RSS FeedBy M. Isi Eromosele
The global financial system should conform to certain broad principles. These principles, which can be readily understood and widely accepted, should form the bedrock foundation of a vital and strong future global financial system.
This foundation should encompass three components. First will be the basic economic model by which international financial relations are conducted. Second, a network of institutional understanding that is put in place to manage these relations and third, how decision making power in the system is distributed among individual countries.
The post World II era ushered in the growth of the free market philosophy. This inevitably led to a focus on open and global financial markets as the principal driving mechanism for international allocation of resources. The ongoing global financial crisis has called into question the validity of some aspects of the above global financial model.
Given the fact that the current global financial crisis had its origin in the major financial centers of developed economies, there has been increasing calls by emerging nations for a greater say in how the global financial system is managed.
For example, Asian countries have been both the beneficiaries and occasionally victims of the financial globalization. They have been the nations that have seen their shares of world output and trade grow the fastest. Asia therefore has a key interest in a more robust framework of international finance and a more prominent role in decision making within the global financial system.
When the Bretton Woods global financial framework was set up in 1944, a key role was given to governments of developed nations within the framework of four major components. These components were: the exchange rate system; the balance of payments adjustment process; international liquidity creation and international debt payments arrangements. Under Bretton Woods, all has a substantial level of government management.
Over time, however, this government-led system was undermined by forces of economic liberalization, particularly in capital markets. By the latter part of the 20th century, market forces largely guided cross border flows of real and financial resources.
A major consequence of the liberalizing trend was an enormous expansion in cross border capital flows. The separation that had existed between national capital markets in the earlier post war years largely disappeared and a single global market developed.
The growth of global financial markets ushered in significant changes in the basic model within which international economic relations were managed. The relative importance of governmental decisions about exchange rates, liquidity creation and so on declined relative to regulatory decisions about how financial institutions and markets were supervised.
It should be noted that unfettered market forces have not prevented a synchronized global meltdown in financial markets, with devastating consequences for real economic activities and employment. We have seen that market failures can be more widespread than previously believed. A lightly regulated financial system does not necessarily result in a stable world financial equilibrium.
At Oseme Finance, we believe reforms to the previous regulatory philosophy are urgently called for. Our view is that globalization has proved wanting in the present crisis and what is required is a greater involvement of sovereign governments in key economic areas.
This could include more managed exchange rates, stricter controls over movements of capital and tighter licensing of financial products. It could also involve more government control of the shape of national financial systems.
There are superficial attractions to more direct government involvement in key financial markets and prices and more local control over national financial markets.
This could help avoid some of the consequences of unfettered market over-reactions. It could prevent government policy objectives from being frustrated by market developments.
Emerging markets in Asia have been vindicated in their policy of government managed exchange rates that have resulted in the accumulation of large foreign exchange reserves.
The aim of the reforms that are now needed urgently should be to preserve capital market benefits while addressing the specific defects that have resulted in great instability in the global financial system.
The new financial architecture should therefore be based on a greater recognition that market failures can occur, that market forces need to be better controlled and that new institutional mechanisms are needed to manage these processes.
M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance
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