The Ends and the Means of Development

I am not confident at all that we have moved to the type of regulatory environment that is necessary to prevent the next crisis. I tend to agree with the IMF assessment that our model of financial regulation was deeply flawed. Loan brokers and mortgage originators had few incentives to more realistically assess risk which, in any case, they sold on to others—this was part of the “financial innovations” so warmly welcomed by market participants. Investors relied too unthinkingly, in assessing asset quality, on unrealistic or overly optimistic analyses done by credit rating agencies, which, again, proved a time-tested ability to be lagging indicators of crises (remember the 1997 Asian financial crisis?). Regulation and supervision were too concentrated on firms and not sufficiently focused on issues of systemic risk. None of these weaknesses is being addressed in a credible way yet. The shadow banking system—investment banks, mortgage brokers, hedge funds, among others—were lightly regul

Published on the Editorial Page of Financial Times , May 4, 2009 Letter to the Editor Dear Sir/Madame, The London Summit of the G20 went some ways toward strengthening the capacity of the IMF to assist emerging markets currently suffering the spill-over effects of the financial crisis. The Summit seems to have been less successful in updating the governance structure of the IMF, to better reflect the changes which have taken place in the structure of the global economy during the past quarter century. Thus, at least until 2011 (maybe even longer), IMF decisions will continue to be made in an absurd system where the voting power of the EU currently stands at 32.4 percent, whereas the combined voting power of the United States, China, India, Brazil and Russia—accounting for a much larger share of global GDP—is 26.9 percent. The G20 also decided to finally break, at least nominally, with the convention adhered to ever since the IMF’s creation, which establishes that its managing director

Augusto Lopez-Claros 1 Whether to view the G20 London Summit as a success or as a disappointment is very much a function of one’s reference point. 2 Viewed against the needs of the moment—a global economic crisis without parallel since the Great Depression—it could be argued that the Summit did not go far enough. The fact is that in the past 30 years the global economy has become both more complex and more interconnected, but the mechanisms and institutions that we have to deal with crises have not kept pace with the tempo of change and what has emerged is a “governance gap”. An inability to cope with complex global problems either because the institutions we have are woefully unprepared or, in some cases, because we do not even have an institution with the relevant jurisdiction to address the problem in question (e.g. climate change). Against these challenges the Summit’s achievements—a combination of well-meaning declarations and a few hard decisions—were at best a mixed bag. On th