Reflecting on the causes of recent financial crises, former World Bank chief economist Joseph Stiglitz observed by analogy that when so many accidents occurred on the same road one needed to re-examine the design of the road. And indeed, the growing frequency and severity of financial crises have fostered a re-examination of the international financial architecture. The recent episodes of currency and financial crises in east Asia, Russia, Latin America and Turkey have provided the same watershed opportunity for rethinking the architecture of global finance as did the breakdown of the Bretton Woods order. In the wake of the Asian episode in particular, there has been a flurry of proposals on how the policies and institutions of the global financial regime should be reformed.

These reform proposals on the official ‘new financial architecture’ agenda, however, have remained limited in their intent and extent. While there has been progress in the development of international financial standards, efforts at exploring the optimal exchange rate regime, defining and encouraging private sector responsibility in crisis resolution and improving multilateral policy surveillance have been patchy and uneven. The modesty of proposed reforms to the global financial system have not been restricted to technical issues. The apolitical terms in which financial architecture debates have been couched serves to obfuscate the political dynamics that underlie and limit international efforts to restructure the global financial regime.

One way to examine global governance – that is, its present and future situation – is to analyse international organisations (IOs). Given their important position and mandate in the international arena, they provide a convenient entry point of analysis. However, their number, variety of purposes and contradictions provide strong evidence against a vision of international socialisation seen as a natural and smooth process of progressive integration of states into a peaceful international society under the guidance of universal values and rules. The tension between goals, charts, intentions and realpolitik, far from being an object of naive lamentation or hypocritical contempt, is precisely the interesting empirical material with which one can study the components of their legitimacy. The main purpose of this chapter is to examine the legitimacy of international organisations where this tension plays a visible and important role. The examination will not only provide a good indication of their standing and evolution but also allow us to take stock of the present situation and explore the future of the international system and global governance.

This chapter contends that the legitimacy of IOs stems from an awareness and an acceptance of the need of mechanisms and institutions of global regulation for the common good. In turn, this awareness feeds a political rhetoric and a system of ethical values which are then ‘operationalised’ by the political ruling elites in nation states.

Robert Rubin, the US Treasury Secretary, was reported to have bluntly criticised Japan for lacking a sense of urgency after his meeting with Kiichi Miyazawa, the Japanese Finance Minister, in September 1998. In fact, the US–Japan dialogue on economic issues was highly acrimonious in early 1998, and American media were fraught with comments that ridiculed Japanese economic policy. In essence, they grumbled that the Japanese government was pursuing fiscal retrenchment and did nothing to rescue troubled banks, while the Japanese economy came under deflationary pressure and neighbouring countries were in the thick of the financial crisis. In view of the fact that the same media had, just four to five years before, described Japan as an invincible economic giant that even threatened the American economic supremacy, it is hard to believe that they were referring to the same economy.

In fact, the Japanese government was far from inactive during the Asian crisis. It made the largest financial contribution, organised a rescue package and even proposed a new regional mechanism for financial co-operation. Thus, it was surprising the United States, which was even unwilling to appropriate money for IMF resources through a quota increase, should criticise Japan. But Japan's international efforts were hampered by its poor economic performance. It had its own financial crisis at home, and was thus unable to help the crisis-stricken economies by absorbing more of their exports. It was well known that the Japanese financial system became increasingly fragile under the heavy load of bad loans.

For ordinary people, firms and governments of the affected countries and regions, the financial crises in east Asia, Russia and Latin America were major events of enormous economic and political consequence. The fallout manifested itself in soaring interest rates, repressed investment activities and outright recession. In connection with these economic woes, unemployment rose to an unprecedented high and the income of a wide range of social groups declined sharply, leading to increased social instability and political unrest. In the crisis-stricken economies, political leaders struggled to balance strong external pressures from international financial institutions (IFIs), creditor countries and market agents for neo-liberal reforms with vigorous demands from domestic constituents for protection against growing international financial volatility.

These developments, despite national and regional diversity, have a common background: the process of global financial integration. This process has increasingly entangled once essentially closed and discreet national markets, greatly enhancing movements of capital across national frontiers. It is widely perceived to have generated increased strains in domestic sociopolitical and policy-making processes and intensified the conflicts between the dictates of financial globalisation and national policy imperatives. These tensions have raised serious doubts over the sustainability of economic growth in an environment of untamed capital movements, calling into question the legitimacy of the prevailing market order in the global system. Building on earlier work on the political economy of international finance, this chapter seeks to interpret, in three different but interrelated arguments, the constraints of global capital mobility and their consequences for democratic governance.

Recent financial crises in emerging market economies have heightened the importance of prevention as the better part of cure. Crisis prevention has become central in current efforts to reform the international financial architecture, partly because of growing systemic disturbance caused by regional contagion and partly because of the increasingly constrained ability of the IMF to rescue crisis countries. From architecture debates and discussions there has emerged a consensus on the essential policy measures needed to prevent future financial crises. Emerging market governments and private sector institutions have been required to change their interactions with domestic and international financial markets through greater transparency in various policy arenas. They have also been urged by the IMF to implement minimally acceptable and harmonised standards in supervision, accounting and corporate governance.

Concrete steps to enhance transparency and to design international financial standards have been centred on the Bretton Woods institutions as well as on national governments. The IMF, the World Bank and other international financial institutions have encouraged and helped domestic regulatory authorities to develop and implement good principles and practices for sound economic management and to improve their capacity to make timely and accurate assessments of the vulnerability of financial and corporate sectors to external shocks. The core of national government responsibilities has rested with the compliance with these principles and practices under the surveillance of the IMF and other international groups.

Since the 1980s, a regular round of meetings between finance ministers and central bank governors from the G-7 countries has been one of the principal mechanisms for formulating international financial and monetary policy. This chapter traces the contribution of the G-7 finance ministers and central bank governors to debates on the design of the international financial system, and draws conclusions on the collective role these agencies play in global financial governance. Such an exercise takes us right to the very heart of questions concerning the exercise of power and authority in the international system. Over the last decade, G-7 finance ministries and central banks have shared and refined ideas and drawn collective lessons against a backdrop of widespread financial turmoil that has posed questions about the sustainability of the current system and the authority of the state.

It is argued in this chapter that the G-7 finance ministries and central banks have developed a narrow, technical belief system. This belief system has not only constrained the finance ministries' and central banks' ability to respond to financial crises, but it has also generated a series of very modest incremental proposals for reform of the global financial system. Rather than challenging the finance ministries' and central banks' belief system, the principal impact of the financial crises of 1997–8 and the subsequent response has been to reinforce, refine, deepen and extend the belief system into new countries and new policy areas. The likely net result of these activities is further capital account liberalisation.

Legal and institutional aspects of global economic governance, particularly the management and resolution of financial crises, are the focus of this chapter. To avoid ever-larger public sector bail-outs (and their adverse incentive effects), increased involvement of private bankers and investors in resolving sovereign debt crises is called for. In the short term this may be achieved by standstills and other ‘bail-in’ devices such as forced roll-overs, collective action clauses and bond swaps. In the longer term, however, an International Bankruptcy Procedure accompanied by private arrangements for contingent credit provision and debt restructuring will probably be required.

We begin with an interesting historical precedent. When the United States left the Gold Standard in 1933, the dollar price of gold rose by almost 70 per cent and the Gold Indexation Clause embedded in most private long-term debt contracts – and in much of the public debt – mandated a matching increase in the dollar value of debt. To prevent a credit crunch, President Roosevelt secured a resolution of Congress suspending the Gold Clause; but this was challenged by creditors going to the law, all the way to the Supreme Court.

The purpose of this chapter is to explore the consequences for South Korea of both its democratic deficit and its accession to membership of the Organisation for Economic Co-operation and Development (OECD) in late 1996. It is argued that the interaction of weak governance and imprudent liberalisation was a material contributor to the financial crisis that occurred in late 1997.

This chapter attempts to put governance at the centre of the policy quandary faced by this important Asian country. Thus this analysis of the events leading up to the 1997 financial calamity will go beyond the calculus of economists. That calculus portrays such concepts as ‘crony capitalism’, imbalances in the trade account, exchange rate disequilibria, moral hazard, the herd instinct in the market and systemic contagion as the major causes of the country's financial problems. It is argued in this chapter that these factors were manifestations of the shortcomings in the country's governance structures.

The chapter will show that ‘authoritarian capitalism’ in South Korea – its hybridity – was not compatible with the state's desire for the economy to engage as a fully competitive participant in international finance and commerce. Korean society generally, and the business and political elites in particular, did not share the important values of democratic capitalism.

The financial crises of the 1990s, following two decades of financial market liberalisation and ever growing capital flows, have prompted a passionate debate about ‘globalisation’ as the successor world system to the Cold War. The background to these crises is a story well told, stretching from the breakdown in the Bretton Woods system in the 1960s, the confirmation of the dollar as the world's reserve and transaction currency, the recycling of funds following the rise in oil prices, and the expansion of the financial marketplaces in London and New York. This in turn prompted a scramble among developed countries to open their securities markets to institutional investors, who demanded the liberalisation of capital controls as the price for their presence. Liberalisation of capital movements then spread to developing countries. Initially, resistance was loud, but as time passed and US hegemony became entrenched, even major financial meltdowns – such as the devaluations of the Italian lira and pound sterling in 1992, or the collapse of the Mexican peso in late 1994 – attracted only temporary attention. By the mid-1990s, confidence in dominant policy prescriptions reigned supreme. Asia's financial crash therefore came as a shock, the equivalent for economists of the Soviet Union's collapse for sovietologists, all the more severe in that it was unpredicted and its severity unanticipated.

Recent currency crises have affected not only east Asian countries but transition economies as well. The Russian crisis of August 1998 was perhaps the most spectacular example. It was preceded by a series of currency crises in Bulgaria and Romania in 1996 and in Ukraine and Belarus in 1997–8, and was followed by similar crises in Kyrghyzstan and Georgia in late 1998 and in Kazakhstan in early 1999. Did these crises result from financial contagion that spread across the global economy? Or were they caused by national institutional factors similar to those in east Asia? This chapter argues that neither of the above explanations are completely true. It proposes a third explanation: currency crises in transition economies resulted primarily from domestic policy mistakes, but of a different nature from those in east Asia.

The argument will be developed in the following five sections. The first section will critically review the prevailing approaches to examining the Russian currency crisis, and evaluate their respective explanatory values. On the basis of the theoretical review, the chapter will proceed to a detailed discussion of the macroeconomic background and causes of the August 1998 crisis in Russia in the second section. The third section will extend the argument to a broader analysis of currency and financial crises in other transition economies. The penultimate section will explore the sociopolitical factors that underlay the mis-management of exchange rate policy.

There was a time, not that long ago, when the leadership of the People's Republic of China (PRC) would have viewed international financial crises with a sense of glee and vindication – a sign of the vagaries of the global capitalist system and perhaps an indication of its impending demise. But contemporary China is no longer isolated from the global economy and wholly insulated against external shocks. A crisis in Mexico was of little more than academic interest to China's elites, but the crisis on China's doorstep in 1997 had immediate and direct significance.

This significance was primarily through the impact of the secondary or responsive stage of the crisis. The collapse of demand in Japan and other regional states, the dampening of international investment activities, and enhanced competition for export markets combined to jolt the efficacy of China's export-led growth strategy after 1997. But while inward investment and export strategies had become more and more open and integrated, the Chinese financial system remained relatively closed and protected in 1997. And it was this relative lack of liberalisation that helped protect the Chinese economy from the worst excesses of the 1997 crisis.

Nevertheless, the pressures to reform the financial structure, which appeared to serve national interests so well in 1997, are enormous. These pressures partly come from without, most notably in the shape of meeting WTO standards and criteria. But they also come from a complex interplay between domestic and external forces as China incrementally reforms itself away from socialism.

The Theory of the Firm

It is impossible to study workers' control of firms without first saying what a firm is. I define a firm as a set of agents supplying inputs to a common production process, where the productive activities of the agents are coordinated through an authority structure and the resulting outputs are sold on a market. Inputs may include labor, physical assets, financial wealth, raw materials, land, or any other resource that can be owned by an individual or group. More will be said about the nature of authority structures later.

In principle, a firm might consist of one person or a household, but I am concerned only with enterprises in which groups of agents come together for the specific purpose of production. The condition that output be sold on a market rules out production activities directed solely toward household consumption. It can be argued that households produce labor itself, and that labor services are often sold on a market. However, I do not address “firms” of this kind.

I do not want to become committed to a purely technological view of the firm, so a common production process is deemed to exist whenever input suppliers are coordinated directly or indirectly by a common authority. In this context, indirect coordination means through a chain of authority relationships rather than by market contracting (this distinction will be discussed shortly).