Will there be a move towards liberalisation of capital accounts or will existing restrictions and controls be maintained in some parts of the world? Under current international arrangements, this is a matter for sovereign choices: IMF articles, in particular, do not cover capital account convertibility. Nevertheless, in a more diverse, multipolar world, interactions between countries with different financial systems will become more complex and, as the crisis has shown, very destabilizing. International cooperation should therefore aim at creating an environment where incentives to structural distortions in capital flows are reduced. Opening the capital account exposes countries to increased financial volatility. The impact, however, is different for capital importers and exporters. Capital importers face the possibility that flows would abruptly dry up, thus inflicting damaging shocks to their financial systems and national economies. Capital exporters accumulate claims on the outside world and, therefore, run the risk of valuation losses (through exposure to country and exchange rate risk). Ideally, an international open capital account regime would protect both capital importers towards sudden liquidity shocks and capital exporters toward abrupt changes in the value of their assets. This is, obviously, unrealistic in the current environment. But these are potential avenues for progress and debate. International liquidity The provision of international liquidity has been severely disrupted during the crisis. Emerging (and some industrialized) countries have suffered from acute dollar liquidity shortages which had to be remedied, inter alia, through a network of currency swaps between Central Banks.

As national financial sectors become increasingly integrated and interdependent, another top priority for us must be to strengthen our understanding of the factors that drive global capital asset allocation, and the reasons for capital flows across sectors and national borders. Early identification and assessment of capital flows will help us evaluate vulnerabilities in a timely manner, as well as enhance  BIS Review 43/2005  3  countries’ ability to address them. The effectiveness of our bilateral and multilateral surveillance activities will also be strengthened as a result. For members who wish to access international capital markets and integrate their economies more fully into the global financial system, we can provide advice on the appropriate sequencing of measures, such as how to strengthen their financial sectors and reduce their vulnerability to shocks as preparatory steps. Third, IMF financing and lending. The Fund’s traditional role of providing financing to help smooth the adjustment of temporary current-account imbalances remains vital for many countries. For others, our main task is to help prevent, or mitigate, capital account crises and their cross-border contagion effects. To succeed in these roles, the IMF must be able to exercise selectivity in supporting only those adjustment programs that will put the relevant members firmly on the path to external viability. The existence of robust domestic institutional frameworks, and strong national ownership of programs, would be key.