International finance ministers and central bankers have gathered in Washington this week for the annual meeting of the International Monetary Fund and the World Bank. They have much to consider. Fears are growing for the global economy and serious threats confront the international financial system. Economies responsible for at least two-fifths of world output are in recession or close to it. Japan is struggling to save its banking system and restore confidence to its economy. Shares have sustained heavy losses in all major markets. President Clinton is not exaggerating when he says that the world is facing is worst financial crisis in 50 years.
There have been some piecemeal attempts to restore confidence. The US Federal Reserve Board reduced interest rates by 0.25 of a percentage point last week. Japan, meanwhile, has agreed a package to try to rescue its banking structure, although it is struggling to restore confidence. The International Monetary Fund is doing its best to restore confidence in Asian economies and to stop further crises in Latin America.
However more should be done and the statement from the G7 meeting - and from other meetings over the weekend - show that at least policymakers recognise the severity of the situation and the issues to be tackled. One result is likely to be further reductions in interest rates in the UK and the US and the movement of all euro-zone interest rates to low German levels before the new currency is born next January.
Among the other key issues is a need to examine urgently the best approach to restoring confidence in the battered Asian economies. Investors will only put funds back into such economies if they are provided with a much better level of information, while reform and development of the financial sector in many of these countries is vital.
The question of financial regulation in the developed world must also be addressed; only a last-minute bail-out saved the US hedge fund, Long-Term Capital Management from a collapse which could have destabilised the entire US financial system. Yet how could a such a fund build up exposures of some $200 billion without, it appears, catching the attention of regulators until it hit difficulties?
The role of the IMF and its sister institution, the World Bank, also needs to be reassessed. The IMF was clearly under-resourced and unable to tackle the crisis over the past year; it appears extraordinary that President Clinton cannot persuade the US Congress to provide it now with badly needed extra funding.
The IMF's policy approach has also been called into question over the past year. Clearly a new way is needed to deal with short-term debt problems in the developing world, in a manner which does not let banks which have invested unwisely off the hook, while at the same time averting the disruption of the entire economy. And the G7 ministers this weekend signalled a willingness to examine President Clinton's suggestion of a new emergency funding mechanism for countries in difficulty.
There is no better place than the IMF/World Bank annual meeting to start a discussion on these matters. In recent weeks many international leaders have signalled a desire for reform of the institutions; they must now show that they can seriously engage in discussions on how this should be achieved. They must also address the wider policy issues raised by the threat to the world economy and the international financial system. If they do not, then things could get a lot worse before they start to get better.