By Susan Schadler
The debate about how to prevent future crises focuses largely on improving financial sector regulation. Few ideas have surfaced for strengthening institutional capacity to prevent macroeconomic policy faults, a key factor underlying the current crisis. Here, politicians seem to be settling for more of the same – “firm surveillance” by the International Monetary Fund. Clear thinking on a fresh start is needed.
First, some history. After 25 years of an essentially rules-based international macroeconomic order (fixed but adjustable exchange rates), the post-Bretton Woods system abandoned rules. Instead, flexible exchange rates (initially adopted by large countries and gradually by many others) were expected to put market pressure on countries with unsustainable policies. IMF surveillance -annual assessments of each member’s macroeconomic policies – was to buttress market discipline, especially when countries impeded market forces or markets sent wrong signals. Read more