Lessons from Asian Crisis.

1508

The Journal of Finance

Reforming the Global Economic Architecture: Lessons from Recent Crises

JOSEPH E. STIGLITZ*

RECENT TURMOIL IN INTERNATIONAL financial markets has raised a set of fundamental questions for the global community: Is the set of international financial arrangements, established after the Great Depression and World War II and modified after the abandonment of the gold standard in 1973, up to the challenges of the twenty-first century? Are minor modifications ~such as slight changes in the governance of the international financial institutions, increased transparency, or surveillance! all that is required to adapt these institutions to the needs of modern economies, or are more fundamental changes necessary? Today, although much has been proposed, discussed, and argued, no consensus on desirable changes has yet been reached. In the meantime, what can countries, especially the poor, the small, and the lessdeveloped, do to protect themselves from the seeming ravages of storms brought on by international financial instability? The subject is complicated, and in the time allotted to me, I cannot do it justice. Rather than endeavoring to provide a comprehensive treatment, I shall summarize my views in 10 basic points, followed by three important methodological observations. We should keep in mind that the success of a development or stabilization program must be assessed by its impact on the livelihood of the concerned individuals, not by whether the exchange rate has stabilized! Our objective should be clear: the welfare of the citizens in the affected country, with due attention to distributional concerns. A program cannot be hailed a success if the exchange rate is stabilized, but the country falls into a deep and prolonged recession. One cannot count a program a success until unemployment has returned to normal levels and growth has resumed. Ascertaining success is made ever more problematic by hypothesizing on the counterfactual—that...