With effective reforms, the economy should better withstand shocks and reap more benefits from increasing interconnectedness. It is worth noting that reforms are not complementary, but rather a much needed action to unlock long-overdue potential enhancements, especially on the production side. Additionally, financial reforms and institutional adjustments to new regulations will lay a crucial foundation for efficient management of systemic risks in the financial system. Once our houses are kept in good order, one might hope that the stable global equilibrium could be reached. [This is what Professor Taylor has dubbed as the “Nearly International Cooperative Equilibrium” or NICE.] Nonetheless, with greater interconnections, keeping one’s house in order might only be the near-best equilibrium. It should go along with enhancing cooperation in the international community. Long before this recent crisis, Emerging Market Economies have been in the process of strengthening the cooperation in both regional and global level. “Coordination” is essential and will facilitate policymakers in staying ahead of the crisis. In this light, international coordination, I believe, should provide three key policy elements; Firstly, policy dialogue that would serve as a platform for discussions on developments of risk scenarios, and sharing experiences to counter difficulties among members. Such cooperation includes the Executive’s Meeting of East Asia-Pacific Central Banks (EMEAP), Bank for International Settlements (BIS), and International Monetary Fund (IMF). These platforms have also provided channels for policymakers in the region to communicate their policy conducts, which may also create spillovers to other members, so that one could make the region being more cooperative.
So far the only specific agreement is to talk to each other. Concrete steps to reduce the scale of global imbalances have, to date, been notable by their absence. Smiling family photographs marking the attendance at international gatherings are no substitute for specific actions. Still, the G20 has laid its reputation on the line. It will be damaged if the framework comes to nought. Looking further ahead, the legitimacy and leadership of the G20 would be enhanced if it were seen as representing views of other countries too. That could be achieved if the G20 were to metamorphose into a Governing Council for the IMF, and at the same time acquire a procedure for voting on decisions. The economic message from the crisis is clear: low-saving countries will reduce their net borrowing from abroad and so will no longer be able to play the role of consumer of last resort. To maintain levels of economic activity, high-saving countries must expand domestic demand and allow their trade surpluses to shrink. This is easier said than done. It will require changes in prices and most obviously in real exchange rates – via either nominal exchange rates or domestic price levels. In themselves, proposals such as the creation of a new reserve currency do not solve the inconsistency puzzle unless they alter the desire of highsaving countries to run imbalances that are too high to last.