Martin Wolf has an excellent piece today in the Financial Times, provocatively called Asia's Revenge. Wolf explains how the liberalization of international finance and the savings glut generated by emerging economies came together to help produce the current financial crisis. Preventing a recurrence of this mess will require some changes:
So among the most important tasks ahead is to create a system of global finance that allows a more balanced world economy, with excess savings being turned into either high-return investment or consumption by the world’s poor, including in capital- exporting countries such as China. A part of the answer will be the development of local-currency finance in emerging economies, which would make it easier for them to run current account deficits than proved to be the case in the past three decades.
Wolf doesn't get into the specifics of how to achieve this reallocation of savings into investment or consumption by the world's poor, but a recent seminar at the World Bank on payment systems gave some insight into this question. Massimo Cirasino and Jose Antonio Garcia Luna presented the findings of a new publication on Payment Systems Worldwide: Outcomes of the Global Payment Systems Survey 2008.
Normally, this is the kind of topic that might induce a yawn - it doesn't have the development star power of microfinance or the Millennium Development Goals. But given the ongoing financial crisis, payment systems merit plenty of attention. The first point is that improving payment systems will be vital to achieving the goal of reallocating savings that Wolf argues for. Establishing effective retail payment instruments are one necessary component for generating trust in banking systems in emerging markets. In many countries, cashless payment systems - e.g. credit cards, debit cards, and the like - are still almost non-existent.
Second, effective payment systems are also essential for reducing system risks. Here the issue is the effectiveness of large-value payment systems, which are typically utilized by banks and other financial institutions. Cirasino and Luna explain the role that large-value payment systems have in systemic risk:
Large-value payment systems are typically the most significant component of the national payments system due to their potential to generate and transmit disturbances of a systemic nature to the financial sector. In this area, a total of 98 central banks report having a real time gross settlement (RTGS) system in place, allowing for a significant reduction of systemic risk in such countries when compared to previous arrangements to process large-value payments, such as cheque systems...Adoption of modern, safe and efficient large-value systems is highest among high income and upper-middle income countries (more than 90% in each case); on the other hand, only 57% of low-income countries have adopted such systems. These percentages are lowest in the EAP and South Asia (SA) regions.
The sooner that more countries adopt a real time gross settlement system, the quicker the world will achieve the changes to international finance that Martin Wolf rightly argues for.
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