Emerging Markets and Global Financial Reform

BERKELEY It is fitting that the upcoming G-20 summit is being held in Pittsburg, an old industrial center of an advanced industrial country, for the advanced countries have been allowed to set the agenda for strengthening financial systems. Other than schadenfreude , emerging markets have brought little to the table.

The United States is emphasizing higher capital requirements. The Europeans are pushing for reform of compensation practices in the financial sector. While both proposals have merit, whether they will be enough to stabilize our dangerously unstable financial systems is at best dubious.

What emerging markets can add to this agenda is, to put it charitably, unclear. They have said little about how they would reform financial systems. They can argue that this is not their problem – that the crisis of the last two years has been centered in the advanced economies, and that it is these countries’ financial systems that need to be fixed.

But the agenda set at Pittsburgh will shape, for better or worse, not just the US and European financial systems, but also the global financial system. Financial markets are too integrated – and will remain so, like it or not – for whatever rules are established not to profoundly affect emerging markets. China, Brazil, and Russia have offered ambitious proposals, which may bear fruit in 10 or 20 years, to make the International Monetary Fund’s Special Drawing Rights a true international currency. But they have not said how they would reform financial systems and policies now.