The current Asian financial crisis, Russia’s economic collapse, economic instability in Latin America, and the expanding global economic turmoil make us feel deeply that we do live in a global economy which is characterized not only by the free movement of goods and services but, above all, by the free movement of ideas and of capital. In particular, better technology and financial innovation have further accelerated the movement of capital until it reached a point where movements in exchange rates, interest rates, and stock prices in various countries are intimately interconnected. Yet, why do people move their capital? It is because capital movement—the past lending to the future, old money investing in new ventures—is able to create new wealth. In order to seek higher return, capital mobility is theoretically considered desirable. For this reason, capital liberalization can lead to increased investment, faster economic growth, and improved standards of living in some countries, particularly for developing countries. For example, the expansion of private capital flows to developing countries, from $34 billion a decade ago to $256 billion in 1997, had brought much needed capital to emerging economies and healthy returns to rich-country investors.

But capital flows also expose countries to external disturbances and can have destabilizing effects such as short-term capital-flows, hot money, and speculative behaviors. As recent developments have shown us, increased capital mobility and financial market integration also pose difficult challenges for not only countries reliant on capital inflows but also more generally. In the current Asian crisis, the five worst-affected

Asian economies (South Korea, Indonesia, Thailand, Malaysia and Philippines) received $93 billion of private capital flows in 1996. In 1997 they saw an outflow of 12 billion. This shift of $105 billion in one year was equivalent of 11% of their combined GDP. So far there have been a variety of explanations for the current global financial crisis. One of the most prevailing perspectives is focusing on the impact of free capital movements. As the Director of the IMF’s Monetary and Exchange Affairs Department, Manuel Guitian, states, "the financial crisis that erupted in Asia in 1997 vividly demonstrated the risks associated with free capital flows."

The still unfolding effects of the Asian crisis, the more recent turmoil in Russia, and their spillover to other markets, have imposed significant costs on both individual countries and the world economy. In approaching the challenges of a more global and risky capital market, today’s international financial institutions (designed at Bretton Woods in 1944 for a world of limited capital mobility), in particular the International Monetary Fund (IMF), may not be capable of dealing with or preventing future financial crises effectively. In order to manage the increasingly unfettered movement of capital, it is time to discuss what role the IMF should play in a more global capital market. In doing so, we need to analyze the dynamic of unfettered capital first. Therefore, this paper is going to answer the following two primary questions:

1. What factors contribute to increasingly unfettered capital?
2. What can be done by the IMF to deal with unfettered capital?

To answer both questions, I will first address how the international legal

regulations evolved from the Bretton Woods system to the globalized age. Subsequently I will explore the first question of why is capital getting dangerous and unfettered. After understanding the factors for boosters of unfettered capital, I will discuss the issue of capital control. To what extent should we control capital flows? What is the consensus about this internationally? In order to manage increasingly unfettered capital, several revisions will be proposed to the Fund’s Articles of the Agreement. That is, to redefine the role of the IMF and improve its functions. Lastly, the concluding section will summarize the article and make some conclusions.

The construction of the postwar international monetary system came as a result of a general agreement that a repetition of the economic and political nationalism of the 1930s could and should be avoided. The interwar experience had provided a vivid and terrifying demonstration of how the collapse of the economic order could bring political and social fragmentation, or even wars. To prevent this from happening again, policymakers from 44 countries meeting at Bretton Woods, New Hampshire, in 1944 determined to avoid the prewar financial instability that wrecked their economies and in turn led to social and interstate conflicts. In the meeting, they discussed an institutional and legal framework for the reconstruction of the world economy. Ultimately, they concluded to devise a framework of fixed exchange rates (the dollar being defined in terms of $35 per ounce of gold) and to establish the International Monetary Fund (IMF) and the World Bank—known as the Bretton Woods institutions—primarily to promote international monetary cooperation, to maintain exchange stability, and to oversee the international monetary system (Article I of the IMF Articles of Agreement). This is what we call "the Bretton Woods System."

In this new order, a commitment to keep stable but adjustable exchange rates would eliminate the temptation to engage in competitive devaluation. Controls or regulations on capital movements would eliminate the big speculative flows that had destroyed the exchange rate regime of the interwar period. On the whole, the agreements produced at Bretton Woods combined a vision of a liberal world economy with a rule. The main attraction of the rule was that "a body of legal norms is accepted by the Fund and by members as binding in the conduct of monetary relations between the Fund and members and among members." For instance, States were obligated under the terms of their legislation accepting Bretton Woods to maintain fixed exchange rates, and the exchange rate could be altered with the approval of the Fund (Article IV of IMF Articles of Agreement). Based on the basic commitment to rule-guided liberalization of trade and exchange convertibility, the Bretton Woods System laid the foundations "to facilitate the expansion and balanced growth of international trade, and contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members."

However, there was a major surprise, largely unforeseen at the Bretton Woods conference. This surprise was the emergence of large capital movements, freeing money from national control. This development not only contributed greatly to the dynamism of the world economy but also altered the character of the monetary order. The original agreement of the Bretton Woods conference just involved an obligation to liberalize current accounts, rather than capital accounts, but involved necessity of controlling capital flows. Even in this context, substantial capital flows developed because capital movements brought not just the possibility of increasing national investment levels, but also associated flows of skills and technology. As the capital flows developed, the problems of financial management became more complex. Consequently the flows of capital brought an increasing instability to the system, and eventually destroyed the par value system between 1971 and 1973. The breakdown of the Bretton Woods System obviously exposed that the System was incompatible with increasing capital mobility.

The Bretton Woods meeting was the first conference to establish a permanent international legal framework for ensuring cooperation between states, requirements by states to limit their sovereignty for the sake of cooperation, and to observe specified rules in economic course. In this respect it did work before the United States abandoned the Bretton Woods in 1973. The breakdown of the Bretton Woods system in turn resulted in the birth of today’s global capital market. Since then, the scale of capital flows and their importance and threat for the world economy have grown considerably. Over the past two decades many countries, particularly in emerging markets, have relaxed capital controls in the context of a general liberalization and deregulation of domestic financial markets. Technology, computerized trading, and instant communication have further accelerated capital mobility in many ways. Now, everyday, these money markets handle trades worth $1.3 trillion. This is an unimaginable sum. A year’s trading would produce a stack of $100 bills reaching to the moon. Yet most of it is speculation, as far removed from the real economy as a poker game, and has taken on a life of its own. In short, it is almost a cliché to point out that a key characteristic of the global financial system in the end of twentieth century is the size, complexity, and speed of international capital markets. However, who shall govern these economic activities, governments, private markets, or international institutions? This article is going to discuss what can be done by the IMF to deal with the problem. In doing so, we need to find out what factors cause unfettered movement of capital first.

In the earlier generations information moved slowly, constrained by the primitive state of communications. Financial crises in the early 19^th century, for example, particularly those associated with the Napoleonic Wars, were often related to military and other events in faraway places. An investor’s speculative position could be wiped out by a military setback, and capital mobility was very limited in terms of its speed and amount. However, today’s capital market could be described as rapid, global, complex, and more particularly, unfettered. Yet what in the world are factors causing capital flows rapid, tremendous, and unrestricted?

To better understand the evolution of today’s burgeoning global financial markets, we should parse the extraordinary changes that have emerged, in the past century or more, in what we conventionally call the real side of economies: the production of goods and services. The same technological forces currently driving finance were first evident in the production process and have had a profound effect on what we produce, how we produce it, and how it is financed. One of the most extinct effects was that the expansion of international trade of goods and services. As goods and services have moved across borders, not unexpectedly the necessity to finance them has increased dramatically. That is, as a result of very rapid increase in telecommunication and computer-based technologies and products, a dramatic expansion in cross-border financial flows and within countries has emerged. The pace has become truly remarkable. These technology-based developments have so expanded the breadth and depth of markets that governments, even reluctant ones, increasingly have felt they have had little alternative but to deregulate and free up internal financial markets.

But what is particularly stunning is how huge the expansion in cross-border finance has become, relative to the trade it finances. To be sure, much cross-border finance supports investments portfolio, doubtless some largely speculative. Thus in this context of rapid globalization of capital markets, disruptions are inevitable. The turmoil in the European Exchange Rate mechanism in 1992, the plunge in the exchange value of the Mexican peso at the end of 1994 and early 1995, and the recent sharp exchange rate adjustments in a number of Asian economies have shown how the world of financial trading can punish policy misalignments and ruleless markets. In sum, globalization has enhanced cross-border trade in goods and services, facilitated cross-border capital flows, and led to expanding of international trade and rising of living standards; however, it has shown the potential for some negative consequences in the ruleless and unprepared context. One of these negative consequences is unfettered capital flow or financial crisis.

Information and transparency, in both economic policy and in data on economic and financial developments, are critical ingredients to a better functioning of national economies and the international financial system. More comprehensive public information on the financial condition of a country, including current data on commitments by governments to buy or sell currencies in the future and on its foreign reserve and debt, would allow investors—both domestic and international—to make more rational investment decisions. Such disclosure would help to avoid sudden and sharp reversals in the investment positions of investors once they become aware of the true status of a country’s and a banking system’s financial health. More timely and more complete disclosure of financial data also would help sensitize the principal economic policymakers of a country to the potential emerging threats to its financial stability. Both the Mexican and the East Asian crises were partly triggered and propagated as a result of investors learning that reserves were smaller than they had thought and that

short-term debt was higher. The result was not just a withdrawal of short-term credit but portfolio outflows as well.

As a consequence, limited information and inadequate disclosure contribute to instability of financial markets and to sudden and sharp movement of capital. Particularly in a world where private-to-private capital flows are increasing tremendously, information and transparency are more crucial for stabilizing capital markets. This is because getting information about private sector spending and borrowing is much more difficult than obtaining comparable information about public finances. Under the circumstances, more and more capital movements are not restricted or overseen. This trend further challenges the current weak international monitoring and surveillance system.

At the national level, the surveillance over and regulation on capital flows depend on countries. Some are restricted; some are loose. It is apparent from the recent crises that the combination of a weak supervisory and regulatory framework and an open capital account is "an accident waiting to happen." Indeed countries with poor surveillance and regulation in capital markets are more vulnerable to fast and huge capital flows such as Thailand and Indonesia. Internationally, the IMF is a critical institution, which involves in surveillance activities to ensure the orderly liberalization of capital accounts and to monitor capital flows. These activities consist of monitoring developments in member countries and international economy and warning of impending problems. Under the Articles of the IMF Agreement, all members are obligated to accept the surveillance of the IMF and its regulations. However, half a century after the Found was established, the world economy has changed beyond recognition. IMF’s supervising and regulatory abilities are challenged by the global financial markets.

For instance, in November 1996, an IMF publication reporting on an IMF-sponsored conference in Jakarta trumpeted, "ASEAN’s Sound Fundamentals Bode Well for Sustained Growth." The central message of the conference, it stressed, was that "the region is poised to extend its success into the twenty-first century and that governments still have a major role in driving this process….Participants’ confidence…was rooted in the region’s strong macroeconomic fundamentals; in ASEAN’s (Association of Southeast Asian Nations) tradition of, and commitment to, efficient allocation of investment; and in the widespread belief that external environment will continue to be supportive." From this statement, the IMF seemed quiet confidant about the region’s economic growth right before the 1997 financial crisis began in Thailand. This shows us that international surveillance and regulation provided by the IMF are not effective to prevent crises or even to find and cure problems. Under the situation of poor surveillance and regulation, capital flows undoubtedly can go any way they want.

Now we know what are the dynamics of unfettered capital flows. They are globalization of capital markets, limitations of information and transparency, and weak surveillance and inadequate regulation. These factors also partly cause the current global

financial crises. But before exploring plausible alternatives for curing unfettered capital flows, it is necessary to discuss the question of capital control.

In order to discuss this topic, one needs to understand what is capital control first. Capital account liberalization is not an all or nothing affair; rather there are many financial instruments and underlying transactions involved in the opening up of the capital account, and therefore many possibilities for the ordering of the liberalization in light of domestic financial structures and economic objectives. Capital flows, for example, can be intermediated by international capital markets, local capital markets, or a combination of both. Capital controls can also be in various forms such as controls on short-term capital inflows and controls on capital outflows in the event of a crisis.

Regarding the controls on short-term capital inflows, it has been argued that restrictions on short-term capital flows may be part of an appropriate policy strategy to prevent a crisis, as they discourage volatile short-term portfolio investment and therefore insulate the country from the disruptive effects of sudden reversals in market sentiment. The experiences with capital controls on short-term inflows of Chile, Columbia, and Slovenia are often mentioned in support of this view. Taking Chile’s inflow controls as an example, Chile requires investors to leave a portion of their funds with the central bank for a minimum period without interest before being able to put them to use. The sooner the funds are taken out of country, the higher the effective tax. None the less, the available evidence from Chile and other countries that have imposed controls on a broad range of short-term capital inflows is mixed. Controls do appear to affect the composition of inflows (in favor of long-term loan and foreign direct investment) but do not appear to affect the overall volume of inflows. The major leakage of these measures has been that flows have been rerouted through other channels (especially via trade credits).

Another form of capital controls is on outflows. The case for controls on capital outflows in the event of crisis appears much more controversial, particularly in the ongoing academic and policy debate. The logic of the argument in favor of outflow controls is laid out primarily by Krugman. He argues that Asian countries should introduce controls on outflows as a short-term emergency measure. To mitigate the extent of the crisis, Malaysia did impose controls on capital outflow recently. At the beginning of September 1998, the Malaysian central bank announced the introduction of capital controls, requiring official approval for repatriation and withdrawal of ringgit (Malaysian currency) from external accounts, imposing that all settlements of exports and imports be made in foreign currency, limiting the sale and purchase of ringgit-denominated financial assets to transactions through authorized depository institutions, and restricting the export of foreign currency by resident travelers. In Russia, more drastic controls were introduced following the decision to devalue the ruble in August 1998.

Do capital controls matter? Some scholars argue that there is no compelling empirical evidence which shows that countries implementing capital account convertibility are systematically associated with better macroeconomic performances in the long run. For instance, Rodrik has recently shown that, in a large sample of countries, "the idea provide no evidence that countries without capital controls have grown faster, invested more, or experienced lower inflation. Capital controls are essentially uncorrelated with long-term performance once we control for other determinants."

Advocates of the opposite view highlight several arguments against such controls on capital flows. First, they argue that imposing capital controls and limiting capital mobility is no solution to the structural problems underlying the Asian crisis. Rather, policy interventions should focus on making the financial system sound, well regulated and effectively supervised. The second argument is based on the experience with capital controls in Latin America in the aftermath of the 1980s debt crisis, which was quite dismal. Controls tended to be ineffective and eventually led to more, rather than less, capital flight. The third argument stresses that countries imposing controls may lead to a perverse international contagion on other countries. This in turn may actually accelerate the crisis. They thus argue that the news of capital controls imposed by Russia and Malaysia in August 1998 was an important factor in the contagious spread of financial panic to Latin America and other emerging markets. Finally, capital controls are implemented and managed by governments that are potential sources of distortions and moral hazard. This implies the possibility of a political use or misuse of such controls.

While two opposite groups of arguments about capital controls, the views on the optimal speed and sequencing of capital account liberalization reflect a widespread and explicit consensus. This consensus view stresses that a progressive liberalization of the capital account may be warranted over time, policy makers should be vary careful about doing it in a gradual and orderly way. As long as financial systems are weak, poorly regulated and subject to political distortions, a hasty rush to capital account liberalization may be unwise and produce destabilizing effects. This is also why IMF managing director, Michel Camdessus, began calling for "orderly, properly sequenced and cautious" liberalization of government controls on money flows in and out of countries.

From the discussion above, the conclusion is very clear. That is, changes are needed, both nationally and internationally, to deal with unfettered capital flows and challenges of global financial markets. Because every country has different degrees of economic development, one system cannot fit to all kinds of contexts. Each country should choose the approach or policy that is right for them. No particular system or policy has all advantages and no disadvantages for any state. For this reason, there would be differences or even disputes among different countries. This in turn underscores the importance of international coordination and cooperation within the international community. Particularly in the transition to global financial liberalization, establishing a clear and comprehensive supervisory and legal framework through international collaboration is considerably crucial. The order exists only under good rules.

In the past, international efforts to harmonize national rules and establish information-sharing arrangements were widely perceived to have moved too slowly, and examination of global risk taking (across jurisdiction boundaries) was lagging. In order to promote better supervisory and regulatory practices, several groups within the international financial community have issued papers proposing guidelines or principles recently. They include 1) "Core Principles for Effective Banking Supervision" proposed by Basle Committee on Banking Supervision, 2) "Principles, Standards, and Guidance Papers" issued by International Association of Insurance Supervisors, 3) "Financial Stability in Emerging Market Economies" presented by Working Party on Financial Stability in Emerging Markets Economies, and so on. Most of these documents are primarily meant to provide a description of an ideal financial system as a benchmark for comparison. Implementation is voluntary, although members of these various organizations are expected to pursue strategies that are consistent with principles. However, these are not sufficient. What we need is an effective supervisory and legal framework in the global capital market. In other words, we need a set of clear, updated, and comprehensive rules based on global consensus to let every member in the international community obligated to observe. The International Monetary Fund used to play a significant role in regulating international monetary order. Yet designed at Bretton Woods in 1944 for a world of limited capital mobility, the IMF is not capable of

supervising or regulating the current global capital market without changes. Therefore, it is time to redefine the role of the IMF, rethink the Articles of the IMF Agreement, and add new rules, if necessary. In the following section, I will first address some common understandings needed to reform the current chaos of capital markets. Then I will propose what can be done by the IMF in terms of revising its Articles of Agreement and improving its functions.

The first of these understandings is the tremendous potential of growing and rapid globalization provides countries fully integration into the global economy. Formidable dynamics are generated by new information technologies and unifying financial markets. Then the question is how to discipline and channel these forces so that economic growth will be sustainable and more broadly shared. The fundamental desire for greater equality will also be more satisfied. Regarding this concern, especially the poor countries (or the South) need to understand that they could accelerate their developments by integrating themselves into the mainstream of the globalizing world economy. If they prefer to do it alone, the poor countries would expose themselves to the risks of globalization, in particular the risks of capital flows.

The second understanding is the importance of an increasingly open and liberal system of capital flows in order for globalization. To build this consensus, it is necessary to understand the necessity and the importance of transparency and information first. Both transparency and information are influential to the order of capital flows. Better transparency and accurate and timely information rely on good surveillance or governance, nationally and internationally. As a consequence, establishing an open and liberal system of capital flows has to consider the significance of transparency, information, and governance.

The third, a set of standards and codes of best practices are required for global financial markets. There is an emerging recognition that global financial markets still suffer from the kind of anarchy that ever afflicted Europe during the beginning of the twentieth century—a lack of common standard and codes. The world community now should again look for a definition of international standards and codes of good practices, which would be disseminated by the IMF through its surveillance, and could help limit the excesses of an international "casino economy."

Finally, the multilateral approach to handle problems which are now more and more global in nature is indispensable. And the key instruments of such an approach will have to be the Bretton Woods institutions themselves, particularly the IMF. That is because the experience they have accumulated, the quality of their staff, and the legitimacy and authority they possess make them a major asset of the world community and a central pillar of a new financial architecture. No doubt these institutions are not perfect in some important ways such as preventing crises or supervising economies of members. But reforming these institutions would be a quick and efficient way to establish an effective multilateral approach to deal with challenges of global financial markets.

These understandings have been neglected or unevenly utilized for too long. Assembled in the right way, they could offer a solid foundation for a new global financial system. Nevertheless, assembling them will be difficult because each of them implies that vested interests or perverse practices would be challenged.

When the IMF was founded, trade flows dominated capital flows. And the architects of the organization believed that capital controls were a necessary condition for the successful freeing up of trade around the world. The articles mandated the Fund to be the custodian of current account covertibility—open trade flows—and endorsed the use of capital controls. Now capital flows dominate trade flows. Thus the need for an organization to be the custodian of capital account convertibility, and for that organization to be the Fund. In this context, the IMF’s articles need to be modernized to reflect the new realities of capital flows and the new role that the Found should play.

• Add A New Purpose

Of these efforts to reform the IMF, the one intended to be most irreversible is the revision of the IMF’s construction—its Articles of Agreement—in order to make open capital accounts a condition of Fund membership. Originally the Article I, which describes the purposes of the Fund, doesn’t include capital liberalization. To regulate increasingly unfettered capital flows, a new purpose that says that promotion of the sequencing and orderly liberalization of capital is one of the Fund’s main purposes should be added to Fund’s Article I. Under the circumstances, the revision to Article VIII (General Obligations of Members) is needed too. This revision may say that the Fund should have the same jurisdiction over the capital account of its members as it has over the current account. This means, in effect, that the Fund shall oversee and approve any capital account restrictions. However, it is necessary and crucial to stress that capital liberalization should be orderly. In other words, transitional arrangements are allowed, so that countries can take their time, for instance, four years or six years. The revision should not commit members to rapid changes.

• Redefining the Fund’s Role

1. Role of crisis prevention

Prevention is always better than cure. I agree the suggestion of Zanny Minton-Beddoes, staff of the IMF. She contends that the IMF should enhance its role of mitigating the risks that requires better monitoring of capital and economic policy. This would allow the IMF to play a far greater role in crisis prevention, particularly in countries whose access to capital markets is more recent and at greater risk. Of course, the IMF should promote the timely publishing of key economic indicators and rate countries on the quality of their economic statistics. Its judgments about economic policy should be made public. In essence, the IMF should become more like a public rating service, providing financial and economic analyses of stability and risk. In doing so, the Fund needs to enhance its work in surveillance of financial sector issues and capital flows (Article IV), and to focus on the risks posed by potentially abrupt reversals of capital flows, especially those short-term nature. In addition, developing supervisory and regulatory frameworks that are consistent with internationally accepted practices as well as building common or similar standards in areas such as accounting, auditing, disclosure, asset valuation, and bankruptcy is conducive to Fund’s function of preventing crises. Recent developments have underlined the vital importance of sound financial supervision and regulation.

2. Reducing Fund’s financial role

To avoid the "moral hazard" (the propensity in both borrowing countries and creditors to take excessive risks because of implicit insurance offered by bailout), the IMF should provide the technical advice and the limited financial assistance necessary to deal with a funding crisis and to place a country in a situation that makes a relapse unlikely. Some commentators have argued that the IMF’s assistance to countries suffering from financial crises will only encourage more reckless behavior by borrowers, lenders, and investors. The IMF cannot and should not play this role, because the finance it provides is strictly limited and is usually provided in return for specific policy demands negotiated over a period of time.

3. Handling massive capital flows

The recent sharp movements in global capital flows have provided a stark demonstration that while open capital markets do bring substantial benefits, they also pose serious challenges. From the lessons we learned in the recent crisis, it is vital to have the IMF ensure close and regular contacts between governments and private sectors that can provide early warning of problems.

4. Playing a clear role

• Greater Openness and Accountability of the IMF

As Tony Blair, UK Prime Minister, states "At a time when we are calling for greater accountability, transparency, and disclosure on the part of governments, it is essential that the international institutions apply these principles themselves." At a time when more and more responsibilities are being given to the IMF, the question of its political accountability will probably be raised with increasing insistence. Therefore, is there anything that could be done to strengthen political accountability or legitimacy of the IMF? Improved openness in procedures and more systematic external evaluation of IMF policies might be expected. Also, it is critical that programs or decisions should take full account of their impacts on the poorest sections of society.

The crisis in Asia and its widening influence highlight the dangers in the current expansion of international financial system. Allowing financial capital to flow freely across national borders could expose countries to inevitable risks of runs against their currencies, instead of creating new wealth. In the wake of ongoing global economic crisis, some judgements might say: "See, that’s what free-market capitalism does for you." Using more or less those words, Malaysia’s leader, Mahathir Mohamad, announced on September 1^st a bold initiative to put the country on path to recovery: an array of severe controls on cross-border flows of capital. Does this imply capitalism in retreat? Actually there has been a backlash in Malaysia—such strict controls inevitably create economic distortion, as well as deterring the long-term foreign direct investment that is crucial for growth in developing countries. And even there, policymakers know they cannot get by without the outside world. They know that technology and capital can come only from outside, and they know that only markets can deliver the chance of sustain growth.

In fact, capital mobility is like water which can either float or turnover a boat, depending on how you manage it. The reasons for increasingly unfettered capital flows are globalization, limited information and transparency, and weak surveillance and insufficient regulation. Yet "capital mobility," Manuel Guitian, the Director of the IMF’s Monetary and Exchange Affairs Department says, "is a goal worth pursuing, given the potential benefits." "With the right polices, countries can manage the risks while increasing their access to global financial markets." In the context of globalized financial markets, the consensus of the right policy should be orderly, properly sequenced, and cautious liberalization of government controls on money flows in and out of countries.

Certainly the effort of nation-state itself is not enough. Internationally, in approaching the challenges posed by global capital markets, the International Monetary Fund created fifty years ago is not able to handle today’s financial problems any longer. It is time to rethink what the global capital markets need and what the IMF can do. Several common understandings need to be built to explore what can be done by the IMF. They are the potential of growing and rapid globalization, the significance of transparency and information, the requirement of a set of standards and codes of best practices, and the necessity of the multilateral approach. On the basis of these understandings, the IMF needs to modernize its Articles of Agreement and redefine its role. First, the Fund should add a new purpose, the promotion of the sequencing and orderly liberalization of capital, to Article I. Second, the Fund should redefine its role, including playing a role of crisis prevention, reducing its financial role, handling massive capital flows, and playing a clear role. Finally, the Fund needs to increase its openness in procedures and decisions and to improve its political accountability and legitimacy.

So far there have already some international conferences or forums about international cooperation on financial issues, such as regular meetings of the G7, the IMF, the World Bank, and the OECD. There are more of these, some led by governments, some led by private business, and some well planned, some ad hoc. But

firm and binding regulations have not come out yet. Therefore, I would agree that a new Bretton Woods-type conference should be held in the near future to design a clear and legal framework under which the IMF can be revived.

"The Perils of Global Capital," The Economist (April 11, 1998): 52-55.