Global Financial Fix-it Task

Since Asian financial markets crashed in 1997, there has been much talk of creating a new kind of "global financial architecture."

The goal of such a revised financial system is to prevent future economic disruptions and the hardships they impose on working men and women around the world.

The search for ways to boost economic stability is not new.

Since the Asian problems started with a currency collapse, much of the current attention focuses on stabilizing international currency rates.

One long-standing debate has been between advocates of fixed exchange rates for currencies and "floating" rates, with demand and supply setting prices on foreign exchange markets.

The dollar ended up floating in 1973. This year, most West European nations took the other route, fixing their exchange rates firmly with one another through creation of the euro.

The idea of fixed exchange rates for developing nations has gained some popularity in the wake of Asia's turmoil. One method would be "dollarization," the route chosen by Argentina. That ties the local currency to the US dollar. Another is the adoption of a currency board, with the currency also tied to the dollar (as done in Hong Kong).

So which idea is best? The fact is, individual national circumstances should decide the outcome of any fixed versus floating rate battle. Sound domestic economic policies are vital.

US Treasury Secretary Robert Rubin has taken a cautious approach to the discussion of new architecture. That's appropriate at this time.

It could be that at some future point, as the world's national economies merge further, the International Monetary Fund (IMF) will need to fill in greater degree the role of "lender of last resort." The IMF would rescue nations in financial distress just as central banks sometimes rush to save major national financial institutions hit by market panic.

Last month the IMF's executive board agreed to provide contingent credit lines "for member countries with strong economic policies as a precautionary line of defense...."

That sounds good. But the usefulness of these credit lines is limited. To ask for a line could signal markets that a nation sees its financial situation in peril. Mexico has already declined to use such a line.

Another shift arising from the Asia crisis is the recognition that developing nations may sometimes need to put limits on individuals and institutions making short-term investments in a country. Such short-term inflows can create financial vulnerability.

What is essential now is that developing nations bolster their own financial institutions with good business sense. They must avoid cronyism and corruption. And they must provide more and better financial information to the public.

Such a course could restrain the herd behavior of investors that undermines institutions and nations.