It argues for an approach which recognizes diversity and the need for gradual reforms, and avoids placing excessive administrative burdens on developing countries and linking implementation of codes and standards to IMF conditionality. Rethinking the exchange rate system Better codes and standards offer limited protection to debtor countries in the absence of measures designed to tame supply-driven fluctuations in international capital flows. Almost all major crises in emerging markets have been connected with shifts in exchange rates and monetary policy in the major industrial countries. According to the Report, the root of the problem lies in the failure to establish a stable system of exchange rates after the breakdown of the Bretton Woods arrangements. Currency instability exerts much greater damage on debtor developing countries, which depend more heavily on trade and whose borrowing profile exposes them to greater currency risk.
Crises are as likely to occur under floating rates as under adjustable pegs.
A currency board regime makes payments crises less likely only by making banking crises more likely, and costs incurred in defending a hard peg may exceed those incurred by countries experiencing a collapse of soft pegs. While it advocates seeking a solution to the problem at the global level, it notes that the exchange rate system is not even on the agenda for the reform of the international financial architecture. With the benefit of hindsight, the international policy response to the Asian crisis left much to be desired. According to the Report, a good deal of the problem rests with rescue packages designed not so much to protect currencies from speculative attacks or to finance imports as to meet the demands of creditors and maintain open capital accounts. Such bailout operations prevent private creditors from bearing the consequences of the risks they take, which weakens market disciplines, the Report contends.