Insurance Policy

Posted by Eswar Prasad on 12 March 2009

The issue of global macroeconomic imbalances is a troubling one, especially if one believes it had a central role in the crisis. In all likelihood, we will come out of this crisis with even larger imbalances. More to the point, I fear that this crisis has strengthened incentives for emerging markets to self-insure, which would be dangerous for the world economy. 


There is a great deal of discussion now -- especially in the run-up to the next G20 meeting -- that increasing the IMF's resources is the right fix for this problem. I do not think that more resources for the IMF will fully solve this problem, especially if there aren't major changes to the governance structure of the IMF (and possibly even if there are). 




I have developed a proposal for making progress on the collective action problem facing the world economy (individual countries' policies that feed these imbalances and adversely affect global financial stability). My proposal outlines how an insurance pool for the G20 economies with some simple and transparent rules would serve as a more efficient insurance mechanism for emerging markets and could also be a more effective and transparent mechanism for bringing moral suasion to bear on major countries' macro policies. This would help foster international financial stability.
Professor of trade policy at Cornell University and a senior fellow at the Brookings Institution.