Fischer asks if new IMF reforms could have eased Asian crisis, stresses region's future role
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On June 1, IMF First Deputy Managing Director Stanley Fischer addressed the Institute of Policy Studies on Asia and the IMF. Following are edited excerpts of his remarks. The full text is available on the IMF's website (www.imf.org).
Following the Mexican crisis, and more intensively after the Asian and Russian crises, the IMF entered a period of far-reaching reform, which is still continuing.
The reforms aim to help us prevent crises where we can and mitigate their effects where we cannot.
In its crisis prevention efforts, the IMF has responded to the enhanced role of the capital account in financial crises by taking steps in three areas:
Surveillance and the financial sector. The IMF has sharpened its scrutiny of national policies and international markets, focusing in particular on developments that can leave countries vulnerable to crisis. Of all the changes that have taken place in the IMF in recent years, the increase in two-way transparency between the IMF and the outside world is the most significant.
Transparency not only helps ensure better-informed citizens and investors, but also encourages policymakers to strengthen their policies and institutions.
The structure of external debt and financial sector weaknesses played key roles in exacerbating capital account crises.We have significantly stepped up our surveillance of external vulnerabilities, including through scrutiny of the national balance sheet, particularly external debt and reserves, and the strength of financial systems, most notably through the Financial Sector Assessment Program. IMF surveillance is also being given greater focus and structure by the development of international standards and codes of conduct, monitored by the IMF or other relevant bodies.
Department is evidence of the increased attention the IMF is paying to surveillance over international capital flows. Our interactions with the capital markets have also been enhanced through the creation of the Capital Markets Consultative Group.
Exchange rate and capital account regimes. Every major financial crisis since Mexico's in 1994 has in some way involved a fixed or a pegged exchange rate regime.
Having said this, floating exchange rates are not sufficient to prevent crises, and I do not imply that policymakers can or should be indifferent to the exchange rate or necessarily refrain totally from intervention in the foreign exchange markets. If a country decides to float, it must decide on the monetary policy it will follow. Inflation targeting,which many recent converts have chosen, seems to be working well and has much to commend it.
On capital account regimes, it is surely no coincidence that the most advanced economies all have open capital accounts. The IMF has cautiously supported the use of market-based controls on inflows in some emerging markets. The controls seem to have been successful for a time in allowing some monetary policy independence and in shifting the composition of capital inflows away from short-term debt. But empirical evidence suggests that they lose their effectiveness over time.
Capital controls may at times appear attractive, especially during a crisis, but it is telling that even among the countries worst affected by the crises, almost all have resisted the temptation to close themselves off.When push comes to shove, policymakers have abandoned fixed exchange rates before capital mobility-and they have been wise to do so.
Foreign reserves and Contingent Credit Lines. The growth of international capital flows has prompted a rethinking of the way we assess the adequacy of a country's reserves. In an era when crises are...
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