Reforming the Global Financial Architecture

“Architecture” may seem a rather pretentious word to describe the ad hoc set of arrangements that make up the current international financial system . Even a reformed financial system will surely lack the clarity of structure and design that are the hallmarks of good architecture . But a financial system should nevertheless conform to certain broad principles, which can be readily understood and widely accepted . It is these principles that I want to talk about today . To my knowledge, there is no generally agreed definition of what is meant by the term “global financial architecture .” I will take it to encompass three things: first the basic economic model by which international financial relations are conducted; second, the network of institutional arrangements that are put in place to manage these relations; and third, how decisionmaking power in the system is distributed among individual countries . I hope that what I mean by each of these aspects will become clearer as I go along . My central theme is that all three aspects of the international financial architecture have been profoundly affected by the way in which the world economy has evolved over the past few decades, and by certain trends that have come to a head in the current crisis . The first major trend of the postwar era has been the growing ascendancy of the free market philosophy . This has led to a focus on open and global financial markets as the principal driving mechanism for the international allocation of resources . Not only is this a somewhat different model of international financial relations from that envisaged at Bretton Woods, it has called for new institutional mechanisms to manage it . Now, however, the current financial crisis has placed in question the validity of some aspects of this new model . The second major trend has been the growing weight in the world economy of newly emergent economies . This has rendered outdated the distribution of power in the global institutions created after the Second World War . The fact that the crisis had its origins in the major financial centers has intensified the calls by emerging markets for more say in how international financial relations are managed . K e y n oT e A d d r es s Reforming the Global Financial Architecture