Poverty and Development Division
last updated : 27 April 2000
Does the fact that the prediction of a crisis appears difficult render early warning systems, surveillance and monitoring mechanisms futile? Not exactly, but it may mean a change in the orientation of such mechanisms. Rather than concentrate efforts on avoiding crisis or identifying oncoming shocks to the system, it may be more realistic to engage in activities that monitor how robust or vulnerable a country/financial system is to any internal and external disturbance. This can be carried out by engaging in monitoring the conditions of countries related to economic, financial and institutional stress. Thus, even though accurately forecasting the timing of crisis is likely to remain an elusive goal for academics and policy makers alike, there is clearly a need to develop a warning system that helps monitor whether a country may be slipping towards a potential crisis.
There appear to be at least two strategies in which countries, regional or multilateral institutions can engage in order to avoid or contain the effects of crisis. The first is to engage in surveillance and early warning systems that can detect the possibility of oncoming shocks, as discussed earlier. The second is to concentrate efforts in making the real and financial economy more robust and less vulnerable to shocks. Closely allied to this are measures to strengthen financial systems and improve risk management. Of course, these two strategies are not mutually exclusive, but the choice of priority will have implications for where efforts and budgets are directed.
In the light of the inherent limitations of surveillance and early warning systems, the second strategy of strengthening the financial system and making the economy more robust against stress requires to be pursued simultaneously. There are two channels through which a crisis can occur:
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