Economic and financial crises are not everyday phenomena, but when they come, they inflict untold economic and social costs.¹ The severe economic contraction, widespread bankruptcies, large-scale unemployment, social and political discontent and continued vulnerability to speculative attacks entail a very great burden for any country to bear. As observed in the Asian crisis, the poorest sectors of society tend to be the ones that bear the brunt of the difficulties. The aftermath of the crisis is usually accompanied by intense soul-searching by all affected parties, creditors, debtors, the private sector and policy makers alike. Why did the crisis occur? What could we have done to manage it better? Why was it not spotted in advance? And, perhaps more wistfully, how can a recurrence be avoided?

The Asian crisis has sparked worldwide interest in reform of the international financial system. The main thrust of proposals for a new financial architecture - the buzzword for a reformed system - is to ensure both that the potential benefits of the globalization of markets are realized and that the risks inherent in the process are mitigated. While these objectives are not new, the changing circumstances, including technological advances in communications that underpin financial market integration and the presence of massive and volatile capital flows, give rise to new challenges in managing national and international financial systems. The ideas behind reforms in the financial architecture are multifaceted and include elements of promoting transparency and accountability; strengthening financial systems through better supervision; managing the process of capital account liberalization by better sequencing; ensuring the appropriateness of exchange rate regimes; dealing with volatile capital flows; and involving the private sector in crisis prevention and resolution. The call for improved surveillance (defined to include international cooperation in monitoring and exchange of information and views, as well as the application of peer pressure on policy matters) is an integral part of the overall response to the need to reform the international financial system.

At the global level, there have been some important initiatives by IMF, BIS and the World Bank, as well as by private organizations such as IIF and rating agencies, to revamp and strengthen their information collection and monitoring activities (for a review of these efforts see chapter V). The idea of a regional surveillance or monitoring mechanism, first proposed during the Manila Framework meeting in November 1997,² has gradually advanced to the point where 14 countries have agreed to meet twice a year to review economic and financial development in the region. The ASEAN Finance Ministers Meeting in February 1998 endorsed an ASEAN Surveillance Process³ (discussed in chapter VI).

Designing an effective surveillance or monitoring mechanism is complicated. History is replete with attempts at the international level that failed to take off owing to various constraints. While at the national level the technical challenges to collecting data accurately, on time and with the required frequency, are daunting, it is much more difficult, given political sensitivities, to design and implement monitoring measures at the regional and global levels. In many regions, especially within groupings of developing countries such as ASEAN or SAARC where trade issues have tended to dominate the agenda, cooperation on financial matters is quite novel. Thus, the creation of any regional or subregional initiative necessarily involves a steep learning curve, with many technical and institutional hurdles.

On top of all of this the world is becoming more complex. As the recent experience of the Asian crisis illustrates, policy makers have yet to come to grips with the modalities for operating in an environment of floating exchange rates and free flows of capital, both within the ambit of the expectations and reactions of global markets. Thus, given the possible negative externalities arising from financial crises in either developed or emerging markets, it is in the interest of the world community, and not just the countries affected by a crisis, to take steps to improve the management of the world financial system.

The members of ESCAP have been reviewing regularly the overall economic situation in the region, including the impact of the financial crisis which hit East and South-East Asia in 1997. The spillovers from the crisis affected many countries in the region and outside negatively. Though the worst predictions did not materialize (see chapter II), all were caught unawares by the force of the crisis. However, such reviews have not been in the nature of what can be considered surveillance, as defined earlier. The Commission, at its fifty-fifth session in April 1999, adopted resolution 55/2 in which, inter alia, it requested the ESCAP secretariat to undertake a study on possible regional mechanisms for the exchange of information and early warning systems in relation to the financial and economic situation in the countries of the region, with a focus on crisis prevention and reduction of the vulnerability of countries to economic and financial turmoil. The ultimate objective of the study is to make recommendations for future activities, including ways and means of making regional contributions to the global monitoring and surveillance programmes of IMF and other multilateral entities while complementing, but not duplicating, efforts already made by multilateral financial institutions in this direction.

ESCAP is not about to set up its own economic and financial surveillance mechanism, operating in parallel with current or new international, regional or subregional mechanisms. Rather, the intention is to explore ways in which ESCAP could complement and support these mechanisms with a view to enhancing the effectiveness of such activities for crisis prevention for the benefit of ESCAP members. This study, which responds directly to resolution 55/2, first looks at what constitutes monitoring, surveillance and early warning systems and the experience with these systems in terms of the ability to predict a crisis. This is followed by a brief review of the existing mechanisms in IMF, BIS, IIF and the rating agencies in terms of the process followed, the technical aspects of the approach and new activities initiated since the crisis. In chapter VI, an effort is made to explore how some regional/subregional approaches could help fill the gaps identified in the review of existing mechanisms, these approaches being of varying degrees of formality and catering for the needs of different groups of countries depending on the degree of their current involvement in world financial markets. The last chapter presents some suggestions for further action, particularly by ESCAP, to assist the countries in the Asian and Pacific region in identifying and coping with vulnerabilities to economic and financial crises.

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Footnotes:

¹ In the past 20 years, more than 125 countries have experienced at least one serious banking crisis. In some cases, the extent of the crisis was so deep that the cost of resolution would exceed 10 per cent of total GDP. See Morris Goldstein, The Future International Financial Architecture, report of the Independent Task Force on Safeguarding Prosperity in a Global Financial System, chaired by Carla Hills and Peter Peterson, Council on Foreign Relations, 1999, available at (18 January 2000).

² Communiqué of the agreed summary of discussions of "A new framework for enhanced Asian regional cooperation to promote financial stability", Meeting of Asian Finance and Central Bank Deputies, Manila, 18-19 November 1997.

³ Joint Ministerial Statement, Special ASEAN Finance Ministers Meeting, Kuala Lumpur, 1 December 1997, available at (18 January 2000).