Bricks and Mortar for Emerging Markets

A decade after communism's demise, capitalism's future in much of Asia and Eastern Europe seems in doubt. Yet policymakers continue to misdiagnose current global economic problems as simply a financial crisis. Unless the United States recognizes another fundamental problem - the inability of foreign governments to regulate their own markets - and acts aggressively to erect new international institutions to improve the integrity of foreign markets, the economic contagion will spread.

Certainly, much of the current economic collapse in emerging markets is finance-based. Integrated global financial markets, in which private investors shift billions of dollars from one country to another, have deprived much of Asia, Russia, and soon perhaps Latin America of desperately needed capital.

For more than a year, the IMF and the Group of Seven industrialized nations (G-7) have responded by extending capital in return for various free-market reforms. But in nearly every affected emerging market, economic conditions have worsened.

Undaunted, the Clinton administration is preparing a $30 billion loan package to bail out Brazil, and has convened a meeting of leading finance ministers and central bank-ers searching for more financial "solutions."

Even as the administration tries to convince a skeptical Congress, other G-7 members, and private lenders to continue financial support of troubled economies, a number of developing countries have begun abandoning the free market. Malaysia prohibits foreign investors from withdrawing their capital for a year. Russia hinted that it may default on its loans.

To stop the economic damage and buttress capitalist and democratic reforms, private investors must be lured back to foreign-capital markets. But the governments of affected countries are too fragile to undertake fundamental macroeconomic reforms.

Britain's Tony Blair has proposed that the IMF and World Bank assume responsibility for expanding transparency and other supervisory reforms. But the IMF lacks the power to push through such micro-reforms in addition to broader structural reforms. While the World Bank and regional development banks have pushed for domestic banking reforms, their approach, like the IMF's, is country by country.

Instead, new international regulatory institutions are needed to ensure the openness and integrity of foreign markets. Although such new global agencies would be modeled on the Federal Reserve, Securities Exchange Commission, and Commodities Futures Trading Commission - the agencies responsible for making US markets the most trusted in the world - submission to them would be voluntary.

In order to be certified, corporations, banks, and other financial institutions would meet minimal reporting requirements, adopt standardized accounting practices, and be subject to inspection by international regulators. Companies not willing to comply would risk being shunned by foreign investors.

Parts of such a regulatory regime already exist. Bank and securities regulators of leading nations have developed basic reporting and operating standards. International regulators would expand efforts to improve transparency and accountability in emerging markets. And a professional class of lawyers, accountants, and bankers would emerge in developing countries to facilitate compliance.

A voluntary system would not be perfect. No police would punish infractions; nor could investors sue. But regulators could withdraw certification for violations. Absent effective national regulators, or international institutions able to implement reforms across borders, such minimum standards will give foreign investors some reason to trust the markets they have fled.

The alternative is not just slumping stock markets. If Russia cannot regain control over its economy and China's banking sector plummets, a "financial crisis" will be the least of our problems.

r Peter Charles Choharis practices international law at Mayer, Brown & Platt in Washington, D.C.