The global economic watchdog concludes that it needs to do more to predict potential crises and to persuade national authorities to take corrective measures.
Of course, some crises will continue to occur, and there should be no implication that by simply strengthening surveillance procedures the Fund could prevent all future crises, the report argues. And Fund surveillance risks being ineffective unless members are willing to give full consideration to the views expressed by the international community through the Fund.
The report identifies five preliminary lessons for crisis prevention.
n Collaboration and the provision of timely and transparent information by the authorities. Over the last two years the Fund has encouraged countries to provide more information to itself and the public. This should be extended to information on the short-term assets and liabilities of the government and private sectors, as well as financial sector data.
The Fund should make it clear to members in annual Article Four consultations that they have a responsibility to provide information it needs for surveillance. This includes high frequency data on the true state of foreign exchange reserves. At a minimum, any shortfall in this regard should be clearly noted, possibly publicly, the Fund argues. But it accepts that compiling timely and accurate data on short-term external debt is a daunting task.
The Fund should also make more use of third party data and report systematically on market participants views. The scope of the IMFs data dissemination standards should be extended and, to protect their integrity, subscribers practices should be monitored and instances of non-observance handled firmly and expeditiously.
n The focus of surveillance needs to extend further and more deeply beyond short-term macroeconomic issues. Developments in the banking sector, including the impact of over-extended property lending, the build-up of off-balance sheet liabilities and reliance on short term foreign currency borrowing made the Asian economies very vulnerable. Effective surveillance will require closer examination of the functioning of the financial sector, at a much more detailed level than was previously required. The Fund will need to strengthen staff expertise, with implications for recruitment and internal training.
The experience of countries with capital controls that insulated them from market turbulence should be examined closely. The development and stability of domestic capital markets and the regulatory regime should be taken into account when assessing a countrys vulnerability and advising on capital account liberalisation.
The composition and maturity structure of external debt should be monitored more closely.
n Surveillance over emerging market economies should pay more attention to policy interdependence and risks of contagion. Some countries mitigated the contagion effects of the Asian crisis by taking precautionary action, so a countrys vulnerability to potential shocks should be assessed carefully.
The Funds assessment of conditions in financial markets and the world economy should therefore be integrated better into its bilateral dialogues with member governments.
This could be done by improving the extent to which the available expertise on capital market issues is disseminated within the Fund, which would both attune the staff and the board more to financial market developments and risks and encourage much-needed human capital development.
n The crucial role of credibility and the restoration of market confidence in the Asian crisis underlines the importance of transparency. It is difficult to restore confidence where markets doubted the coverage and candour of information provided by the authorities.
Many countries now allow the IMF to publish Press Information Notices detailing the outcome of their Article Four discussions, but most emerging market economies remain reluctant.
Whether the Fund should reveal its concerns about a countrys policies against its wishes is more problematic.
This could impede the IMFs dialogue with a country, make it more difficult to calibrate its warnings and make unwelcome messages less easy to convey.
The tension between the role of the Fund as a confidential adviser to members and as an international watchdog, with the broader interest of the international community (including private markets) in mind, requires striking a fine balance, the report argues.
It seems unlikely the Fund would be more effective in obtaining confidential information and persuading the authorities to respond to its advice if it made that information and its assessment public.
The Fund should promote transparent practices in member countries. The Fund will help its members achieve greater fiscal transparency through surveillance, technical assistance and programme design.
It will be equally important to encourage more transparent practices in the private sector, including by banks and corporations, which will strengthen corporate governance.
n The effectiveness of fund advice benefits from supportive peer pressure. Conclusions of Fund surveillance should be bolstered through other channels. Regular staff input into a regional surveillance mechanism could strengthen regional peer pressure for the implementation of good policies.
