##tagion effects in future. 5. the lessons learned from the experience of the past two years the analyses of the reasons for the financial markets ’ disaster of 1997 / 98 are still continuing and the dissection of the major casualties is continuing. some consensus may be developing, however, that both at the macroeconomic and at the microeconomic level, important adjustments are necessary to strengthen the fibre of financial systems and markets in order to meet the challenges of the irreversible process of globalisation. these structural adjustments must include : * an improvement and standardisation of accepted institutional arrangements covering aspects of property protection, bankruptcy procedures and accounting standards. * bank and other financial institution supervision and regulation must be upgraded, and new standards of adequate risk management must be introduced. * the architecture, role and policies of the multilateral institutions such as the world bank and the imf, not only on an ex post basis but also in the prevention of a crisis, must be reviewed. * policy makers must follow sound and credible economic and financial policies. the experience in a number of countries, for example, warned against a policy of excessive short - term borrowing by governments and by countries to finance chronic fiscal or balance of payments deficits. credibility comes from monetary policies aimed at achieving price stability. macro - economic policies that are judged by investors to be responsible are those that allow free markets to work with undue intervention from governmental authorities. * the international exchange rate regime of floating exchange rates and its contribution to the increasing volatility of the global financial markets has come under the spotlight. * the need for greater transparency at the level of multinational institutions, governments and public sector institutions and, very importantly, also from private sector participants in global markets has been identified. * the ability of countries to attract long - term foreign capital, e. g. direct foreign investment, should be improved. this once again leads to the conclusion that exchange controls and / or excessive protectionist policies should be avoided by developing and emerging market countries that want to remain competitive in the global market environment. 6. prospects for the world economy although there are still a number of downside risks in the global economy, there is growing optimism that some recovery will take place in most of the more seriously affected economies of the east asian crisis. the main priorities in these countries are now to end the decline of economic activity, limit the adverse impact of the crisis on the welfare of the most vulnerable members of the community, promote the resumption of sustainable growth,

short period of time absorb the shock of the turnaround in the sentiment of international investors. the adverse developments in east asia almost immediately affected emerging markets all around the world. initially, that is from the middle of 1997 up to the second quarter of 1998, most of the other emerging markets succeeded in keeping afloat and there was still a chance to keep the crisis restricted to the east asian region. the situation was exacerbated, however, by the complete collapse of the situation in indonesia, and by the early signs of an emerging second crisis in russia. the effective devaluation of the rouble and unilateral restructuring announced by russia in august 1998, triggered a further series of sharp market corrections, indicating a generalised increase in perceived risk or risk aversion. a third threat to a major collapse of the global financial system came towards the end of last year with the deterioration of the financial situation in brazil, mainly because of chronic fiscal imbalances and large - scale speculative attacks on what markets perceived to be an overvalued currency. in general, the immediate effect of a loss of confidence of investors in any specific economy was reflected in a decline in the inflow of foreign capital or, in many cases, a large withdrawal by nonresidents of previously invested funds from the country. the widespread flight to quality and liquidity gave rise to a severe tightening of credit conditions in the affected countries : equity prices fell sharply ; yields on bonds rose to extremely high levels, followed by soaring interest rates in general, and exchange market pressures intensified as exchange rates went in an uncontrollable tumble. as a by - product of these developments, many international investors and banks suffered substantial losses, especially on highly leveraged investment positions. gradually, the worsening conditions in the financial markets also affected real economic activity. the international monetary fund ( imf ) revised its outlook for world economic growth in 1998, first from 3 to 2½ per cent ( in august 1998 ), and then to 2 per cent ( in october 1998 ). for 1999, the projection was similarly reduced from 3¾ per cent to 2¼ per cent at this stage. 2. the contagion effect of the financial crisis a special feature of the financial crisis of the past two years has been the contagion effect, or the spill - over of the economic problems of a few important emerging market economies to other countries, and eventually to the world economy. the transmission mechanism, or the con