Global Policy Forum

Governance of the International Financial System and Institutions: Some Latin American Perspectives


Dr. Manuela Tortora, Director of Economic Relations of SELA

April 2, 1998


The following comments were requested by the Chairman of the 2nd Committee of the United Nations General Assembly in order to make a contribution in the preparation of an international conference or special session of the General Assembly on the topic of financing development, to be held before the year 2001, pursuant to Resolution 52/179 of December 18, 1997.

This paper first examines the systemic impact of the financial crises that we have experienced in the decade of the 90s. Secondly, certain comments will be made regarding the lessons that can be learned from these crises insofar as managing the international financial and monetary system is concerned. And thirdly, the paper will address the topic of the role played by the actors in that system, as well as their role in these systemic crisis. Lastly, the priorities of the Latin American and Caribbean countries with regard to development financing and management of the international financial and monetary system will be addressed. Since these are basically general reflections aimed at stimulating debate, the topic, which is very broad and complex, will obviously not be exhausted.

Summary and General Considerations

The success of an initiative such as convening a conference or special session of the General Assembly on the topic of development financing depends to a great degree on its political impact – but the impact that will be translated into processes of change after the meeting is more important than the event itself. In the international financial and monetary system the nature of the institutional mechanisms and of the interests that govern them, contribute to making the forces of the status quo stronger than the forces of change, above all if the latter come from countries that have little influence on the decision-making bodies.1

However, when faced with the dynamics of a system characterized by volatility that is not beneficial to anyone and costly for all, an important consensus could be forming regarding the need to multilaterally address the topic of global economic governance. The political stimulus that led to the Bretton Woods agreements had its origin in the urgent need, shared by all the international actors of the time, to organize and channel the system for the benefit of all. It is probable that we are on the threshold of a similar political moment, because the cost of not acting may be very high for all the countries of the world.

As mentioned in the following pages, the treatment to be given to the topic of development financing requires a systemic and interdisciplinary vision encompassing the global implications of good or bad management of development financing. Likewise, at Bretton Woods, the approach was quite correctly systemic, even though at that time globalization did not have the geographic scope nor the intensity it has today.

In this order of ideas, here are some general reflections that might be worthwhile considering:

The relevance of the United Nations as a forum:

The forum of the United Nations is the most "systemic" of all multilateral fora, not only because it is universal, but because in its very concept, in 1945, the intention was to integrate into the United Nations organization chart all the political, economic, social and cultural areas that make up human society. That vision was and continues to be today more valid than ever in the presence of a multifaceted and universal globalization process.

The topic of development financing and management of the financial and monetary system is basic to and inseparable from its context. To address it only from the technical point of view, or solely at specialized fora, is tantamount to distorting reality, or at least reducing it to a dimension that will limit the impact and viability of the decisions that are made. The first condition for a good governance of the system is that decisions that affect its functioning be based on a solid and broad consensus, product of the participation of all the actors. Therefore, any doubt regarding the appropriateness of the United Nations General Assembly as a forum for addressing international financial and monetary topics should be discarded from the outset.

The trade dimension:

At Bretton Woods, monetary, financial and trade policies were linked by using an integral and systemic approach. In the context of this initiative of the 2nd Commission, a lot is being said about the International Monetary Fund and the World Bank, but little mention is being made of the World Trade Organization. Today, it is even more important than in 1944 that the trade dimension be introduced into the treatment for development financing, from both the institutional and substantive points of view. The Asian crisis is proving that the trade repercussions are at least as important as the monetary and financial ones, particularly for Latin American and Caribbean countries, and it should not be forgotten that the topics of trade in financial services as well as investments are already an integral part of the WTO work program.

It would be absurd, for example, if the recent agreement regarding financial services reached in December at the WTO were to imply commitments to open up the national financial systems, in contradiction to the guidelines established at other fora on related topics, such as handling flows of short-term capital or regulation of the banking system. The concern is for the subject itself and not the form. It is not merely a case of achieving good inter-institutional coordination, but of addressing the topic in all its ramifications. Once again, that substantive coordination can only be achieved in a forum that has an overall vision, in addition to the sectoral vision of the different specialized agencies.

The changes under way:

As stated in the following pages, a revision of the functioning of international financial institutions has been under way since the beginning of the 90s in different fora: at the Group of 24, at the Boards of the International Monetary Fund and the World Bank (as well as regional development banks), at the Interim Committee and the FMI and World Bank Development Committee of the IMF and the World Bank, as well as in the Group of 7 (now 8) most industrialized countries, and now in this framework of the General Assembly.

Numerous reports, debates, studies and proposals have been generated. Perhaps it would be best to first make a balance of what changes has been achieved, or better yet, what adjustments have been introduced in those institutions so that they will be in tune with the evolution of the global economic system and the need to establish more participatory mechanisms for developing countries. We should ask, for example: Over the last few years, how is the intense activity of the Group of 24 reflected in the management of the International Monetary Fund and of the World Bank? How are its recommendations conveyed to the Boards of Directors and to the Staff of both institutions? In light of the lessons learned recently regarding the volatility of the financial system, in practice, are the new procedures aimed at strengthening the watchdog role of the IMF in the system giving results? And at which countries is that monitoring aimed: only at the "emerging economies" or also at industrialized countries that play a key role? How is the development agenda reflected in the financing of the World Bank, and how is that agenda being prepared: taking into account the priorities identified by the borrowing countries, or by some influent lobbies in Washington?2

Most definitely the challenge faced by the initiative to convene a multilateral forum on development financing is to mobilize institutional mechanisms that are very complacent in their routines and in their traditional power so that they will embrace integral concepts and strategic visions they are not accustomed to handling. The change that is at stake is not only political and economic, but mainly "cultural" because it refers to a culture that governs the management of financial institutions and of the system as a whole. Cultures evolve when they are open to dialogue and when crises arise that threaten them. It is possible that the ghost of a new crisis is being transformed into the incentive that was lacking.


The financial crisis that began in Mexico in December 1994, and more recently the Asian economic crisis have brought to light the growing systemic risks derived from the interdependence characteristic of the international monetary, financial and trade system. Likewise, the vulnerability of developing countries (particularly "emerging economies") has also become evident, as well as the validity of the topic of development financing.

Both crises have also reactivated the debate regarding the role of international financial institutions in this new international context, a debate that really is not new because it has analogous antecedents from the end of the 60s3 and from the decade of the 70s when the gold standard and fixed exchange rates were abandoned. Later, in the framework of the 50 years of existence of the Bretton Woods agreements, both the World Bank and the International Monetary Fund, as well as regional development banks, began the process of examining and revising their policies and operations in view of the changes that had occurred in their areas of competence, particularly in recent years.

The debate regarding the role of the institutions established at Bretton Woods is one of the principal points of departure in considering the broader topic of development financing. In fact, because of their by-laws and policies these institutions play a determining role as sources of financing for developing countries and as actors in the capitals markets. Also undeniable is their role in formulating national policies relating to official aid for development, attraction of public and private, bilateral or multilateral financial resources and, in general, regarding the evolution and impact of international financial cooperation and capital flows toward developing countries. In other terms, in addressing the topic of development financing, an analysis of the existing institutional mechanisms at the multilateral level and their capacity for contributing to the financial needs of those countries is inevitable.

1. Systemic Impact of the Financial Crises

Analyses made by international organizations and experts of the financial crises that are affecting a number of the Asian countries since last year seem to coincide in identifying internal and external causes such as: weak banking systems, unsustainable exchange and monetary policies, accumulation of important foreign deficits, speculation in the real estate and exchange markets.4

In this regard, noteworthy is the fact that there are many analogies between the Asian crisis and the crisis that began in Mexico at the end of 1994. The internal and external reasons are similar: the speed with which the "contagion" spread worldwide (although of lesser scope in 1994-95), the manner in which the infection was generated, as well as its significance for the functioning of the financial and monetary systems. The systemic impact – or the "contagion" – that has been characterized by its swiftness and scope inside and outside Asia, is still being analyzed as its manifestations and consequences are being observed. It is in this way that certain "transmission belts" of the Asian crisis have been identified, which are operating because of the growing interdependence among the economies of the world and the characteristics of those economies (flexible exchange rates, easing of restrictions in financial and trade systems, relative homogeneity of macroeconomic policies of the "emerging economies").5

  • In the monetary area the chain reaction has been evident in the devaluation of the Thai baht with respect to the currencies of neighboring countries over a very short period of time.
  • In the financial area, the impact has been on the behavior of the capitals markets and of international investors with respect to their evaluation of "emerging economies" (increase in risk premiums, variations in the value of bonds issued by those countries, withdrawal of capital).
  • In trade, three impacts are becoming apparent: two direct impacts borne out by the decrease in the demand for imports by Asian countries and the increase in competitiveness by exports from those countries; and a third but more indirect and medium term impact relating to the fall in international prices of commodities.
  • In relation with the growth of the global economy, all the forecasts for 1998 have been revised downward, for the industrialized nations as well as for the developing nations, because of the sum of the aforementioned effects. It is evident that in a context of economies with a high degree of interdependence, a recession in one area slows down growth in others, above all in the area of trade. (According to the revised ECLAC forecast, Latin America and the Caribbean should have an average growth rate of 3.2%, in comparison with the 5.5% in 1997).

On the other hand, the Asian Crisis has again stressed what financial analysts call "risk configurations." The countries affected or which might be affected by the crisis, and particularly "emerging economies," are placed in a financial risk classification based on criteria such as the strength or weakness of their currency when compared with the dollar and other currencies, the stability of their exchange rate, the scope of the country's external imbalance, macroeconomic stability, and financial creditworthiness in international capitals markets.6

All these indicators are geared to evaluating the position of the country in the international financial and monetary system. In other terms, systemic crises such as the Asian one point out both the intrinsic importance of the system and its dynamics, as well as the importance of risk ratings, that have become a determining factor for capital flows. This is the new context in which the topic of development financing should be considered.

2. Some Lessons of the Crisis for the Governance of the System

Several analyses have brought to light that these systemic effects are inherent to the current operations of the international economic system and, therefore, might be repeated at another time or in other latitudes in greater or smaller measure. In fact, it has been proven that the Asian crisis is quite similar to the 1994 Mexican financial crisis, both with respect to the causes as well as its international implications – although the systemic effect at that time was less intense.

As the Managing Director of the International Monetary Fund stated, the Mexican crisis was "the first financial crisis of the XXI Century" in the sense that it was a manifestation of what could be the monetary system and the international financial system in future years. It is necessary then to comment on the fact that it is the global economic system itself that is generating "tremors" of large magnitude;7 to achieve stability and avoid the perverse effects of their "transmission belts" is the first challenge in managing the system.

One of the most controversial points of the last few months generated by the Asian crisis has been the easing of restrictions on financial systems because of the volatility of capital flows. The topic of the degree of liberalization of capital accounts is currently being discussed specifically by the International Monetary Fund and the Group of 24. Without a doubt, it is a key topic to be considered when discussing development financing, but it is also a point that refers to the possibility of controlling short – term capitals more than the global administration of the international financial system, which implies other considerations of a greater scope. In this regard, it is important to stress that some experiences of Latin American countries have been successful in putting "brakes" on the volatility of foreign capital, as for example in Chile and Colombia. This appears to indicate that it is not enough – although necessary – to examine the viability and justification of possible "barriers" or "controls" for capital flows as a means of avoiding new financial crises, such as the recent ones which had systemic effects.

In fact, conclusions can be reached from the Mexican and Asian crises that transcend the handling of the volatility of capital in the short-term. One of these is that an economy which is apparently successful is not immune to this impact, and that this could be the point of origin of the crisis as in the case of Thailand.8 Here it would be worthwhile to reflect on the implications of this paradox that is of interest to any developing economy. The recent financial crises tend to demonstrate that success is not a guarantee of stability and that there is a vulnerability of a structural nature that characterizes developing and "emerging" economies: high growth rates, significant export volumes, and attracting foreign capital constitute indicators of "bonanzas" that do not necessarily mean that stable growth has been achieved.

In this regard, in his recent appearance before the Board of Governors of the Inter-American Development Bank, the Executive Secretary of ECLAC stressed that "the focal point of attention should be the handling of "bonanzas" and not of crises, because these, in many ways, are the inevitable result of "bonanzas" that have been mishandled. This is an essential point of view because, in a way, existing institutions, especially the IMF, have been designed exclusively for crisis management we lack appropriate instruments to alert on the approach of, or better yet, to prevent in time the development of unsustainable "bonanzas". (…) The successions of excessive waves of expansion and financial panic indicate that the market tends to grow first and then contract, far beyond what basic economic factors recommend in both cases. There is no international institution that can contribute to prevent the development of unsustainable financial "bonanzas" and the International Monetary Fund has only a limited response capacity to handle subsequent crises."9

Consequently, an efficient governance of the financial and monetary system implies achieving a sound domestic management and growth, through the appropriate economic policies: "excess attention in handling crises in reality ignores a fact that should be evident: that the degree of freedom of the authorities is greater in a "bonanza" than in a crisis."10 Concomitantly, from the external point of view, it implies considering that accelerated growth of successful economies stimulates euphoria among foreign investors, particularly those that manage volatile capital attracted by the high profits.

In other terms, perhaps the most important lesson to be learned from recent crises is linked with the internal and external vulnerability of some "emerging" economies that derives from growth whose structural roots are neither solid nor sustainable. It is obvious that the nature and handling of development financing are intimately related with the fragility of that growth.

In light of recent crises, there are probably some underlying questions to be considered in any analysis of global financial management: What type of development is currently being financed? Is it sufficient to finance growth to generate integral and stable development? What local and foreign capital supports stability and minimizes the vulnerability of developing economies? How should such capital be managed?

At the systemic level, what rules of the game and institutional mechanisms would have to be established so that the interdependence among countries would act like a virtuous circle? What role can international financial institutions play along with the other actors that participate in managing the financial and monetary system?

3. The Actors in the International Financial and Monetary System

The behavior of the international financial and monetary system of today is basically determined by three actors whose policies and decisions govern and guide it: (i) the International financial institutions (mainly the International Monetary Fund and the World Bank, besides regional development banks and, indirectly, the World Trade Organization that is one of the institutions included in the Bretton Woods scheme and which participates in managing the system through its watchdog function over international trade regulations); (ii) some industrialized countries (members of the Group of 8, and whose positions regarding the handling of financial and monetary matters are made known through meetings of Ministers of Finance and the decision-making processes at the IMF and World Bank, in addition to their bilateral policies of aid for development); and (iii) the investors, rating agencies, commercial banks, fund managers, transnational companies and stockbrokers who act internationally and are not organized, but whose decisions as regards long-term and short-term capital flows to developing countries become more decisive with each day.

(i) International financial institutions

As was indicated earlier, approximately five years ago a revision process was begun first at the World Bank and then at the IMF, regarding the policies and operations of both institutions.

At the Bank, the revision concentrated mainly on the scope of its mandates and its role as a source of development financing the Bank extended its financial and technical cooperation operations to areas such as social policies, privatization, financial systems, environment, institutional development, judicial systems, strengthening of civil society, etc.: Until the end of the 80s the Bank's financing was concentrated in infrastructure, agriculture, and industrial development).

In recent years, there has been greater insistence on the role of the Bank as a funding source for those projects that do not have ready access to private resources, as well as its role as a catalyst for private investment. Changes were also made at the beginning of the 90s in its criteria for "assessing" the economic policies of borrowing countries, stressing the link between sustainable macroeconomic and sectoral policies, in accordance with the opening of their national economies.11

Beyond the quantity of resources that the Bank channels directly or indirectly toward developing countries, it is imperative to analyze the quality of its financing policies compared with the need to maintain the stability of the global system and to contribute to the structural development mentioned in the preceding section. If we consider that the operations of these institutions are based on a medium-and long-term vision (operations are designed on a 5 year-term or more), they play a key role in the general topic of development financing.

With respect to the International Monetary Fund, the debate regarding two topics has become more accentuated recently as a result of the Mexican crisis. These topics are: its watchdog role in the international monetary system and its capacity to contribute resources to support countries in crisis.

As to its function as watchdog of the monetary system, it has been repeated on many occasions that the IMF was neither efficient nor timely when faced with the imminence of the Mexican and Asian crises. Its "early warning" mechanisms which should have averted systemic repercussions , failed. It has been affirmed that nowadays, the Fund does not have the necessary operative instruments for its role as "watchdog"; since 1995 the G-7 (G-8 as of last year) has been insisting on improving access to the information regarding the situation of member countries, as well as its consulting procedures with governments, in order to foresee emergency situations.

With respect to the IMF's capacity to contribute its own resources to countries in crisis, at this time, a lot depends on what the U.S. Congress will decide regarding the capital increase of this institution. In fact, recent IMF operations to rescue the Asian economies have seriously depleted its resources. The IMF has US$ 45 billion in non-committed resources, but it can only use some US$10 to 15 billion because it must maintain cash balances which allow the possibility of withdrawals unconditional.

It is important to note that the H.R.3114 bill, recently submitted by the Executive Branch to the U.S. Congress, proposes an increase of US$ 18 billion in that country's quota in the IMF, while urging the administration "to use the voice and vote of the Executive Director (of the United States)" in the IMF to promote increased economic liberalization, privatization and deregulation.12 Amendments by certain Democratic representatives were added to this provision geared to introducing labor and environmental conditions for IMF resource allocation and which definitely allowed approval of the bill by the Banking Committee of the House of Representatives last March 5.13

The Appropriations Committee of the Senate, on the other hand, approved the additional contribution to the IMF, but with a series of conditions for the allocation of funds that exceed those traditional on financial and monetary policy: "compliance with all international trade obligations and agreements to which the borrower is a party", prohibition to finance certain industries that represent potential competition for U.S. industry (for example, the South Korean steel industry was specifically mentioned), and conditions concerning the transparency and accountability of the IMF.14 To date, however, the debate in Congress regarding the contribution of the United States to the IMF has not been concluded. Specifically, linking this increase in the IMF's capital to the topic of abortion (the "Pro-Life" movement in Congress insists that funds should not be contributed to public or private institutions that directly or indirectly support pro-abortion legislation) is still a possibility. Last year, this topic was introduced into the debate on the U.S. contribution to the United Nations.

The debate in the U.S. Congress regarding the role of the IMF demonstrates that at least in the country with the most powerful vote in the institution and the greatest clout in the world financial system, considerations regarding development financing and stable management are not the only ones nor the priorities, and that the "para-economic" or non-economic conditionalities for the allocation of multilateral financial resources continue to expand and become more complex.

This is where we should include the debate in the U.S. Congress on the role of the IMF in its current political context, and reflect on its implications for analyzing the topic of development financing. At the bottom of the discussion is the role of the United States in international economic cooperation, or in other terms, the "internationalism" of that country in the new multipolar system that has replaced the bipolar division of the Cold War. Exactly 50 years ago, the debate regarding approval of the Marshall Plan also generated similar arguments and doubts, but at that time, faced with the threat of communism, "internationalism" triumphed.

In both aspects, with respect to the role of the IMF as both watchdog for the monetary system and as an emergency financing mechanism, it is valid to formulate a basic hypothesis: "the deficiencies noted in the functioning of the monetary system, more than the technical difficulties, are the result of the power or governing structure of the IMF (…) [The changes that have occurred in the role of the IMF] reflect the growing distinction between debtor and creditor countries and a change in the way industrialized countries see the IMF, no longer as the center of the monetary system, but as a specialized institution that supports developing countries. The current international economic order arose as a result of an unprecedented cooperation effort. In the last decades, this has been deteriorating as the large nations no longer feel the need to maintain the same level of international cooperation to advance their interests. Exceptionally, when faced with a problem that may have systemic repercussions, such as the debt crisis, the IMF has expanded access to its resources to a certain number of countries."15

In the original Bretton Woods scheme, the IMF was in charge of the stability of the monetary system; the World Bank of the financing of post-war reconstruction projects; and the International Trade Organization (ITO) of the rules for guaranteeing liberalization of world trade. One of the most important results of the Uruguay Round of Multilateral Trade Negotiations was the establishment of the World Trade Organization (WTO) to replace the General Agreement on Trade and Tariffs (GATT), and which preserves and expands the original mandate of the ITO.

With the institutional triangle designed in Bretton Woods complete, and in light of the economic openness prevailing in almost all countries, the need to strengthen coordination among these three institutions becomes patent because it is obvious that their respective areas of competence are closely related. The GATT already had mechanisms for formal coordination with the IMF. In addition, "the new organization born at the Uruguay Round (…) has a series of elements that are similar to the functioning of the IMF and the World Bank,"16 which have facilitated both the formal establishment as well as the implementation of coordination mechanisms among the three institutions.

As a result, in any revision of development financing, the commercial angle and its corresponding institutional instrument, the WTO, must be taken into account along with the implementation of its coordination with the two Bretton Woods financial institutions.

The structure of the decision-making process in the IMF and the World Bank is one of the less discussed topics in the analyses on the functioning of the financial and on the monetary system. In addition to the increasingly important role in this area of the G-8, or functioning group of most industrialized countries, which will be discussed shortly, and of the growing importance of the non governmental actors such as the investors or the rating agencies, it is obvious that the institutional mechanisms of both organizations are not the decision making centers that play a determining role in the management of the system.

In the same vein of ideas, the G-24, which represents the developing countries, is neither a counterweight nor an important partner in the decisions of the financial institutions nor in the handling of the system as a whole, even if it has recently regained credibility and efficacy. The G-8 plays the decisive role in both fields.

(ii) The Group of Eight most industrialized countries:

Both with respect to the international monetary system as well as in all matters concerning development financing, this group (in principle informal, but in practice very efficient insofar as political weight is concerned) plays a key role.

It should be noted that its modalities of action are not limited to the annual Summit Meetings of Presidents and Heads of State, because they also include the multiple meetings of their Ministers of Finance and ministers from other areas, their top officials, besides their "indirect" actions which are equally important and influence the Bretton Woods institutions (particularly the IMF) and the Organization for Economic Cooperation and Development (OECD).

As was stated earlier, with respect to the management of the international financial and monetary system, the Group of Seven, subsequently the Group of Eight, intensified its technical work and the formulation of decisions at the Summit level as a result of the Mexican crisis, emphasizing the need to strengthen existing multilateral mechanisms.

In this context, the IMF was the first institution and the one most studied by the Group, above all with respect to its role as watchdog over the monetary system. The main guidelines of the Group in its documents of 1997 regarding the functioning of the international financial and monetary system and the role of the IMF, may be summarized as follows, to:

- Assign a central role to the IMF in managing the system and the crises that may occur, emphasizing the importance of the reform process begun at the institution so that it will continue to be ‘an effective and relevant force in the evolution of global economy' ;

- Support the measures to open up financial markets and promote the free circulation of capital ;

-Improve the capacity of the IMF to prevent financial crises by means of improved vigilance and greater emphasis in supporting sound and transparent policies in industrialized and developing countries ;

- Provide the IMF with ‘appropriate resources so that it can fulfill its responsibilities in the international monetary system' ;

- Strengthen international cooperation in bank supervision and among international regulating institutions (through the Basle Committee on Banking Supervision) ; - Improve transparency of markets and the handling of risk and crisis situations ; - Analyze the implications of ‘electronic money'.17

As to development financing, role of the World Bank and regional banks, and of official aid for development, the Group has also defined its position and priorities encompassing four principal points:

- The responsibility for development relies mainly on developing countries; Development must be sustainable, generate employment, be equitiative, and environmental – friendly;

- Concessional aid should be concentrated in the poorest countries;

- Development aid must be based on solidarity and on ‘effective burden-sharing' among all the participants in the development process.18

As a result of the financial and political impact of the Asian crisis, it is safe to assume that the Group of Eight will closely follow the topic of managing the financial and monetary system, and will evaluate the implementation of recommended measures, as well as probably expand its decisions with respect to the specific powers of the IMF. It remains to be seen whether the topic of development financing will again be addressed by the Group in the light of the lessons learned from the Asian crisis, and with what criteria.

(iii) International investors:

Thanks to the opening up of the financial systems, concomitantly with capital flows, the number of "users" of those flows has multiplied, together with their power to determine their characteristic swings and sudden movements, especially in "emerging economies."

What might be identified by the general term "investors" in reality covers a very broad and varied group of companies, individuals or financial entities in many areas of the globe, and in theory independent insofar as decisions are concerned, but in practice, motivated by similar interests and behaviors. This is a disperse and decentralized group, with neither organization nor coordination. Nonetheless, the final tally indicates that despite the multiplicity of individuals or companies, the largest concentrations of capital are in the hands of a few companies or banks of international importance.

The Mexican crisis was perhaps the first time that the role of this category of actors in the international financial system was seen, particularly their capacity to avoid the scrutiny of the IMF, to change the image of economic soundness of a country, bring about the beginning of a serious recession, and generate a macroeconomic collapse with international repercussions – all in just a few days, or even a few hours, by sending simple orders using the keyboards of their computers.

In the case of short-term or flight capital (basically portfolio investments), the volatility is determined by the high interest rates and the possibility of higher and faster profits in emerging markets than in "traditional" capital markets. Managers of mutual funds, stockbrokers and other funds operators are responsible for massive and sudden withdrawals of capital which apparently can destabilize the most solid economies. The phenomenon of the "self-fulfilling prophecy" – where the crisis is provoked by its own announcement of a crisis- as well as in the "flock behavior" where pessimism self-generates and expands, are quite frequent among them.

But these "investors" are also characterized by the fact that their decisions totally lack any knowledge of the country where they operate,19 contrary to productive capital investors whose decisions are determined by their expectations regarding the long-term behavior of the local economy.

In both cases of the flight capital as well as direct foreign investment, the information regarding the potential of a country – in terms of profits – play a determining role in their behavior. In this sense, notable is the growing influence that the rating agencies have acquired in capital flows, achieving greater importance than the opinions or forecasts of international financial institutions. For the ministers of economy and finance in developing nations, the report of a rating agency can have a greater effect on the country's policies than a decision of the IMF Board of Directors.

Consequently, the behavior of these actors affects not only capital flows, but also the structure and operations of the financial and monetary system as a whole, because they displace, or at least compete in the decision-making process with traditional actors like the international financial institutions and the States.

In this context, it would be necessary to ask how this disorganized and disperse group of decision-makers could be integrated into the institutional mechanics that manage development financing, because it would be absurd to ignore or ostracize them. Their growing importance is also a determining factor in the debate on the measures needed to handle global financial volatility: To what degree is it feasible to establish ‘universal rules of the game' to apply to these investors? With what local and international mechanisms can they be monitored so as to avoid the negative effects of speculative flows? Will the warning mechanisms that are being incorporated, for example into the IMF, be sufficient for handling the volatility of capital? Is it possible that we will be watching an innovative phenomenon where the financial system itself, as it evolves, will accommodate the negative results of opening capital accounts?

4. Prioroties of Latin America with Respect to Development Financing and the Management of the Global System

The countries of the region have a keen interest in the treatment that is given the topic of development financing from two points of view: first, it is fundamental to achieve a successful linking among the economic and social strategies and access to stable and productive financing sources, on pain of compromising the democratic governance and the credibility of new development models based on unilateral opening up of domestic economies; second, it is also important to consolidate, at the multilateral decision-making level, a position that reflects the current and future role of the region in world economy and in the global economic system.

In this context, the priorities of the countries of the region may be summarized in six principal points, in each of which multilateral financing and sound management of the international financial and monetary system, directly or indirectly play a determining role:

  • Direct foreign investment versus volatile capital:
From the short-term point of view, as a result of the 1994-95 Mexican crisis, dependence on more volatile foreign capital has decreased in the region: of a total of approximately US$ 73 billion in net income in 1997, the net direct foreign investment represented about US$ 44 billion. However, one of the systemic effects of the Asian crisis is the one that refers to a probable overall recession in investments (both short and long-term) in all "emerging economies," which will obviously affect the region's capacity to attract development financing. Likewise, and also as a consequence of the Asian crisis, some Latin American countries have experienced a rise in the risk premiums on their nation's securities in the international Euro-bond market, limiting their capacity to obtain access to that market to increase their liquidity and make their foreign debt service payments. But, in general, these difficulties appear to be temporary because in recent months the region has had a good response capacity to the impact of the Asian crisis, thanks to the greater solidity of its financial systems and appropriate macroeconomic policies.20

  • Direct and productive foreign investment:
The fact of attracting important volumes of non-speculative capital is insufficient to guarantee that these resources will be used in the economic sectors that most need them: one of the challenges in the countries of the region consists in channeling the direct investments to those activities that are most relevant to achieving national objectives for strategic development. In this same vein of ideas, one of the criteria that should allow for evaluating the "quality" of the investment could be the generation of employment, growth in exports (particularly those with greater added value), technological development, and support for local business (small and medium-size companies).

  • Complete the structural reform begun a decade ago:
The successes recorded on the macroeconomic plane as a result of structural reform processes begun, in different degrees and with different speed, in the countries of the region do not coincide with the persistent "social deficit", together with an increase in the concentration of wealth. In this regard, the reforms have been incomplete since they have not included more effective social policies, along with deep-seated changes in economic development models and a decrease in social spending. The cost of this deficit is patent in education, health, unemployment programs, basic services to the most vulnerable sectors.21 Also the "lost decade" of the 80s has meant serious deterioration in basic infrastructure because of the lack of local and foreign investment. The World Bank and the Inter-American Development Bank estimate that at present the financing needs of Latin American and the Caribbean are approximately US$ 60 billion per year in electric and telephone networks, drinking water, telecommunications, ports, airports, railways, roads. It is in this area of investment in human capital and in basic infrastructure in the region where the participation of development financing is most important, above all in social projects.

  • Stabilize the financial and monetary system:
For economies that are still in the consolidation phase of their structural reforms and are still searching to participate in international markets for goods, services and capital, the stability of the external environment is paramount. External vulnerability continues to be a priority concern for all the countries of the region and it is not enough to implement adequate and successful national policies to achieve stability. Recent crises have demonstrated that the indicators of sustained growth do not compensate for systemic impacts. Although volatility also affects industrialized countries, the cost is greater for economies in the growth and modernization phase, as for example those in Latin America and the Caribbean – even though the efforts made in the last few years to strengthen the financial systems have attenuated the turbulence coming from the environment. In treating the topic of financing, an evaluation of the stability of the monetary system cannot be dissociated from the stability of capital flows destined for productive investment and whose role determines the rhythm and quality of the development of a country.

  • Identify the problem of the foreign debt in its context:
From the point of view of total volume and the relationship with export income, the foreign debt and its servicing continue to be a problem for many countries of the region.22 However, favorable changes have been recorded in the structure of the region's foreign debt: various countries renegotiated with commercial banks, in the Paris Club, or with bilateral creditors obtaining, in certain cases, important discounts. The initiative to reduce the debt of the strongly indebted poor countries will benefit Bolivia, Guyana, Honduras and Nicaragua, and in the case of the medium-income countries, it is probable that repurchase at market prices with significant discounts will be a viable medium-term option. The major portion of the debt has been transformed into bonds and operations connected with the debt (such as reconversion and advance payment), constituting an excellent business for the commercial banking sector.23 All this means that the topic of the external debt should be considered in the broader context of development financing in its different modalities, as well as the management of the financial system, of which it is at present only an element and not the most preoccupying one for the region.

  • Participate in decision centers of the system:
As was demonstrated with the recent and active participation in the work of the Group of 24, Latin American and Caribbean countries are very interested in the topic of the functioning of the international financial institutions. In addition, they are the most important shareholders and clients of the International Monetary Fund and the World Bank. In treating the link between these two institutions and the World Trade Organization, Latin America and the Caribbean can contribute its vision, and above all, experience in linking macroeconomic policies to regional integration schemes. It is important that a recommendation like the one made in the framework of the Group of 24 to establish a dialogue between that Group and the eight most industrialized countries, come to fruition. As was pointed out earlier, the region has an important agenda insofar as development financing is concerned, and requires fora, standards and mechanisms that will allow it to present that agenda and put it into practice.


1. "The question is: are the current international financial institutions likely to be able to transform themselves, spontaneously and without prodding and in a reasonable time frame, into what will be required for the emerging world of the twenty-first century. (…) These are not signs of an organization able easily to recast itself in the interest of the majority of its members.": Gerald K. Helleiner, "A Conference on Finance and Development?" International Finance and Developing Countries in a Year of Crisis. United Nations University, 1998, pp. 101-102.

2. "Much as they try to hone a more attractive image to the world, they still disproportionately reflect in their actions and policies the views and interests of a few major industrial countries." Ibid., p. 103.

3. Noteworthy is an ECLAC study on the functioning of institutional mechanisms of the international financial and monetary systems before the gold standard was abandoned: ECLAC: Sistema Monetario Internacional, Cuestiones Relativas a la Financiación del Desarrollo y al Comercio de los Paí­ses en Desarrollo. TD/B/198, October 23, 1968. Many of the conclusions continue to be completely valid, as for example the following: "The International Monetary Fund has been functioning for more than twenty years. Therefore, it is understandable that there may be a need to revise certain of its current regulations and procedures, bearing in mind the experience and structure of international economic relations. To judge any revision of regulations and practices it is necessary to determine the degree to which such a revision will strengthen the nature of the Fund as a multilateral organization responsible for stimulating worldwide monetary cooperation. In this regard, to guarantee that the revision of the regulations and procedures is not aimed at making the use of resources of the Fund more restrictive than at present, is considerably important. On a number of occasions, the developing countries have attempted to make the use of resources of the Fund more automatic and the conditions for redemption that are applied to developing countries more liberal so that special services could be provided to solve payment problems generated by regional integration."

4. For a synthesis of the origins for the Asian financial crisis, see SELA, "Markets roar and tigers tremble: lessons for development" Strategic Issues 35 , November 1997.

5. See SELA, Impact of the Asian Crisis for Latin America. SP/DRE/Di Nº 21-98, Caracas, March 1998.

6. Ibid., p. 6.

7. The term is used particularly by Lester C. Thurow, The Future of Capitalism, Penguin Books, New York, 1996.

8. See Samura Jamara and Tony Traub, "The Asian Currency Crisis: Emerging Conceptual and Practical Considerations," International Capital Markets. Vol. 17, Nº 4, Commonwealth Secretariat, December 1997, p. 23.

9. Speech of the Honorable, José Antonio Ocampo, Executive Secretary of the Economic Commission for Latin America and the Caribbean. XXXIX Annual Meeting of the Board of Governors, Inter-American Development Bank, Cartagena de Indias, Colombia, March 16, 1998, p. 2.

10. Ibid., p.3. "Anecdotal evidence suggests that East Asia's sustained rapid growth of the past several years generated euphoria and encouraged the taking of excessive risks. Credit was extended relatively freely with inadequate attention to rates of return (e.g. in the real estate sector), by both domestic and foreign lenders." S. Kamara and T. Traub, op.cit., p. 26.

11. It should be recalled that the guidelines of the "Washington Consensus" have had a determining effect on the policies of multilateral and bilateral financial institutions in recent years: maintaining sound macroeconomic policies; promoting microeconomic efficiency and private investment; liberalizing foreign trade; implementing social policies geared to the most vulnerable sectors.

12. SELA Antenna in the United States, Nº 43, March 1998, p. 3. This law project also contains a provision requesting the Executive Director of the United States to guarantee "that the policies and procedures (of the IMF) strive to support internationally recognized labor rights such as the freedom to belong to an independent union and to negotiate collectively." Ibid., p. 3.

13. SELA Antenna in the United States, Nº 44, 1998, p.4. It should be recalled that there was another bill submitted by four Republicans (H.R. 3090) that recommended the withdrawal of the U.S. from the IMF.

14. Ibid., p.5.

15. Ariel BUIRA, "Reflexiones sobre el Sistema Monetario Internacional" Capí­tulos Nº 43, April-June 1995, pp 40 and 50.

16. Esperanza Durán, "El Triángulo Institucional FMI-Banco Mundial-OMC", Capí­tulos Nº 43, April-June 1995, p. 27.

17. SELA, The agenda of the industrialized countries and international economic organizations. SP/CL/XXIII.O/Di Nº9, October 1997, p. 17.

18. Ibid., p. 20.

19. "Many fund managers did not care much about the details underlying the region's turnaround. 'We went into Latin America not knowing about the place,' one of them noted after the Mexican crisis. 'Now we are leaving without knowing anything about it´." Moises Naim, "Latin America the Morning After." Foreign Affairs, Vol. 74 Nº4, p. 53.

20. SELA, Impact of the asian crisis on Latin America, Op.cit.

21. An updated synthesis of the needs of Latin America in the area of social development may be found in IRELA, Structural reform in Latin America: an unfinished agenda. Dossier Nº 62, Madrid, November 1997.

22. SELA: External Financing, Foreign Debt and Intraregional Capital Flows in Latin America and the Caribbean. SP/CL/XXIII.O/Di Nº 7, October 1997, p. 35: "in 1996 the total amount corresponding to the foreign debt disbursed by 22 Latin American and Caribbean countries exceeded US$ 600,000 billion, that is, US$ 60,000 million more than in 1994."

23. Ibid., p.35.

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