Financial instability, banking system failures, exchange rate crises and consequent real macroeconomic disruption have increasingly been seen as a major (and in many cases, new) threat to the development prospects of poor countries. Highest priority has in recent years been reassigned by international development institutions from advice on project evaluation and "development strategy" (which, in any case, often remains controversial) towards macroeconomic and financial sector policy reforms. There no longer seems much doubt that the strength, stability and effectiveness of savings-investment systems; the broad appropriateness of exchange rate policies; a reasonable degree of macroeconomic stability; and public confidence in government and the legal system are likely to be far more important to the development of the poorest countries than any amount either of external assistance or of fine-tuning of (often controversial) trade policies or other domestic economic, political or social policies.

Moreover, the potential problems created by contagion of financial distress are now seen as threatening to whole regions, and indeed well beyond. In August 1998, Latin America as a whole was suddenly shut out of global capital markets because of events in Russia. South Africa’s future is highly vulnerable to current developments in Brazil. While most discussion of these issues has focused on the problems of the "emerging" and "transitional" economies, and often on their systemic implications, the analogous problems of smaller developing countries have been relatively neglected. In future discussions of the FTAA and post-Lomé IV arrangements they can no longer be avoided.

These "new" financial issues have by now assumed such regional, and even potential global, importance that any negotiation of longer-term development or trade cooperation cannot be credible without full provision for cooperation in financial crisis prevention and management within a fully integrated trade–financial cooperation package. It is no longer plausible for some intergovernmental agencies to address purely trade issues (sometimes even trade in financial services) in one forum while totally different ones (often considerably more powerful) "sort out" the financial issues separately in another. Nor can these "financial cooperation" issues any longer be understood, as they once were, as basically the business of the official development assistance agencies. As private capital surges and crises grow in frequency and in importance, Treasuries and Central Banks must be directly involved in negotiations of the FTAA and post-Lomé type. (In some national capitals a degree of inter-agency cooperation and information exchange on these issues is achieved; in most there is still very little. Some Treasuries and/or Central Banks have argued, for a variety of reasons, that their activities must remain independent. )

This paper will argue that in all future FTAA or post-Lomé IV Agreement negotiations, there must be provision for direct discussion among the relevant financial authorities, perhaps in separate committees or subcommittees, of financial cooperation, crisis prevention and management; and on their agendas there must be room for the provision of special arrangements for the smallest and most vulnerable countries. It will argue that these negotiations may offer, as a useful byproduct, a useful alternative forum for the pressing of important points about future global financial architecture at the same time that concrete and practical proposals for future FTAA and post-Lomé IV Agreements are negotiated. It begins with some contextual background on the new role of global financial markets, crises and contagion. It then addresses some of the major issues in recent crisis management. Finally, in Part 4, it makes suggestions as to appropriate reforms and approaches to crisis prevention and management in the context of forthcoming FTAA and post-Lomé IV negotiations. For the reader who is short of time, Part 4 contains the main recommendations. It is a short paper; there is therefore no summary or conclusion.

The East Asian crisis has brought dramatic attention to the implications of the vastly increased flows of private international capital throughout the world, not least to many developing countries, and, in particular, their potential to generate major difficulties not only for developing countries but for global macroeconomic management. It is now widely understood that financial crises can inflict severe social and economic damage upon countries even when the governments of these crisis-stricken countries have been managing their budgets prudently and have had little prior indication of deficient macroeconomic conditions or economic mismanagement. "Contagion effects" in other countries are now recognized as potentially severe.

It is well-known that financial markets, indeed all asset markets, are qualitatively different in their functioning and behaviour from the "text-book" markets for goods and services in which policymakers all are so well schooled. Because of the importance of information in asset markets, and its imperfect and asymmetric availability, participants in financial markets respond to "signals" in sometimes herd-like and apparently perverse fashion. The available information is always subject to interpretation by these market participants and interpretations can and do alter at short notice. It follows that asset markets can settle at multiple equilibrium points in consequence of participants’ alternative interpretations of available information about the future. These markets are therefore highly vulnerable to fluctuations in "animal spirits" and, as in the recent East Asian case, to self-fulfilling losses of confidence. "Bubbles" in asset prices and crises are inherent in financial markets. No amount of increased information, transparency or supervision can prevent recurrent "runs", panics and crises in stock and bond markets, property markets or currency markets. National central banks and financial supervisory agencies have been expressly created to protect the social interest in these circumstances and to seek to prevent or suppress their possible negative consequences in the real economy and society.

Of course, the global economy is undergoverned in these (and many other) dimensions. It has only the bare rudiments of a central bank or the requisite financial regulatory authorities – in the IMF, BIS, IOSCO and various less formalized arrangements. Yet it is now clear that there are significant economic and financial spillovers across national borders. Contagion across countries and markets is inevitable. No country can be totally immune. The best that policymakers may be able to achieve is some reduction in the frequency of crises and greater preparation for the modification of their consequences, including their potentially contagious effects.

International economic and financial contagion takes many forms. Direct links between financial institutions are the most obvious source of financial contagion. There is a long and sorry history of sequential domino-like consequences, even for apparently sound and significant financial institutions, flowing from what initially seemed fairly minor disturbances in smaller financial institutions. When loans and investments begin to turn sour, financial institutions have fiduciary and often legal obligations to call in their loans, increase their liquidity and reserves, raise risk premia on their credits, and exercise greater restraint in their credit and investment allocations. Financial institutions frequently have faced margin calls and liquidity pressures in one country that have forced them to sell perfectly sound assets, in a quasi-distress manner, in another.

In the new world of informatics –with instantaneously teleconnected, round-the-clock financial markets and often highly leveraged international investments– and absent adequate international supervisory or lender-of-last-resort facilities, such direct international financial contagion can spread extraordinarily quickly. Indeed the sophistication of current derivatives markets and the degree of (still poorly understood) linkages among international financial institutions and markets appear to have reached a stage well beyond the capacities of even the strongest financial supervisory authorities fully to understand; their risk aversion in the face of such informational and analytical constraints led to the debacle of the Fed’s "organized rescue" of the LTCM, a modest-sized but evidently highly leveraged and well-linked New York-based hedge fund. Many fear that current international financial markets, so technically advanced and so undersupervised, may already be inherently extremely fragile and highly volatile.

Perhaps a more familiar form of (international) contagion takes the form of psychological effects –the herd-like behaviour (already referred to) typical of asset markets with limited information, in which market actions themselves constitute an important informational signals upon which the less well-informed base their own activity, thereby forcing even the well-informed to take such reactions into account in their own decisions. As noted above, bubbles and "busts" are typical of asset markets. Such contagion may, at times, be based upon perceived similarities in policies, economic structures, or real links between countries and hence it may be focused on particular geographic regions, e.g. East Asia, or Latin America, or particular types of economies, or particular types of asset, e.g. real estate, or stock markets.

There are also, of course, reasons for expecting old-fashioned "real" contagion effects through the existence of direct trade and other current account or international production links and/or the prospect of intensified international competitiveness in third markets, competitive devaluations and the like. And it should go without saying that these different forms of contagion can all feed upon one another.

It is also important to note that there may also be severe indirect contagion effects for some small countries that appear otherwise totally unlinked to foreign financial markets or indeed only weakly linked to the world economy at all, and that appear to be managing their own economies prudently and promoting development effectively. Financial crises, wherever they occur, unfortunately, but inevitably, breed negative real effects with some "general equilibrium" consequences –on real investment, trade flows, commodity prices, etc.– even when their own financial markets do not seem to be much affected. Most African and Caribbean countries suffered more from the effects of the Asian crisis on their primary export prices than they did from direct effects through financial markets.

Sometimes forgotten, however, in the continuing debate over the causes and implications of the East Asian financial crises are the ramifications of the new international financial scene for a large number of smaller, amd often already highly vulnerable (to other exogenous shocks), developing countries in other parts of the world. It is not widely known that many of these countries have already experienced surges of capital flows, both inward and outward, of dimensions (relative to the size of their own economies) just as great as those recently experienced in East Asia. Because of their small absolute size and their more limited implications for the global economy, such events in smaller countries receive much less press. The problems created, for them, by volatile private international capital flow are just as great, however, and arguably even greater, in smaller, potentially more volatile, less flexible and "less consequential" countries as (than) they are in countries with "deeper" financial markets and the potential to generate systemic consequences. The changing character of international finance; new experience of the herd-like behaviour of international financial flows and international contagion; and new sensitivity to the potential severity of their negative consequences all make it imperative to open focused discussion on mechanisms that could be deployed to prevent unnecessary damage from surges in private international capital flows to the smaller, more vulnerable and more fragile countries.

At least four major issues have figured prominently in the management of the East Asian crisis, are likely to arise in future crises, and should be among those for which there should be explicit forward planning in future FTAA or post-Lomé IV agreements.

Crisis response has typically taken the form of the immediate application of austerity measures to the borrowers and, more generally, the residents of the crisis-stricken countries. This involves real adjustment downward in economic activity –real GNP, employment and investment. In the case of the five most-affected East Asian countries, a turnaround in the current account balance of roughly 11% of GDP was accomplished between 1996 and 1997– involving an enormous real (downward) adjustment.

If, as most observers now believe, the crisis was at least as much a matter of short-term liquidity difficulties and panic as of economic mismanagement or structural flaws, the timely provision of significant further external credit could easily have overcome the need for such draconian adjustment measures. Rather than permitting external private creditors to "take off", by failing to roll their short-term credits over, the financial "system" should have encouraged them, or even forced them, to maintain their previous exposures. Just as a bank should close its doors temporarily during a liquidity crisis, to prevent further runs on the bank, external creditors should be prevented from leaving precipitately thereby creating an unnecessary economic collapse. Instead of bailing them out, international financial institutions should have bailed these private creditors "in" by demanding, as a condition for their assistance, that private creditors impose a standstill on their exposure and restructure their short-term credits over a longer term. (In some circumstances, the official "rescuers" might reasonably demand expanded private credits –more equitable burden-sharing– as a condition of official assistance.) The official response to such crises should involve the early "pushing" of both sides to the credit relationship, the creditors as well as the debtors, rather than only imposing tough measures upon the latter. If it is truly a liquidity crisis, the creditors will suffer no long-term harm from such official pressures, which are simply overcoming a collective action problem.

If the problem really is one of solvency, in which there will be a problem in future debtor payments, the sooner that the creditors "take a hit" and begin the initiation of a debt workout, the better. In these circumstances, official action will again be needed to stop the creditors from each running for a "piece of the action" immediately. Official coordination and compulsion will be needed for orderly debt workout in cases of insolvency as well as of liquidity crisis.

Such a balanced approach to the distribution of the real adjustment burden implies that the IMF and other official institutions involved in the response to a financial crisis will be encouraging a moratorium on external payments at a fairly early stage and will be lending into arrears. There is a precedent, of course, in the 1980s debt crisis for IMF lending into commercial arrears. Article VIII of the IMF specifically authorizes the restriction of normal debt servicing in support of stabilization objectives. Early and significant official measures to ensure equity and balance in the burden of adjustment to crisis can reduce both the real costs at present borne by crisis-stricken countries and the real costs of financial crises to the relevent region, other countries and to the entire global system. There is no reason why the FTAA and post-Lomé IV agreements should not seek explicitly to put formal force behind such improved arrangements (see below).

Whatever the degree of real restraint that is still required, after better balance between external creditors and the debtor country is achieved, there remain important domestic policy choices in the debtor country. A key objective should always be the protection of the most vulnerable to domestic macroeconomic restraint –the poorest and those most affected by cutbacks. Pursuit of this objective is likely to involve either a reordering of the government budget, or increased tax revenues to finance the necessary expenditures, or a degree of fiscal loosening.

More broadly, there is the matter of the appropriate fiscal–monetary policy mix, given the required degree of macroeconomic policy restraint. Current IMF and "orthodox" approaches emphasize the role of monetary restraint and sharp increases in interest rates to restore confidence in the currency. Sharp interest rate increases failed, however, to restore confidence in the recent East Asian experience. Rather, they seemed to be taken by investors as a signal of the extreme seriousness of underlying problems. Confidence was certainly not furthered by declarations by the IMF and others that the problems of the affected countries were deep and structural rather than of a short-term (liquidity) nature. Interest rate increases, of course, generate enormous negative side effects in the form of increased bankruptcies and reduced asset values, whatever their signalling effects upon operators in currency markets. So, of course, do plummeting currency values. Reasonable people may differ as to the details of the appropriate monetary and fiscal policy response to crisis; but there is little doubt that the monetary measures taken in the recent East Asian crises failed in their primary intent.

Other policy measures, associated with IMF conditionality, were and are also at issue:

• Inappropriate issue linkage. External sources of support should not intrude into policy spheres unrelated to the financial crisis, as they have done in Korea and Indonesia. Longer-term development policy relating to the role of the State, governance questions, competition policy, openness to foreign direct investment, and trade protectionism should not be conditions attached to external finance intended to address financial crisis situations, particularly when they appear to stem from temporary (liquidity) problems.

• Timing of reforms. Major structural reforms should, in any case, not be introduced at the height of a financial crisis. Widespread bank closures, with only limited provision for depositor protection, constitute, at such a time, a major further blow to confidence. Most fundamental reforms take considerable time and should be introduced with due caution. Certainly, the worst time for the introduction of structural reforms in the financial sector is in the midst of a financial crisis.

• Capital account policies. Since most now assign some responsibility for the crisis to premature financial liberalization and, in particular, liberalization of the external capital account, the conditioning of finance upon the further liberalization of the capital account was surely inappropriate. At the very least, it was extremely controversial! Most would describe it as foolhardy.

There exists a strong case for developing liquidity and crisis management systems that are based upon institutions more attuned to the realities of the particular countries in need of assistance. These could be based upon regional familiarity, similarities in economic circumstances (e.g. size or economic structure), linguistic links, or other legitimate likely bases for informed and objective peer review. The degree of overseas and distant (in every sense) concentration of power and influence over financial crisis management has arguably become counter productive and, in any case, politically unsustainable.

It is clear from the Mexican, East Asian, Russian and Brazilian experiences that the size of the external financial inputs required for the resolution of financial crises in some developing countries may be very large. It is far from obvious that the IMF will have anywhere near the resources to supply the necessary amounts in the future. In all of these recent experiences, it was necessary for it to find a variety of other complementary sources of official finance.

No less important, however, is the manner in which such finance is to be supplied. In order to address a liquidity crisis it is necessary to insert liquidity, i.e. finance that is available at very short notice, in large amounts, and virtually unconditionally. Finance that is supplied only on the basis of negotiated conditions and which is released only on the basis of compliance with them, through successive tranches, may be very helpful in the resolution of the crisis. In some circumstances, it may be sufficient. But it is not liquidity. Future liquidity crises should be met with liquidity responses, and all countries should be treated equally in this respect. It is striking that the amounts quickly supplied to Mexico during its crisis far exceeded the amounts only slowly being made available to the East Asian countries and Russia in response to their crises. Only a fraction of the financial package put together for East Asia has so far been disbursed. There have been no special relaxations of previously agreed quota-based limits on assistance for small countries.

In times of financial crisis, there is likely to be a flight to large foreign financial institutions within the crisis-affected countries, whatever other directions the flight may take. In these circumstances, the "national treatment" required under the terms of the financial services agreement within the WTO may be quite inappropriate. It may be sensible and should be legitimate for the national authorities to devote particular attention to the problems of domestic financial institutions which are usually smaller and less internationalized than those that are foreign-owned. While there is some recognition of this potential problem in the WTO agreement on financial services, it is somewhat ambiguous in its formulation and will have to be tested through particular cases. It is important to prepare for such cases in advance. It will be important to seek (appropriate, i.e. cautious) clarification on this issue in any new North–South agreement that purportedly seeks to go "beyond the WTO". Similar caveats obviously apply to other attempts to go "beyond" existing WTO or other standards, e.g. in respect of foreign investment (see below).

In developed market economies, steps have been taken to reduce the frequency and size of financial crises, and to limit the damage they are likely to cause. Appropriate institutions have been created –central banks, banking and financial supervisors, deposit insurance, etc.– and rules, incentive systems and resources have been deployed in their support. Yet the increasingly globalized international economy does not yet have much of a comparable character. Nor do regional or subregional groupings. Surely more can be done while the world continues to grope its way to a more effective system of global economic governance. Let me highlight some of the issues that arise in this connection, and could receive attention in forthcoming less-than-global negotiations.

In the aftermath of the East Asian crisis there has been greatly increased interest in the problem of volatile short-term private capital flows. Most discussion now revolves around the question of how to reduce surges in short-term capital flow rather than, as before, whether to. The current debate about the appropriate international capital account regimes for countries at different stages of financial development is a healthy one.

It is important that the developing countries quickly develop a coherent response to the OECD push for universal across-the-board capital account liberalization –a push which is found within the IMF, as it discusses its new purposes and jurisdiction in the capital account; in the WTO, as it completes its negotiations on financial services and discusses the initiation of discussions on foreign direct investment; and in the OECD, as it continues its work on a multilateral agreement on investment. Developing countries have yet to put together their own consistent and coherent approaches to capital account issues, and they need to do so as a matter of urgency. For the present, their emphasis, in the IMF and elsewhere, on caution and order in capital account liberalization is entirely appropriate; but there must be more active (as opposed to purely defensive) attention devoted expressly to these issues (and to the turf struggles between the IMF, BIS, WTO and "MAI" that surround them). Why should they not present their own proposals?

A common popular misperception about the problem of financial surges, crises and the uses of capital controls is that they all have to do with capital outflows. In fact, the most difficult issues for developing country macroeconomic managers promoting stability relate to the volatility of private capital flows in both directions –both inward and outward. Those developing countries that have most successfully addressed the macroeconomic management problems created by volatile capital flows are those that have most cautiously "managed" private capital inflows –typically with a judicious mix of real currency appreciation, fiscal retrenchment and direct or indirect resort to capital controls, notably taxes or controls over capital imports. Fundamental to such success is therefore full retention of national autonomy in the management of the capital account, including transactions which may be formally categorized as "foreign direct investment". Herein obviously lies an area of potential fundamental policy conflict between financial interests in the Northern countries and the interests of macroeconomic policymakers in the South. It will be critically important not to leave negotiations on trade in financial services or foreign direct investment exclusively in the hands of trade and/or investment agencies, most of whom have little appreciation of the potential macroeconomic management implications of their potential trade or investment agreements.

Developing country negotiators should be particularly wary of agreements that appear to relate primarily to foreign direct investment but then define "investment" so broadly as to encompass portfolio flows and other forms of foreign-owned capital, as in the aborted Multilateral Agreement on Investment in the OECD. Foreign direct investment can be highly volatile too (as the East Asians quickly learned, to their cost, in their recent crisis). It can readily be translated into liquid capital, e.g. by borrowing from domestic institutions on the security of foreign-owned physical capital, for the purpose of achieving rapid capital outflow when crises strike. Foreign direct investment should therefore be subject to the same general rules as other forms of (portfolio) investment with regard to rights to repatriation.

To repeat, it is not simply the (liberal) trade components of the proposed large-scale integrated North–South economic cooperation agreements that will influence the long-term development of the poorer countries, though they may continue to receive the bulk of popular attention. Capital surges –in either direction– are not necessarily associated with trade liberalization; but their developmental consequences can be enormous, even catastrophic. It follows that arguably the key provisions of these agreements will be those relating to the rights and obligations of private savers and investors; the soundness of the institutions for their support; and the stability of macroeconomic conditions, not least, appropriate and stable real exchange rates. These provisions will have to incorporate full autonomy for local policymakers to manage their capital accounts and their domestic financial systems in the interest of their own macroeconomic stability and development.

Any FTAA or post-Lomé IV agreement that is to be useful to the developing countries facing the new world of international financial market turbulence should therefore include flexible provisions to permit the deployment of capital account measures to discourage short-term inflows and outflows of private capital. They should reflect extreme caution about premature cross-the-board liberalization of member countries’ international financial flows. They should make provision, in carefully defined circumstances, for the favouring of domestic banking and other financial institutions over foreign-owned ones in the resolution of financial crises.

Moreover, there is no reason why any such agreements should not write in some specifics as to a required increase in the two-way exchange of information and technical cooperation among central banks and regulatory/supervisory agencies in the financial sector. The degree of direct bilateral cooperation among G-10 or BIS central bankers is much greater than that between any central bankers in the North and their counterparts in the South. Why cannot Northern financial authorities who have been both so demanding and so cooperative with their Southern counterparts in the sphere of money laundering not be equally cooperative and even active in the monitoring and control of short-term capital flows?

It is clear that the resources of the IMF are quite inadequate to provide sufficient liquidity to address future financial crises of the East Asian kind. The IMF Managing Director has appealed for a significant increase in IMF quotas, but to little effect, and the restrictions placed by the US Congress on its renewed "support" for the IMF threaten the very integrity of this ostensibly "multilateral" institution. In consequence, individual IMF members cannot at present assume the availability of financial support in amounts remotely approaching those required to address their problems during periods of liquidity (or other) crisis.

Strictly speaking, under Article VI (of the IMF Articles of Agreement), the Fund is forbidden to supply resources "to meet a large or sustained outflow of capital". In recent years, however, Fund lawyers have been able to interpret this flexibly so as to permit IMF support in such circumstances and indeed to supply it to some members in amounts considerably greater than those that appear to be authorized under the current formulae for access to IMF resources. So far, these exceptional arrangements have been deployed in circumstances where, as in Mexico, Korea or Russia, the difficulties being addressed are considered to constitute a systemic threat. The IMF’s General Arrangements to Borrow (GAB) and their New Arrangements to Borrow (NAB) are authorized, however, only in support of activities which threaten the stability of the overall system; and their activation requires (uniquely) the agreement of the lending countries rather than simply, as one would think it should in a fully multilateral body, that of the entire IMF membership. There is as yet no agreed mechanism for the provision of equivalent support (equivalent in relative dimensions) for smaller countries whose difficulties are unlikely to constitute a threat to the international monetary and financial system. There is therefore a very strong case for the creation, on an urgent basis, of arrangements to supply such support if or when it may be required.

There is little prospect that smaller and poorer developing countries can acquire sufficient reserves or access to sufficient credit lines to protect them adequately against future financial crises of the kind that other emerging market economies have been experiencing (or indeed of more traditional kinds). Under current IMF rules and procedures, there are no mechanisms for the provision of sufficiently large emergency credits to enable such countries to overcome comparable liquidity (or other) crisis. The IMF could, of course, develop its role in these countries less as a direct financier than as a "leader" and "signaller" for other sources of finance, notably central banks, private banks and, conceivably, even the BIS.

New forms of regional cooperation, such as were mooted in response to the East Asian crisis but (myopically) discouraged by the US and the IMF, are another obvious new route to pursue. The FTAA and the post-Lomé IV Agreement arrangements could provide mechanisms for the support of all members, including those in which crises are unlikely to constitute threats to the global or even regional systems, in circumstances of contagion-induced or otherwise exogenously caused financial crisis. Such arrangements could take the form of special "stabilization funds" or agreements for direct central bank cooperation through swap arrangements or similar devices, to be activated in circumstances that are fully agreed in advance. Such supports could and should offer contingent support well in excess of that provided under the current terms of IMF financing arrangements. The inclusion of such agreements within the FTAA and post-Lomé IV Agreements would help national governmental promises to maintain liberalized external financial arrangements, whether in the current or the capital account, to carry real credibility. Again, if central banks can work so closely in cooperation against money laundering, it is difficult to see why they cannot act similarly in other spheres. These possibilities and the case for them are pursued further in the sections tht follow.

Both within the developing countries and at the international level, the search is on for new and tightened rules and stronger institutions functioning more effectively in the provision of information, supervision and, where appropriate, regulation. These efforts should be encouraged at the regional level, within the Commonwealth and Francophonie, and wherever common language, institutions or experience make them especially likely to be productive. There is every reason for cooperation and technical assistance in this sphere to be an integral part of any post-Lomé IV or FTAA agreement. While such provisions are to be encouraged their translation into improved practices will take some time. Standards must therefore not be established so inflexibly as to throttle financial development. There are, in any case, limits to the degree to which they can prevent further financial crises.

From this it follows that more needs to be said about the regulation/finance tradeoff in the context of the smaller countries, within a future "integrated" FTAA or post-Lomé IV Agreement. In the larger debates over the future of the international financial architecture the relative weight to be assigned to (i) improved information, supervision and regulation as against (ii) the greatly increased provision of finance when required, is a central element. The sheer magnitude of the amounts that would now be required effectively to influence global markets for most currencies in times of crisis and continued political unwillingness to contemplate a true lender of last resort have left reform advocates with little option but simply to press for improved supervision by national authorities, buttressed by norms established by the BIS, IOSCO or some new World Financial Authority; with, of course, some continuing debate over the efficacy of some forms of controls and/or taxes on capital flows. But, in the case of smaller and poorer countries the relative weight to be assigned to these two basically different policy instruments is not the same as in the conventional argument.

The expertise and experience for the effective supervision of domestic financial systems is considerable. Even financial "booms" of (absolutely) modest dimensions can easily overwhelm (small) local supervisory authorities in small countries that are typically already hard-pressed to meet their normal responsibilities. External technical assistance may be called upon for some relief but it is likely to be slow to respond, inexperienced in the local environment, and, in any case, far from top priority among decisionmakers in supplier countries during periods of overall financial turbulence when they may be most needed.

On the other hand, the emergency liquidity (or restraining influence) required to address the potential problem of surges in private capital flows out of (or into) small poor countries is rarely likely to be absolutely large in size –even in circumstances of considerable small-country crisis coincidence or contagion (although, of course, potentially far greater than currently permissible drawing rights in the IMF). For small poor countries, while obviously continuing to do everything possible to construct sound and well-regulated domestic financial systems, there are therefore sound arguments and real possibilities for building strong financial/liquidity defences for them within subglobal agreements. To do so will help to build confidence in these countries’ emerging domestic financial systems. The prospect of moral hazard, either for borrowing countries or for lenders, while not non-existent, should, as always, be guarded against wherever possible; but it can, certainly in its possible absolute size, be taken as of second-order importance. How exactly such extra liquidity can be provided offers many possibilities, including, for instance:

• A small country liquidity fund or facility operated by a regional monetary fund, a single large national monetary authority, the BIS or the IMF;
• a similar small country fast-disbursing fund administered by a regional development bank, a single aid donor, or the World Bank;
• more informal and even ad hoc agreements among monetary authorities, arranged either on a bilateral or multilateral basis.

As argued above, effective response to financial crises in the future will require larger and earlier insertions of liquidity. The IMF may continue to lead in its provision but it is not now equipped to be its sole supplier. Moreover, it is the World Bank and potentially the Regional Development Banks, not the IMF, that should play the major role in structural reforms in the financial sector, and in addressing the profound social consequences of financial crises, particularly mismanaged ones. The IMF, the World Bank and the relevant regional development banks and/or new regional or subregional monetary associations must work cooperatively. During the Asian crisis, significant policy disagreements have arisen between IMF and Bank advisors. This is not inherently undesirable or surprising. What is undesirable is the effort to suppress such professional disagreements in the interest of the creation of a consistent "Washington" position; and to suppress and downplay legitimate alternative professional analyses emanating from within the crisis-affected region. Both on the basis of likely comparative advantage, the principle of subsidiarity in the allocation of governance functions, and political sustainability and credibility, there is a strong case for greater decentralization of financial power and influence –a significant reduction in the roles of the IMF and Bank in development and crisis response in smaller and poorer developing countries. (A parallel case can be made for a significant reduction in the roles of purely Northern credit rating agencies and other financial institutions in the private sector as well.).

What the recent experience further clearly underlines is that the IMF (and the international community) still suffers from the fact that the IMF has no independent evaluation and assessment unit. The recent IMF experiment with external assessment of its ESAF programme, which uncovered significant differences of view as between the IMF staff and the external assessors, illustrates the potential importance and value of such independent assessments. A recently-released report by Jacques Polak and others, done for the Washington-based Center of Concern, also makes a persuasive case for increased IMF transparency and independent evaluations of IMF activities. If the IMF is unable itself to introduce these critical elements of good internal governance, it is even more important that alternative sources of professional analysis be consciously constructed in the emerging international financial architecture, e.g. at the regional or subregional level, or conceivably for the worldwide "small country" constituency.

The FTAA and post-Lomé IV Agreement negotiations provide an important potential forum for the presentation of developing country views on (i) future financial architecture, outside the (considerable) constraints of the IMF/Bank meetings, and (ii) the need to integrate the financial discussions with those of trade issues.

Such integrated approaches will be opposed by the US and the EU, or at least by their Central Banks and Treasuries. Some Southern Central Banks, Treasuries (and even Trade Ministries) may also fear loss of turf and oppose such integration. But eventually it must and it will come. Wouldn’t it be good to initiate proposals for it in the South? push its unassailable logic hard? and seek to influence the current IMF/Bank and financial architecture debates on this quite different stage? (while simultaneously conducting parallel activity in the run-up to the UN Conference on Financing for Development and, on an ongoing basis, within the UNCTAD)?

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