policy is decided by the national political systems. they are free in principle to alter tax rates, boost public spending and adjust interest rates whenever they wish. in this direct sense, a more open economy does not mean that policy is restricted. in many ways, access to international capital can actually enlarge the scope for action. unlike the case in earlier centuries, a country that is stricken today by severe crop failures, for instance, can borrow external funds to buy seed. similarly, a country wishing to strengthen its growth potential by more than domestic saving permits can expand its production apparatus more rapidly with the aid of imported capital. at the same time, loans and other financial transactions do entail dependence. if a country ’ s economic policy does not inspire confidence, the consequences may be unfavourable. perhaps investors will no longer be prepared to provide new loans and may even stop existing credits. long bond rates are liable to rise, accompanied by a depreciating currency. such reactions are the market ’ s way of passing judgement on economic policy and a country ’ s creditworthiness. this mechanism is the same as that for private borrowers. access to credit enhances welfare but also exposes the borrower to the scrutiny and discretion of creditors. a good example of how this works is provided by the swedish economy. from the mid 1970s, problems with government finances led to external borrowing, which mitigated the effect on interest rates. but debt accumulated and an acceleration of this trend in the early 1990s led to an acute loss of confidence : interest rates shot up and after a time the krona fell. besides illustrating how a country can be hit if its economy is not managed properly or if problems arise from other causes, this example shows that the imbalances may be generated gradually, so that timely signals can be an advantage. perhaps prompter warnings would have put a stop to the economic mismanagement at an earlier stage. something may thus be gained from the market sending clear signals without delay. but the situation should not be idealised. the functioning of financial markets is by no means perfect. real economic problems can build up without attracting attention and when they are detected, the financial unrest is liable to spread to other countries for no apparent reason. the financial market ’ s reaction may also be out of proportion to the underlying imbalance. this brings me to the next type of problem. financial instability in a global market just as in any other market, financial market prices are basically a function

better systems for oversight and supervision. the imf, the world bank and the bis are all involved in this work. knowledge must be enhanced. the rule systems in many third world countries must also incorporate bankruptcy legislation, arbitration procedures, and accountancy rules that are fair and transparent. extensive and well - motivated work on reforms in also in progress in many industrialised countries. the tasks and methods of central banks and financial supervisors are being specified. many private institutions are reviewing risk models and adapting them to the global reality. conventional models must be augmented. supervision also needs to be developed to cover new instruments and types of risk, risks that the asian crisis has brought to the fore. the basle committee is now working to identify respects in which supervision may need to be extended, for instance to create standards for the bank ’ s transactions with highly leveraged institutions. the problems in ltcm clarified the central importance of this. at the global level, closer coordination of authorities ’ work on supervision is being called for ; today, such coordination is confined to sectors. a financial stability forum has therefore been set up and consists, at least for the time being, of representatives of the finance ministries, central banks and supervisory authorities in the g - 7 countries, together with imf representatives. the forum met for the first time some weeks ago. discussions are also in progress in what is known as the group of thirty - three, consisting of the participants in the g - 10 and some twenty emerging market countries. in its country evaluations, the imf will also be paying more attention to the development of the financial system. there is to be cooperation with the world bank ; these two organisations have agreed on a joint model for the appraisal of national financial sectors. these appraisals are to be based on the current minimum standards for banks and other financial institutions, a broad review of developments and risks in the country ’ s financial sector, and other conditions such as legislation, accountancy rules, payment systems and financial markets, for example. 3. greater transparency a more stable development also calls for greater transparency. if the global capital markets are to function as intended, their players must know about the actual risks and be in a position to make realistic profit assessments. this in turn means that international organisations as well as governments, private companies and financial institutions must convey a fair picture of the prevailing conditions. as regards the imf, increased transparency has been proposed in the country assessments, for example. a pilot project has