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Spanning the disciplines of economics, finance, political economy and international relations, this analytical review is a mainstream "primer" for defining the issues of the world economy and catalyzing a fruitful public debate. It also offers practical recommendations for policymakers.
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Turbulent Waters This page intentionally left blank Turbulent Waters Cross-Border Finance and International Governance Ralph C. Bryant brookings institution press Washington, D.C. Copyright © 2003 1775 Massachusetts Avenue, N.W., Washington, D.C. 20036 www.brookings.edu All rights reserved Library of Congress Cataloging-in-Publication data Bryant, Ralph C., 1938– Turbulent waters : cross-border finance and international governance / Ralph C. Bryant. p. cm. Includes bibliographical references and index. ISBN 0-8157-0072-5 (cloth : alk. paper) — ISBN 0-8157-0071-7 (pbk. : alk. paper) 1. Capital movements. 2. International finance. 3. International Monetary Fund. I. Title. HG3891 .B793 2003 332'.042—dc21 2002151830 987654321 The paper used in this publication meets minimum requirements of the American National Standard for Information Sciences—Permanence of Paper for Printed Library Materials: ANSI Z39.48-1992. Typeset in Adobe Garamond Composition by R. Lynn Rivenbark Macon, Georgia Printed by R. R. Donnelley Harrisonburg, Virginia Contents Foreword Acknowledgments xiii xv 1 Introduction: Financial Turbulence and Financial Governance Financial Activity Intermediate, Messy Globalization International Collective Governance Pragmatic Incrementalism The Policy Dilemma for Individual Nations Goals for the Book Companion Volumes A Road Map and How to Read the Book 1 3 4 6 9 11 12 15 16 2 Saving, Investment, and Financial Activity in a Single Closed Economy Basic Concepts: Investment, Saving, and Financial Activity Basic Concepts: Financial Intermediation and Financial Institutions Characteristics and Advantages of Financial Activity Differences among Financial Contracts Sticky Capital and Skittish Capital; Voice versus Exit Different Financial Institutions at Different Stages of Development Potential Problems within the Financial System 21 21 23 25 36 43 44 47 v vi Contents 3 Collective Governance for Financial Activity 61 Collective Governance and Government Market Failures and Government Failures Essential Elements of Collective Governance for Financial Activity Management of Financial Storms Prudential Oversight and Supporting Governance Systems for Financial Activity Macroeconomic Policies Implementing Prudential Oversight Moral Hazard: A Fundamental Observation Storm Management: Further Issues Which Institutions for Collective Governance? 69 73 74 78 80 93 4 Political Economy in a Multination, Intermediate World 97 Basic Structural Features of the World Polity Increasing Pluralism and Diffusion of Power in the World Polity Increasing Integration in the World Economy The Economic Significance of National Borders Collective-Governance Problems with Cross-Border Dimensions Levels of Governance, Subsidiarity, and National Sovereignty National Autonomy versus Openness to the Global Economy Global Standards and a Level Playing Field Prospering in an Intermediate, Multination World 98 99 106 110 113 119 124 128 130 5 The Progressive Internationalization of Finance National Reservoirs in an Increasingly Integrating World Geographical Variations in World Financial Activity An Empirical Overview of the Last Five Decades Alternative Explanations for the Growing Linkages of National Reservoirs How Far Has Internationalization Progressed? 61 63 66 67 132 132 134 135 145 151 6 Ana