What Progress on International
Financial Reform?
And: Counter- Cyclical Prudential & Captial
Account Regulations in Developing Countries

By Stephany Griffith-Jones, et al.
December 2003
Sodertorns Hogskola
ISBN: 91-7496-308-2
121 pages, 6 " x 9 "
$38.50 Paper Original

The recent financial crises in East Asia, Russia and Latin America have had a dramatic impact on a large number of developing countries. Outflows of capital, disruptions in domestic financial systems and terms of trade deterioration have led to slow or negative GDP growth, and to economic welfare decline.

In the aftermath of the crises the Expert Group on Development Issues (EDGI) has asked three authors to analyze, in two separate studies, the emerging financial architecture and the role of different policy instruments that developing countries posses for managing the effects of boom-bust cycles.

The first study, "What Progress on International Financial Reform?," gives an overview of the emerging international financial architecture should be to prevent currency and banking crises and better manage them when they occur, and to support the adequate provision of net private and public flows to developing countries. Progress towards these goals has so far been no agreed international reform agenda. Some advances in the international financial architecture run the risk of reversal.

The study also discusses what can be done to overcome the insufficient representation of developing countries in key financial institutions and organizations. A fund or resource center could be created that would provide independent support to representatives of developing countries in the boards and for a where the international financial reform agenda is being discussed.

The second study, "Counter-Cyclical Prudential & Capital Account Regulations in Developing Countries," explores the role of two complementary policy instruments for managing the effects of boom-bust cycles in developing countries: counter-cyclical prudential regulations on domestic financial intermediation, and capital account regulations. The study argues that prudential regulation and supervision should take into account not only micro-economic, but also macro-economic risks associated with boom-bust cycles.

In particular, instruments need to be designed that will introduce a counter-cycle element into prudential regulation and supervision. To guarantee this, banks' provisions for loan losses should be more forward-looking. As the major source of boom-bust cycles in developing countries is capital account volatility, the authors find that a mix between the prudential banking approach and direct capital account regulations is advisable. The paper also highlights experiences with capital account regulations in the 1990s in Chile, Colombia and Malaysia.

Expert Group on Development Issues, 2003:1

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