In December edition of its quarterly magazine, Finance & Development, IMF has taken up issues related to future.
One essay deals with financial crisis of the future. It basically looks at answering the question – “Will they resemble the contagious crises of the 1990s or the country-specific crises of the 1890s?”
In 1890s financial globalization was much more than what we see today
The typical portfolio of a British investor around the turn of the 20th century was probably more internationally diversified, and included a far larger share of emerging market securities, than that of his great-grandchild living at the beginning of the 21st century
And globalization collapsed in the world war period and has only begun to pick up now. Earlier, the crises were limited to the country but now we see crisis hurting other economies as well (what we call a contagion). An exception was the Argentine crisis which only hurt Uruguay a bit.
IMF says in Argentina’s case most knew it is going to do badly and had already started withdrawing monies from it. Whereas with others it was a sudden stop and hence people withdrew money from other similar countries. Hence contagions could not be ruled out and perhaps would continue in future.
Moreover with increasing financial innovation and aggressive players (hedge funds, private equity etc) if a crisis takes place, contagions are more likely to happen. To manage them we would need coordination across countries and number of questions need to be addressed- Should these new entities be restricted? If not, should they be asked to disclose their portfolios?
Read the entire piece. It is full of fresh insights on what to expect.
In a related piece on global governance, IMF thinks we need to take a re-look at the 20th century model:
…what we have today is a multiplicity of independent actors, both public and private, each pursuing its own objectives and priorities, with its own clientele and constituency, with its own technical language and organizational culture, with its own mandate and specialized focus. These attributes may have been appropriate for a time when international relations focused on several important issues but just a small number of important countries. The lasting effect, however, is that we have inherited a system that is fragmented and that relies heavily, perhaps too heavily, on market forces, competition, and ad hoc public reactions to try to channel energies and allocate resources.
In the 21st century the challenges require more coordination than ever before:
The problems and the challenges of the 21st century—absorbing demographic change, reducing poverty, expanding the provision of safe and clean energy without aggravating climate change, alleviating health risks, and many others—require far more coordination than is possible within such a system. Each of these challenges, even if addressed locally or nationally, has the potential to affect the lives of people everywhere. Specialized technical expertise by itself is unlikely to be fully effective if it is not guided by a global and holistic vision.
