Aside from the volatility of short-term capital flows, sharp swings between abundance and scarcity in private external financing for the developing world have been one of the most disturbing features of the international economic system over the past three decades. These ebbs and flows have translated into sharp business cycles, particularly because the high mobility of capital has curtailed developing countries' manoeuvring room for the adoption of countercyclical macroeconomic policies. These cycles' economic and social costs are very high indeed. For example, as a result of the recent drought in external finance triggered by the Asian crisis, the Latin American and Caribbean region's economic growth rate slipped to a scant 1.5% between 1998 and 2002. Moreover, the downward trend in poverty has come to a halt, and in more than a few countries the poverty rate has begun to climb quite steeply.

This situation must be addressed by means of a comprehensive approach to international cooperation that provides for macroeconomic policies having a more clearly preventive orientation during economic booms, together with more information and better regulation of
financial markets, an adequate supply of exceptional financing from the International Monetary Fund during times of crisis, a clear delimitation of the scope of the conditionality applied by the Fund, and multilateral mechanisms for dealing with debt overhangs. The key objectives should be to diminish capital volatility at its source and to make room for the adoption of countercyclical macroeconomic policies by developing countries or, in other words, incentives for the adoption of austerity policies during booms and policies to promote economic reactivation during crises.

This approach is based on the assumption that one of the explicit objectives of international cooperation should be to smooth out business cycles in the developing world. The comprehensive nature of this approach also means that its various components should be seen as complementary rather than as alternative measures. Hence, the creation of multilateral schemes for dealing with debt overhangs or, in other words, with problems of solvency, should not be regarded as a substitute for emergency IMF funding, whose purpose is to resolve problems of liquidity. Otherwise, there is a chance that country-risk spreads may widen, which is why many developing countries regard proposals for the creation of debt workout mechanisms with some misgivings.

These abrupt cycles in private external financing serve to underscore the continuing importance of multilateral development banks. These banks play a crucial role in combatting poverty around the world and in providing external financing to countries lacking access to private capital markets, especially the poorer and smaller nations. They also perform a vital function by providing external finance to middle-income countries when capital flows dry up. In addition, development banks carry out essential tasks on a number of other fronts by acting as catalysts for private resource flows, as technical assistance mechanisms, as policy forums and as suppliers of global public goods, in close cooperation with United Nations agencies.

In closing, I would like to emphasize the need to look at international financial cooperation as a concerted effort by institutional networks rather than as the result of the work of a few international agencies. Viewed from this perspective, the situation provides broad scope for action by developing countries in the creation of subregional development banks, reserve funds and mutual support agreements among central banks, and the establishment of macroeconomic and regulatory cooperation schemes. The key role to be played by such regional and subregional bodies should be explicitly acknowledged by the international community. The International Monetary Fund of the future should be seen as a network of regional reserve funds rather than as a single global institution, and the creation and consolidation of subregional development banks should be one of the primary tasks of the World Bank and of regional development banks.