. With benefit of hindsight, it is now agreed that the international policy response to the Asian crisis was far from optimal, at least during the initial phase. An undue burden was placed on domestic policies; rather than restoring confidence and stabilizing markets, hikes in interest rates and fiscal austerity served to deepen the recession and aggravate the financial problems of private debtors. The international rescue packages were designed not so much to protect currencies against speculative attacks or finance imports as to meet the demands of creditors and maintain an open capital account. Rather than involving private creditors in the management and resolution of the crises, international intervention, coordinated by the IMF, in effect served to bail them out.

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