Economic Report President

access. Even so, international agreement is finally emerging on somesteps that can and should be taken to strengthen the architecture ofthe financial system, to make it less crisis prone. Chapter 7 is devotedto a discussion of potential reforms, including those proposed in recentreports by working groups of central bank governors and finance ministersfrom a group of industrial and key emerging market countries,informally dubbed the G-22.The G-22 reports focus on measures to increase transparency andaccountability in the financial operations of individual countries, ofprivate financial and corporate institutions, and of internationalfinancial institutions such as the IMF and the World Bank. Greatertransparency and accountability will enhance the availability,relevance, and reliability of information that investors need toevaluate the risks in lending. The reports also propose a series ofreforms to strengthen domestic financial institutions: improvements inprudential supervision and regulation are particularly needed tocreate stronger incentives for borrowers and lenders to weigh risks andact with appropriate discipline, thereby reducing the odds of a crisis.Finally, the reports identify policies that could improve thecoordination of creditors’ interests during a future crisis and promoteits orderly, cooperative, and equitable resolution.Again, no magic formula can prevent the recurrence of currency andfinancial crises. But things can be done to limit their frequency, theirimpact, and their pernicious tendency to spread from country to country.Therefore, even as the United States works to contain the current crisisand help restore growth in the affected parts of the world, it will alsowork with the G-7 and through other international forums to implementreforms of the international financial architecture that will help achievethis longer term goal. Such reform is crucial for restoring support in aninternational economic system based on trade and investment flows thatcan contribute to rising global living standards in the 21st century.Additional necessary steps are described in Chapter 7.EMBRACING CHANGE WHILE PROMOTING FAIRNESSThe tradeoff between efficiency and fairness is a classic problem informulating economic policy. Policies that confer benefits broadlysometimes confer them unevenly, imposing relatively high costs on arelative few. In well-functioning markets, the broadly distributed gainsusually outweigh the concentrated losses—often many times over. Butthose who are hurt naturally seek relief through the political process,and if government responds by substituting political remedies formarket outcomes, it can dissipate the aggregate gains.Increases in the Nation’s standard of living over the longer termrequire that we embrace change and do not retreat from the constant37