Principles of Sequencing
Risks in developing the specific types of markets, the hierarchy of markets, the demands that markets place on risk management and information requirements, and the various considerations discussed in sections 12.1 and 12.2 can be summarized in the form of certain principles and benchmarks on sequencing and coordinating domestic financial sector reforms (see box 12.1) and these principles are further illustrated in figure 12.1. The principles also apply to capital account liberalization, where the key challenge is to identify precisely how and when foreign capital can enhance market development.
Figure 12.1 highlights and illustrates the principles of sequencing and shows that market development measures need to be combined with measures to manage the risks in developing each area of market development, thereby combining development and stability considerations into prioritized action plan. The top row in figure 12.1 lists various themes—in relation to market and product development goals—according to a hierarchy that is based on risk implications and broader policy considerations, such as restoration of stability and confidence in the midst of a shock or strategic focus on strengthening access to target groups. The themes are ordered from left to right at the top in decreasing order of priority, starting with the themes of highest priority requiring implementation in the short term to ensure stability and effective implementation, and moving right toward more medium-term and structural goals. This hierarchical ordering (i. e., setting priorities) is, as already discussed, based on the complexity of risks and broader policy significance of each theme. That is, markets and themes that involve more complex forms of risk and that require a stronger infrastructure may need to be implemented later than markets and themes that involve simpler and more traditional complement of risks.
The first column lists the broad financial policy areas that must be tackled to achieve the specific market and product development goals under each theme. The types of financial policies listed in the first column of the figure distinguishes between five types of policy actions: (a) market and product development, (b) risk mitigation, (c) financial
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financial reforms, regardless of patterns of market development in the past, and can ensure that, at each stage, critical reforms are implemented to safeguard stability in the course of market development.
1. See Johnston and Sundararajan (1999) for some empirical evidence.
2. This section is based on Karacadag, Sundararajan, and Elliott (2003).
3. Issues in facilitating access to international capital markets are discussed in greater detail in IMF (2003b).
International Monetary Fund (IMF). 2003. A Global Financial Stability Report. Washington, DC: International Monetary Fund.
--- . 2003a. World Economic Outlook, April 2003: Growth and Institutions. World
Economic and Financial Surveys. Washington, DC: International Monetary Fund.
---- . 2003b. “Access to International Capital Markets for First-Time Sovereign
Issuers.” IMF Policy Paper, International Monetary Fund, Washington, DC.
Ishii, Shogo, and Karl Habermeier. 2002. “Capital Account Liberalization and Financial Sector Stability.” IMF Occasional Paper No. 211, International Monetary Fund, Washington, DC. Available at http://www. imf. org/external/pubs/nft/op/211/index. htm.
Johnston, R. Barry, and V. Sundararajan, eds. 1999. Sequencing Financial Sector Reforms: Country Experiences and Issues. Washington, DC: International Monetary Fund.
Kaminsky, Graciela Laura, and Sergio L. Schmukler. 2003. “Short-Run Pain, Long-Run Gain: The Effects of Financial Liberalization.” IMF Working Paper 03/34, International Monetary Fund, Washington, DC. Available at http://www. imf. org/external/pubs/ft/ wp/2003/wp0334.pdf.
Karacadag, Cem, V. Sundararajan, and Jennifer Elliott. 2003. “Managing Risks in Financial Market Development: The Role of Sequencing.” IMF Working Paper No. 03/116, International Monetary Fund, Washington, DC. Available at http://www. imf. org/external/pubs/ft/wp/2003/wp03116.pdf.
Obstfeld, Maurice, and Alen M. Taylor. 2004. Global Capital Markets—Integration, Crisis, and Growth. Cambridge: Cambridge University Press.
Sundararajan, V., Akira Ariyoshi, and Inci Otker-Robe. 2002. “International Capital Mobility and Domestic Financial System Stability: A Survey of Issues.” In Financial Risks, Stability, and Globalization, ed. Omotunde E. G. Johnson, Washington, DC: International Monetary Fund.
World Bank. 2001. “Finance for Growth: Policy Choices in a Volatile World.” A World Bank Policy Research Report, World Bank and Oxford University Press, New York.