Global Financial Turmoil, the IMF, and the New Financial Architecture

Publication Date: November 2001

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

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Abstract:

The economies of the world appear to be heading into a simultaneous slowdown and possible global recession that could bear significant consequences for U.S. and world employment, government finances, stock markets, international trade, and capital flows. The poor economic outlook has been clouded even further following the terrorist attacks on September 11, 2001. There has been a sharp curtailment of activity in industries such as travel and tourism, a drop and slow recovery in stock markets, and sagging consumer confidence not only in the United States but in numerous other countries.

Unlike the Asian financial crisis of 1997-99 when economic strength in the United States and Europe offset weakness in Asia, Russia, and Brazil, this time all major economies seem to be slowing at the same time. The U.S. response to this global downturn has entailed and may require additional action by the U.S. Federal Reserve, the Bush Administration, and the Congress in concert with the International Monetary Fund (IMF) and other multinational organizations.

Congressional interest in this issue is related to: (1) the effects of global economic turmoil on the U.S. economy, (2) operations of the International Monetary Fund, (3) U.S. responses to globalization, and (4) U.S. policies to stimulate the economy. Among these policy issues, this report will focus on the spread and effects of the economic turmoil with a focus on Asia.

In seeking a new world financial architecture, policymakers are trying to improve the international monetary and financial system, to reduce the risk that systemic crisis will recur, and to ensure that, when isolated country crises do happen, there are early warnings, effective policy tools, adequate resources, and broad support to help nations withstand difficult external conditions.

Several studies have examined the role of the International Monetary Fund in financial crises. The IMF, itself, also has been reviewing its policies and operations in light of severe criticism from various quarters. It has begun to take more preventative measures, has increased transparency, and is working with nations to improve their standards, economic policies, and measures to prevent financial crises from occurring.

Since the United States is the largest economy in the world, global economic conditions depend greatly on the state of the U.S. economy. As the nascent recession in the United States has pulled down other economies, a strong recovery could do much to lift the economies in the rest of the world. This can be pursued primarily through monetary and fiscal policies - both domestic and coordinated with those of other nations - and international trade policy being pursued to increase global market efficiency and to ameliorate the adverse effects of foreign unfair trade practices.