laurence h meyer : financial stability in emerging markets - what have we accomplished and what remains to be done? remarks by mr laurence h meyer, member of the board of governors of the us federal reserve system, at the center for strategic and international studies, washington, 18 december 2001. * * * economic crises in emerging - market economies were a prominent feature of the economic landscape during the second half of the 1990s. though such crises were by no means a new phenomenon, what brought special attention to the recent episodes was the perception of a heightened possibility of contagion - - the spread outward of pressures from one crisis country to other countries. the risk of such contagion became evident when the collapse of thailand's currency triggered a cascade of crises in other asian emerging markets. pressures could also spread through world financial markets to industrial economies, as happened with the russian financial crisis. in the wake of the asian crises in particular, initiatives were launched on several fronts to improve financial stability in emerging - market economies and thus to reduce the frequency and intensity of future crises. these initiatives have ranged widely, from efforts to improve policymaking in emergingmarket economies in areas such as choice of exchange rate regime and debt management to development of international standards and codes of best practices and to reforms of international financial institutions. today, i venture an assessment of how much progress has been made and how much remains to be done. i believe that there have been improvements in our understanding of the causes of crises, in economic policymaking in emerging - market economies, and in international institutional arrangements. the key to preventing future financial crises is for emerging - market economies themselves to institute sound domestic economic policies and to build robust domestic financial institutions. no improvements in international financial architecture can make up for deficiencies in these crucial areas. reducing contagion and promoting financial stability before i evaluate prescriptions for reducing the likelihood of emerging - market financial crises, i need to examine the causes of such crises. in general, financial crises result from adverse shocks to an already vulnerable economy. external shocks that a robust economy would shrug off can have a disproportionate impact on an economy beset by speculative excesses in asset markets, poor risk management, and inadequate regulation and supervision of the banking system. in broad terms, this describes the asian emerging - market economies in the run - up to their crises in the late 1990s. countries in the region did experience external shocks, including a slump in the semiconductor market and an appreciation of the dollar relative to

few more economies ; and representatives of several international financial institutions and of global standard setters for banking, securities, and insurance. the forum is supported by working groups, committees, and task forces, which often include the participation of several emerging - market countries. the forum's mandate is to identify vulnerabilities affecting the international financial system and to improve coordination and information exchange among the various authorities responsible for financial stability. its working parties have addressed issues such as off - shore financial centers, highly leveraged institutions, and short - term capital flows. the international official community has also taken up initiatives to reform the international financial institutions, inspired in part by proposals put forth in 1999 by lawrence summers, then treasury secretary. as a result of this process, the international monetary fund ( imf ) and the multilateral development banks have instituted many changes, which i will discuss in more detail later, and reform initiatives continue. what we have accomplished recent work, both under the auspices of the groups i just enumerated as well as elsewhere, has resulted in substantial achievements. we have a better understanding of the policies and institutional frameworks best suited to creating financial market stability in emerging - market economies, and changes in the international institutional environment have facilitated the adoption of such policies. i want to discuss five of the most important changes - - choice of exchange rate regime, debt management policies, promulgation of standards and codes, reform of the international financial institutions, and private - sector involvement in debt restructurings. exchange rate regimes the financial crises that enveloped mexico, russia, and several asian developing countries in the 1990s reinforced what already appeared to be a growing consensus against pegged exchange rates. the experiences of these countries showed that pegged exchange rate regimes greatly limited the ability of real exchange rates to adjust in reaction to external shocks and restricted monetary authorities'ability to correct excessive growth of credit or to act as lender of last resort. fixed rates also tended to encourage excessive borrowing of foreign currency, by reducing concerns about exchange rate risk, and contributed to particularly abrupt and disruptive reversals of investor confidence once exchange rate pegs were broken. some countries, particularly those in which monetary policy has had low credibility, have felt that the adoption of a fixed exchange rate was necessary to reduce inflationary expectations. in particular, countries with histories of high inflation and poor macroeconomic management may have felt the need for fixed exchange rates, at least for a transitional period, until they developed a better track record for policy performance. in