OTHER REVIEW EXERCISES

There are many other reviews of economic development in the Asian and Pacific region undertaken by a variety of institutions, all of which contribute to monitoring exercises by collating, analysing and commenting on trends and events and issuing warnings on potential problems. Some of these are undertaken at the global level, where the developments in the countries of Asia and the Pacific are compared and contrasted with those in other regions. Examples of these that are produced by international organizations include the United Nations World Economic Survey, the UNCTAD Trade and Development Report, and the World Bank Global Development Finance and Global Economic Prospects and the Developing Countries. Each of these annual publications includes a survey of recent developments, sometimes at the country level and sometimes by groupings of countries, in their particular areas of interest, and they all also include an analysis of some important emerging issue at the global level. The OECD Economic Outlook, which monitors economic developments and policies in OECD member countries and is released twice a year, also covers some countries from the Asian and Pacific region (Australia, Japan, New Zealand and the Republic of Korea). In addition, there are monitoring exercises produced by research centres and universities in the private sector, such as the annual country surveys of the Economic Intelligence Unit of The Economist, which undertake an in-depth and critical review of developments, policies and future prospects.

At the regional level, there are two main publications from intergovernmental organizations which cover the entire region, the ADB Asian Development Outlook and the ESCAP Economic and Social Survey of Asia and the Pacific.  Both of these undertake monitoring-type exercises and provide commentary and analysis of events, policies and special issues of importance to the region. There are also publications which cover more restricted groups of countries through subregional organizations or through private companies, as well as many government and/or private in-depth surveys at the country level.

TRENDS IN SURVEILLANCE MECHANISMS: SUMMARY AND CONCLUSION

As is evident from the preceding discussions, surveillance mechanisms differ according to scope, country coverage, variables monitored, type of leverage etc. Tables V.5 and V.6 review the modalities and indicate the coverage of developing countries of the ESCAP region within these global surveillance mechanisms. There are some overlaps in the scope of surveillance by different institutions. BIS seems to have a comparative advantage in setting standards and codes for supervision of the banking system. However, until recently, it dealt almost exclusively with developed markets. Furthermore, it lacks the necessary leverage to elicit policy changes from countries. IMF, on the other hand, has a comparative advantage in exercising surveillance over financial systems and, in collaboration with other agencies, in assessing the compliance with international standards. It has relatively greater leverage in influencing policies but has traditionally concentrated on macroeconomic and exchange rate policies rather than the structural and financial issues which were at the heart of the crisis in Asia. IIF and the credit rating agencies which focus on variables that are closely associated with the financial crisis, such as the level of debt and international capital flows, share the limitations of BIS in respect of policy leverage. These institutions largely depend on market pressure as leverage in influencing needed policy corrections in countries.

How accessible are the findings of the global surveillance institutions? IMF publishes regularly documents on its multilateral activities, including World Economic Outlook and International Capital Markets. In addition, with the consent of governments of the concerned countries, information on the Fund's bilateral surveillance activities is increasingly being made available to the public through the release of PINs and, in the context of an 18-month pilot project started in the spring of 1999, Article IV consultation reports. However, there is a widespread perception that regional contagion was largely missed by IMF because of its mainly bilateral or global orientation.  Most BIS data are available through its web site, but its monitoring-type analyses are confidential to those participating in the meeting. The private monitoring bodies, such as IIF and the credit rating agencies, largely offer their databases and analyses by subscription. Apart from difficulties in accessibility, these mechanisms vary in the nature of their source of database information. Member countries of IMF are required to submit official data on a regular basis. Of course the quality and comparability of the data vary across countries, but SDDS is meant to improve the quality of data reporting. Apart from official sources, BIS and IIF gather more specialized data (banking or capital flows, for example) from their members. Credit rating agencies rely on a multitude of data sources - official, Reuters and other proprietary information - to produce their sovereign risk ratings.

The various surveillance institutions differ according to their ownership structure. IMF is a Bretton Woods institution controlled by a board of official representatives of member countries. The degree of influence in the Fund of a particular member varies, to a large extent, with the amount of the membership contribution to the Fund. The Basle-based committees are more tightly-knit groups composed mainly of the representatives of the central banks of the G-10 countries (BIS is funded by central banks through the purchase of shares). IIF is an association of private financial institutions, while the rating agencies are private companies which are governed by their respective boards (Standard & Poor's is a division of the McGraw-Hill Companies).

A number of initiatives have arisen from the intense soul-searching among global surveillance mechanisms that inevitably followed after the Asian debacle. There appears to be a commonality in the responses of the surveillance mechanisms; many are geared to address or mitigate the perceived causes of the Asian crisis.  Perhaps one of the more prominent responses of monitoring mechanisms is to focus on the financial sector and the capital account. This stems from the fact that the vulnerability of the financial system, by and large, escaped the scrutiny of most surveillance systems prior to the collapse of the Thai baht peg in July 1997. The emphasis on the financial sector is also a delayed reaction to the altered world external environment which is marked by deep integration of markets, very massive capital flows and powerful effects of changes in expectations. IMF and the World Bank, for instance, are engaged in the Financial Sector Assessment Programme, which is designed to identify strengths and vulnerabilities of a country's financial system. Standard & Poor's, on the other hand, has come up with financial system stress indicators, on top of its more traditional sovereign credit risk ratings.

Another common thread in the recent initiatives is the emphasis on best practices in disclosure, clarity in policy-making, dissemination of data, accounting practices and even the publication of Article IV staff reports. The set of proposals for the new financial architecture is characterized by a proliferation of standards and codes. One reason for the emphasis on codes and best practices is that in this era of global finance and free flow of capital, there is little choice for countries that wish to tap world capital markets but to adapt their policy-making practices, supervisory systems, levels of information disclosure or accounting methods to world standards.

The stress on transparency is intended to limit the problems of informational asymmetries that seemed to be a significant factor in the Asian crisis, in that the lack of transparency prevented the markets from discerning the increasing fragility of the system. In addition, the availability of good quality data should greatly facilitate the monitoring process.⁴¹ It is increasingly recognized that transparency is critical in the functioning of markets as well as in instilling market discipline.

Obviously the codes or best practices advocated by the existing global mechanisms are a function of the areas of expertise and focus of these institutions. Because the core competency of IMF is in macroeconomic and exchange rate policy, it has proposed standards on transparency in fiscal and monetary policies. Similarly, it has pushed for more comparable and accurate data, which are critical in surveillance work, at the national, regional and multilateral levels, through SDDS or GDDS. BIS, which is more concerned about the stability of banking systems and financial markets, promotes better prudential standards in bank supervision. IIF, on the other hand, is concerned with drawing up risk management standards for firms investing in emerging markets. It is also participating in drawing up best practices in transparency in concert with the other international financial institutions. IOSCO, IAIS and IASC are developing or revising standards in their respective areas. By working together, the nexus of agencies, both public and private, seem able to cover the gamut of issues where standards or codes are required at the present time. However, there is still a risk that some areas which can create global stress and shocks may be omitted unless vigilance is exercised in monitoring and in research and analysis and adequate coordination is achieved.

To enhance the effectiveness of the codes and standards, it would appear that the following issues need to be addressed. At present, most of them are optional and not binding, even for the members of the organization devising the instrument. Hence, unless adequate incentives are created to encourage implementation, there is no assurance that countries will adhere to these codes or standards. Proper monitoring mechanisms should go beyond simply monitoring formal compliance with the standards. Rather, the methodology with which the data are collected and analysed, the degree of compliance and problem areas should be subject to monitoring as well. Given that financial markets are dynamic and not static, the types of data reported may also change through time. Hence, there is a need for international organizations to evaluate the appropriateness and relevancy of the existing reporting requirements constantly. Finally, it should be borne in mind that reporting and monitoring compliance of certain international benchmarks is not a panacea for crisis prevention.

Recent initiatives are marked by a greater reliance on market forces. Prior to the crisis, unless a country was subject to IMF conditionalities, there appeared to be little incentive to disclose information, especially by emerging markets. With the new, very public initiatives in the area of transparency, countries and firms alike are under greater pressure to disclose information for fear of being accused of having something to hide. When there are codes and standards, market participants will, in time, expect banks or countries to observe them. The markets can thus reward or punish firms or countries, by, say, applying a risk premium, based on their record of compliance.

There seems to be more cooperation among surveillance mechanisms in the aftermath of the Asian crisis. For instance, BIS, IMF, OECD and the World Bank have collaborated in setting up statistics on external debt. IMF and the World Bank likewise have participated with BIS in drafting a handbook on the methodology for assessing implementation of the Core Principles and in identifying areas in which further work could help countries achieve compliance. There is also a clearer distinction between the areas of competence as indicated by the codes and standards advocated by particular institutions. In time, because of the harmonization of international standards, it is likely that the problems of differences in the definition of data or indicators among different surveillance bodies will be resolved.

The Financial Stability Forum is a prime example of a cooperative arrangement among major global surveillance bodies, national authorities and other regulatory agencies. It is a consultative body consisting of representatives of the finance ministries and central banks of the G-7 countries, IMF, the World Bank, BIS, IOSCO, OECD and other agencies. This arrangement appears to be motivated by the need for a more coordinated response to the problems posed by the global financial system. The objectives of the Forum include pooling and sharing information on vulnerabilities in the international financial system among different bodies, and some kind of monitoring of the implementation of internationally agreed regulatory and supervisory standards and codes of conduct.⁴²

The Forum serves as a vehicle for identifying regulatory gaps and areas of vulnerability in the international financial system. It could become a significant force for effective policy responses, especially where coordination is necessary. However, it is not a representative body because emerging markets are not included. It is clear that the inclusion of the systemically important countries is crucial if the Forum is to achieve the minimum degree of representation and participation that is needed.⁴³ The Forum has a small secretariat in Basle and is chaired by the General Manager of BIS.

Lastly, there is greater interest in the area of managing the risk of globalization of financial markets. The Core Principles are focused primarily on risk management in banks. Financial stress testing exercises are being contemplated in the Financial Stability Forum where possible changes in liquidity conditions or exchange rate changes, for instance, are posited and the consequences are examined. Indeed, given that the costs of crises are so huge in a globalized setting, surveillance mechanisms are increasingly investing in risk management and prudential norms.

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Footnotes:

⁴¹ In general, it is easy to understand that financial systems can adjust more readily to gradual changes in premiums, capital flows etc. More destabilizing to systems are shocks such as abrupt and massive changes in prices or flows. As the saying goes, it is not speed that kills, but the sudden stop. If there are high levels of transparency in the system, points of vulnerability can be picked up earlier, before massive corrections occur.

⁴² Yilmaz Akyüz and Andrew Cornford, "Capital flows to developing countries and the reform of the international financial system", paper presented for the World Institute for Development Economics Research (WIDER), project on New roles and functions for the UN and the Bretton Woods institutions (Geneva, UNCTAD, 1999).

⁴³ Montek S. Ahluwalia, "Key issues in reforming the global financial architecture", paper submitted to the Commonwealth Finance Ministers Meeting, Cayman Islands, 21-23 September, 1999.