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THE GLOBAL CAPITAL MARKET: Summary

While the IMF’s expanded lending role certainly offers potential benefits, it once again raises the moral hazard problem that market agents may take on riskier behavior, in the expectation that if they fail, an IMF-arranged bailout is at least possible, if not probable. To some degree, the IMF can reduce this risk by monitoring the behavior of potential claimants on its resources. But it is much harder for the Fund to monitor and regulate sovereign countries — who are, remember, the shareholders in the IMF — than it is for a nation’s bank regulators to monitor its home financial system (Goldstein and Calvo, 1996).

Furthermore, the Fund’s credibility in foreswearing such bailouts is suspect from the start. Strategic considerations and contagious threats to healthier economies might promote intervention. Moreover, is it plausible that the Fund would deny resources in a pinch, possibly condemning millions of innocent people to avoidable suffering? In discussing the 1995 Mexican support package, the IMF’s First Deputy Managing Director, Stanley Fischer (1996, p. 323), observed, “It would no doubt have been salutary for the Mexican policymakers and for the investors to pay the right price for their sins. But the problem is that ordinary Mexicans would have borne much larger costs. That’s justification enough for the international action.” It remains to be seen how an institution with an essentially humanitarian mission can square this circle. The Fund has faced this dilemma since its inception, but the game is a new one, with higher stakes than ever before.

Summary

Postwar experience has been characterized by a growing acceptance of economic openness. Compared to the world of the late nineteenth century gold standard, however, we increasingly reside in broadly democratic societies in which voters hold their governments accountable for providing economic stability and social safety nets. These imperatives sometimes seem to clash with the reality of openness. Despite periodic crises, global financial integration holds significant benefits and probably is, in any case, impossible to stop — short of a second great depression or third world war. The challenge for national and international policymakers is to maintain an economic and political milieu in which the trend of increasing economic integration can continue.