The Hindu Business Line : A crisis on all streets

Reforming the international financial system is one thing; getting the results to trickle down to the grassroots level is a different matter altogether.

It is a well-known fact that the Bretton Woods arrangement, which led to the establishment of the International Monetary Fund in 1945, has turned out to be inadequate to meet the requirements of regulation of the present-day international financial system, a weakness which has today led to a crisis that is threatening the world with an unprecedented financial and economic squeeze. Not surprisingly, once again, there is a chorus that the IMF should be replaced with a more e ffective international financial watchdog, a point which was also made by the Prime Minister, Dr Manmohan Singh, at the Asem summit in Beijing last week.

In fact, there was nothing really new in what the Prime Minister said, especially his remark that the need of the hour was the creation of a “global monitoring authority to promote global supervision” of cross-border investment, trade and banking. He also called for a “collective international effort” to fight the present crisis which had to involve infrastructure investments in developing countries as a “counter-cyclical device”. In other words, Dr Singh was obliquely hinting at the present-day relevance of the Keynes line adopted by Bretton Woods (it ultimately had to make way for the US stand that favoured a typically banking role for the Fund), which espoused a more active, development-oriented role for the IMF. Indeed, it should not be too difficult for the Fund, or any new body that may come up in its place, to adopt a more active and regulatory role in international finance in view of the fact that, even in the US, the Government has been forced to intervene in the ownership structure of banks and financial institutions in an attempt to get things back on an even keel. However, reforming the international financial system is one thing; getting the results to trickle down to the grassroots level is an entirely different ball-game, requiring a different set of delivery instruments. This has been effectively underscored by the ILO chief, Mr Juan Somavia, who feels that world unemployment could increase by 20 million by the end of next year, in the process surpassing the 200-million-mark for the first time. More important is his (expected) finding that those at the bottom of the heap will be affected much more severely than the better-off, thus making it even more challenging for the international community to devise effective remedies.

Clearly, there are no shortcuts to setting the house of world finance in order, an important factor increasing the confusion being the growing lack of confidence on the part of investors, generally. And yet there is no alternative to putting things in place in the shortest time possible and restricting the damage to the system. As Mr Somavia put it, “this is not simply a crisis on Wall Street; it is a crisis on all streets”.

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