enough money to partially compensate for the lost
access to private markets. Loans should be disbursed
quickly and conditional only on an assessment
beforehand of the soundness of the country’s macro
stance. They should be made in an amount sufficient
to prevent the inefficient, procyclical contractionary
fiscal adjustment that is being caused by the lack of
access to finance. For the world, a program of about
$700 billion—already a familiar number— would be
more or less of the right size.
Second, part of the capital raised could be channeled through institutions such as the International
Finance Corporation in order to purchase a diversified portfolio of private emerging market assets. This
would provide a support mechanism for this asset
class similar to the relief that the Fed is providing to
private American assets.
Third, the IMF should also be recapitalized, pos-
sibly through an issuance of Special Drawing Rights
(SDRs), in order to ensure that the organization has
more than enough funds to help reconnect countries to finance. But the issue is not just to fund individual countries in trouble. The goal should be to
convince safe countries that are currently hoarding
large amounts of international reserves as self-insurance against future crises that they need not sit on so
much liquidity because they will have ample access
to contingent IMF funds.
This will allow countries to adopt policies that
are more supportive of a global reflation effort. In
some sense, it would just be a formalized and multilateral version of the strategy that the Fed announced
in November 2008, whereby it granted swap lines in
the amount of 30 billion dollars each to Korea, Singapore, Mexico, and Brazil. To make sure that this facility is used from the start, emerging market members
of the G- 20 and others with high credit ratings should
simultaneously ask for these new resources in order
to dispel the stigma that is usually attached to borrowing from the IMF.
A lot of effort has been invested in discussing
issues such as global imbalances and the voting
rights at the international financial institutions, but
too little has been dedicated to thinking about what
these institutions should do in the context of the
current global crisis. If capital markets are impaired
over a long period, global and regional international
institutions need to play a much bigger role in the
recovery than is currently being envisioned. If this
strategy is successful, it will lead to a more balanced
and sustainable global recovery. It will also strengthen the case for market democracy in the eyes of Latin
The current crisis may be the worst recession the
United States has seen in 80 years, but
most Latin Americans alive today have
suffered equivalent financial catastrophes. We have also survived it. We have
learned the advantages of open economies, sound fiscal policies, flexible
exchange rates, and respect for markets
and property rights.
We have also seen the value of international financial institutions. These
institutions were principal actors during previous crises and helped to restore liquidity and growth when
that task was beyond the capacity of individual countries. They used multilateral mechanisms to solve
financial problems—and invested political, financial
and intellectual capital in creating the changes that
will go a long way toward helping many countries in
the region weather the current storm.
Their experience in Latin America offers a template for a way forward for a world in crisis. With a
little tweaking of the model, recapitalized, reformulated and stronger IFIs could play a vital role in global recovery.
1 Guillermo A. Calvo, Alejandro Izuierdo and Ernesto Talvi, “Phoenix
Miracles in Emerging Markets: Recovering Without Credit from
Systemic Financial Crises” (NBER Working Paper 12101, National
Bureau of Economic Research, 2006).