Prevention rather than cure

The G7 has announced measures to curb speculative attacks

NOBODY is going to disagree very much with the package of reforms announced by G7 finance ministers and central bankers last week to deal with the crisis in the world economy. But do they go far enough?

If nothing else, the proposals mark a welcome change from the silence and apparent impotence that seemed to characterise the G7's response to the meltdown in emerging markets.

The stretched limos came and went at the International Monetary Fund meeting in Washington last month but not much was agreed on how to stem the gathering crisis. True, interest rates have since been cut across much of the developed world, but this was far from being a coordinated response. At least something is now being done, even it has come too late for many of these beleaguered economies.

The emphasis placed on prevention - of lending support to countries as they become subject to speculative attack rather than afterwards - is an important one.

It might also be said, given the obvious constraints that surround any effort at international cooperation - be they political, military, social, or, as in this case, economic - that the G7 has probably gone about as far as it can. With so many different masters to answer to, a coordinated response to crisis is always difficult to achieve.

Plainly, the reforms stop a long way short of the dramatic changes in the world financial system introduced in the aftermath of the Second World War as a result of the Bretton Woods agreement, but it is not apparent that we either want or need a revolution as such.

It would be silly to try to interfere with or stop the free flow of international capital, for alongside its destructive characteristics, global capital is also capable of bringing very great benefits to the developing world.

However, there is now growing consensus among world leaders that markets need to be tamed and their more capricious characteristics curtailed. The aim of this package is to bring the markets to heel without in any way attempting to control them or interfere with the free movement of capital.

The key element of the package is the establishment of an enhanced IMF facility that could be used for fire-fighting purposes. This is such an eminently sensible piece of infrastructure to put in place that it is a wonder it doesn't already exist.

The idea is to make short term international credit available to countries before they get into difficulties rather than after - prevention as opposed to cure. In this way the contagion that has been such a feature of the present crisis could be stopped in its tracks and the self fulfiling nature of the speculative attacks on currencies and stock markets undermined.

As for the rest of the package, it seems well intentioned and reasonable enough, but is it really necessary? Possibly not. Take the proposed "internationally agreed code of conduct" which would act as a guarantee of minimum standards and good practice.

Isn't this what the capital markets are already applying? After the terrible losses sustained in emerging markets, neither bankers nor investors will touch anything that looks remotely suspect any longer. They've learnt their lesson.

The upshot is that those countries, banks and companies that don't adopt western standards of transparency, prudence and accountability will find themselves denied access to the capital markets in any case. On the whole, however, this a good and measured set of proposals. Whether the G7 is capable of implementing them, or indeed effectively applying them, is another matter.