Heal the world

Given this, what are the measures needed to contain the crisis? Further, what is the kind of international financial architecture that is required to implement these measures, while also ensuring progress towards a stable and sustainable global economy?

Firstly and most important, leaders of the world community need to start with sending out a clear message to the world. Recent events, especially those of the last eight weeks, will make 2008 a difficult year to forget; but it needs to be remembered also as a year when world leaders from across the globe, including those from emerging economies, got together to enunciate the message of confidence and hope. And they did this together, without waiting for the United States to lead. This is an opportunity like never before, for emerging economies including India, China, Brazil , Mexico and others to take the lead in shaping the new international economic order.

Secondly, moving beyond rhetoric and words, they need to display that they have the power, ability and wisdom to act. Leaders like Manmohan Singh should take the lead and initiate thinking on the nature of the multilateral regulatory mechanism that is required to be put in place in order to regulate cross border capital flows, including foreign institutional flows and others. No international financial institution is presently mandated to perform this task, which will require working out a delicate balance between the need to respect the sovereignty of nations, and the demands of global governance. Individual nations will need to give up some of their liberties, while being fully aware that such a contribution would be in their own interest.

Thirdly, measures are required to ensure that monetary policy adjustments and actions of central bankers of different nations are coordinated to prevent the flow of credit and capital in search of higher interest rates across borders. The Bank of International Settlements has so far played an inadequate role, and it remains to be assessed whether it can be made more effective, or whether a new institution could perform this role better. Here too, leaders will have to work out the delicate balance between sovereignty and global governance.

Fourthly, measures are also required to ensure timely provision of balance of payments support to countries or banks in economic distress. Theoretically, the International Monetary Fund performs this role, but in reality, has not been effective. A revamp of the Fund is, therefore, crucial.

Fifthly, a mechanism is required to provide stability in turbulent foreign exchange markets. This is essential to safeguard the trade at times of extreme volatility in exchange rates. While the IMF is mandated for this task as well, measures should be taken to make it more effective and transparent, or perhaps a new institution should be created.

Finally, fiscal stimuli need to be utilised to avert recession. This is already being done at the level of individual nations. What can and needs to be done is to bring hitherto excluded nations, especially the less developed, into the global economy. This will go a long way in correcting the systemic weaknesses that got us here, and in correcting global imbalances. A new international economic institution to focus on creating a fairer and more sustainable global economy is needed. Perhaps the Dr. Singh can take the first step towards this goal by declaring the need for such an institution in the new international economic order. Such a declaration would then become an important first step towards creating a new international global economic order, a step which would make 2008 a truly memorable year.

The writer is an officer of the Indian Administrative Service.

The views expressed are personal.

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