Unless these information problems are addressed, surveillance and early warning systems will be severely hampered. Transparency helps to instil market discipline, which in turn makes the economic and financial systems more resilient to shocks. The implicit assumption appears to be that the markets and international monitoring bodies, when they have access to accurate and timely information, will perceive the deterioration of the financial and economic conditions of a country more easily. This is expected to trigger a gradual response by the markets, such as an increasing borrowing premium or a downgrading of credit ratings, thereby avoiding panics and creditor rush behaviour. In addition, the evils of crony capitalism, where long-term links between banks and corporations lead to overlending and investments in excessively risky areas, can be reduced when there is sufficient information about the true financial position of banks and corporate borrowers.
Transparency helps markets function better.
A sudden loss of confidence in both financial firms and enterprises which prompts creditors to exit rapidly is due, in large part, to a lack of transparency on the part of firms as well as national authorities. In periods of financial stress, a lack of transparency tends to reinforce rather than dispel the rumours that form the basis of the unwillingness of creditors to deal with indebted parties. Thus, the provision of timely information can help mitigate the spectre of contagion effects and stabilize expectations and market sentiments. Because developing countries are more vulnerable to bouts of financial instability and contagion than developed economies, their making available good quality data in a timely manner is a concrete way to fill in the gap in existing international mechanisms. Second, early warning may not operate because political pressure prevents a warning from being heeded.