Conclusion

When I am told that the crisis will mark a fundamental break in the structure and management of the world economy, I am reminded of Hurricane Katrina. By laying bare the extent of American inequality, and also of the inadequacy of the public-sector response, Katrina, it was said, would mark a fundamental break in social policy and the role of government in the US. But it was not too long before America slid back into its comfortable old ways. Analogously, there is now the question of whether once the crisis passes business as usual will resume.

My suspicion, noted at the outset of the paper, is that there will be no return to business as usual when it comes to the regulation of finance. The demand for more stringent financial regulation will be enduring. Leverage, cross-border portfolio investment, and transactions in complex derivative securities will be rolled back or at least grow more slowly than in the recent past. Consequently emerging markets (recently, limited mainly to Central and Eastern Europe) that have relied heavily on foreign capital will have to finance more of their development at home. As the domain of bank operations is reorganized to coincide with the domain of regulation, they will be less able to outsource intermediation to foreign banks. Countries like Korea and the PRC that sought to harness finance as a growth engine, turning themselves into financial hubs for Northeast Asia, will have to look to other sectors.

By comparison, the crisis will have a much more limited impact on other dimensions of globalization. The fundamental social and technological factors supporting the rapid globalization of production and trade in recent years remain firmly in place. Emerging markets need to continue adapting their policies to take advantage of this “real existing globalization.” This means making their economies more attractive for foreign investment by streamlining bureaucracy and imparting labor skills. It means continuing to run sound and stable monetary, fiscal and debt-management policies in good times so that they have space to deploy those policies in bad times.

More controversially perhaps, I have also argued that the crisis is unlikely to occasion fundamental changes in the structure of the international monetary system—in either exchange rate arrangements or the composition of reserves. To be sure, the system will continue to evolve. The dollar will become less dominant in the international monetary system for all the same reasons that the US will become less dominant in the international economy. But, barring even more serious crises, this evolution will remain gradual, as has typically been the case in the past. Thus, the policy problem for emerging markets is to deal with the international monetary system that actually exists, not the one they imagine might exist.

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