Globalization and the International System: What's Wrong and What Can Be Done.
The current era has both increased the role and importance of international organizations and fueled the debate on their actions and missions. Perhaps the event that most clearly signaled the arrival of this age of globalization was the East Asia currency crisis and the subsequent fallout experienced by other countries. This event demonstrated the potential dangers of liberalized capital in countries with weak institutions; it also illustrated the importance of international monitoring of capital flows. However, it also raised issues that have left many concerned and confused about the international financial system. In his new book, Peter Isard seeks to assuage this concern and clear much of the confusion felt by many.
Isard states that he has three aims to achieve in his book: provide perspectives on the various problems that contribute to financial crises and growth failures, describe remedies as proposed by economists, and shed light on the International Monetary Fund (IMF) and its effectiveness. He does this effectively and, in the process, provides a useful tool for beginning and intermediate students of international finance.
The book is divided into three parts. Part 1 provides the background of the international monetary system. This includes both a brief history of exchange rate regimes as well as a primer on the IMF. Part 2 focuses on financial crises and barriers to economic growth. Specifically, it focuses on the IMF's role in combating both and provides an assessment of the institution's efforts. Part 3 provides policy suggestions for reform.
Isard begins his work with a brief history of the international monetary system. This concise history begins with 1870 and covers the most recent changes--including the European monetary union and the introduction of the euro. While the reader could find more comprehensive histories of the international monetary system, Isard's is unique in two distinct ways. First, he frames his discussion of the system in terms of cooperation. When levels of cooperation between countries has been high (e.g., during the post-World War II era), the system has been more successful than during periods of non- or low cooperation. Isard focuses the latter part of this chapter on how globalization has affected the international monetary system. He takes note of the recent trend (especially since the 1970s) of increasing capital mobility. Isard argues that this increased level of mobility has occurred as a result of technological innovations--especially in computers and other communications services. While many note the changes wrought by globalization, Isard's account is interesting in that he carefully examines the pros and cons experienced by emerging markets as a result of these increased capital flows. While increased capital is generally regarded as a good thing for a developing country, the very openness that allows for this advantage also increases the vulnerability to volatile financial markets. Regardless of the side in which the scale settles, Isard argues that capital controls are now a thing of the past. Increased technologies, increased suffrage/democracy, and the growth of offshore account options all combine to make regulations on capital mobility or the maintenance of a fixed exchange rate nearly impossible and wholly impractical.
Chapter 3 provides a briefing on the history and operation of the IMF. This section is particularly informative for the novice reader of economics and refreshes other readers before moving into the second section of the book. Beyond providing background and history, this chapter also provides a short section describing some of the more popular criticisms of the IMF. Isard not only notes these criticisms (e.g., the IMF should have been able to prevent many of the financial crises of the past decade, should not be so quick or generous in bailing countries out, and should not have required the Asian crisis countries to tighten financial policies) but also addresses these criticisms by weighing the merit of each. A brief discussion of each is provided in this chapter, but most of the criticisms are addressed more fully in later chapters of the book.
Part 2 provides a review of the leading perspectives on international financial crises and the obstacles to economic growth. Chapter 4, the first in this section, examines seven recent financial crises (Mexico, Thailand, Indonesia, Korea, Malaysia, Russia, and Brazil) to discover commonalities among them. Isard finds that all these countries had fixed but adjustable exchange rates that were instrumental in all seven crises. Among the afflictions included high levels of short-term foreign currency--denominated debt, weak banking and financial sectors, large fiscal deficits, high levels of short-term government debt, large current account deficits, and poor general governance. Isard advocates that individual countries are largely responsible for their own crises. However, he also cites several areas in which the IMF could improve its performance--including the timely collection and distribution of information.
Chapter 5 focuses on capital flows and macroeconomic policies of countries (specifically, exchange rates) and their role in speculative attacks and financial crises. While it is undoubtedly the responsibility of individual countries to maintain healthy macroeconomic policies, Isard argues that there is much that the IMF could do to prevent crises. Most important, he argues that the IMF could act as a lender of last resort for countries running extremely large current account deficits. Doing so would ensure investors that they would recover their investment and prevent the mass exodus of investments at the first sign of change in the direction of capital. In addition, the chapter addresses the actions of the IMF during the Asian financial crisis. Isard finds the conditions imposed on the Asian tigers by the IMF after their currency crises to be excessive and states that the IMF is unlikely to impose such conditions in the future.
Chapter 6 addresses the larger question economic development. The chapter provides an overview of what economists know about economic growth and poverty reduction. In addition to the well-known facts about development--that is, countries need capital accumulation (physical and human) as well as technological/productivity improvements in order to develop---Isard devotes much of the chapter to discussing the role of institutions. This chapter also includes discussions about several paths that different developing countries have taken, such as import substitution, export-oriented growth, liberalized financial markets, and liberalized trade policies. Finally, he discusses international aid and debt relief.
Chapter 7 begins the final part of the book: the agenda for reform. This chapter focuses on how individual countries should reform. Isard begins by identifying five country-specific problems: Countries liberalize policies without the necessary institutions, market institutions are weak, countries try to maintain fixed exchange rates, countries make inadequate efforts to maintain debt discipline and sound macroeconomic policies, and, finally, they have opened their markets to international capital flows with measures that favor special interests to enhance investment. Isard then addresses each one of these problems and provides the prevailing perspectives for ways in which they may be remedied.
The final chapter focuses on ways in which the international system should reform. Again, Isard identifies the problems and then systematically examines each one. Here, he lists six systemic problems: low IMF surveillance, biased capital movements, lack of good financial instruments, informational imperfections, lack of effective coordination mechanisms, and, finally, ineffective use of development aid. These deficiencies are discussed one by one through the presentation of many different perspectives on each topic.
In general, Isard's book provides the reader with a useful body of knowledge on the international financial system, the ways in which it has been affected and changed by the current era of globalization, and some basic information on economic development. Many of the subsections of this book are titled "perspectives on" the particular topic. This is a very apt description, as Isard does indeed provide the reader with many different thoughts and approaches on that specific topic. However, what Isard fails to do is to provide any of his own perspective or analysis of these topics. As such, the book is basically a comprehensive literature review on the several topics listed in this review. That being said, this book is best viewed as a textbook for the intermediate student of macroeconomics. Isard provides the reader with all the information surrounding recent financial crises, the history and the operation of the IMF, and different thoughts on ways to prevent future crises and ways to reform the international financial system. Moreover, it includes a comprehensive bibliography of financial literature. While the book is clearly and logically organized, it is often repetitive, as the introductions and conclusions to chapters frequently remind the reader of material already covered and topics that will be covered in later chapters. While this is helpful for the reader who starts at a random chapter, it is unnecessary for those reading cover to cover. In all, Isard makes a fair and balanced presentation of this topic and provides the reader with all the information necessary to conduct his or her own analysis.
Adam Godet and Omer Gokcekus
School of Diplomacy and International Relations
Seton Hall University
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|Publication:||Southern Economic Journal|
|Article Type:||Book Review|
|Date:||Oct 1, 2005|
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