Principles of Sequencing

Подпись: 12Risks 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


Box 12.1 Selected Principles of Sequencing


Principles of sequencing domestic financial liberaliza­tion are as follows:

• Liberalization is best undertaken in the context of sound and sustainable macroeconomic poli­cies.

• Capital market development-cum-financial sta­bility hinges on establishing the institutional infrastructure for controlling both macroeco­nomic and financial risks. Financial system reforms that support and reinforce macroeco­nomic stabilization and effective conduct of monetary and exchange rate policies should be accorded priority. This principle entails giving priority to central banking reforms to develop monetary policy instruments and money and foreign exchange markets.

• Financial liberalization and market develop­ment policies should be sequenced to reflect the hierarchy and complementarity of mar­kets and related institutional structures. Market development policies should be comprehensive. Technically and operationally linked measures should be implemented together, and linkages among markets should be considered.

• Capital market development requires a careful sequencing of measures to mitigate risks in par­allel with reforms to develop markets. Policies to develop markets should be accompanied by prudential and supervisory measures, as well as by macroprudential surveillance, to contain risks introduced by new markets and instruments.

• The pace of reforms should consider the initial financial condition and soundness of financial and nonfinancial firms, as well as the time needed to restructure them.


• Institutional development is a critical compo­nent of building capital markets and financial – risk management capacity. Establishing good governance structures in financial institutions, including internal controls and risk manage­ment systems, is among the most critical of markets reforms.

• Similarly, the operational and institutional arrangement for policy transparency and data disclosure need to be adopted to complement the evolving sophistication of financial mar­kets.

• Pacing, timing, and sequencing also need to take account of political and regional consid­erations that could strengthen ownership of reforms.

• Reforms that require long lead times for techni­cal preparations and capacity building should start early.

The following are additional principles for exter­nal financial liberalization:

• The liberalization of capital flows by instru­ments and sectors should be sequenced in a manner that reinforces domestic financial liber­alization and that allows for institutional capac­ity building to manage the additional risks.

• Reforms need to consider the effectiveness of controls on capital flows in place or the implicit restrictions on capital flows from the ineffec­tiveness or absence of markets.

• Transparency and data disclosure practices should be adopted to support capital account opening.




Source: These principles are drawn in part from Ishii and Habermeier (2002) and from Sundararajan, Ariyoshi, and Otker-Robe (2002).


system infrastructure, (d) financial institution restructuring and recapitalization, and (e) capital account liberalization. The presentation of policy actions in this matrix, which is based on the core principles of sequencing, helps develop a well-coordinated road map of reforms and emphasizes the importance of implementing a critical mass of reforms under each theme that combines market development and risk mitigation. In practice, countries are likely to be in the midst of various stages of market development and risk mitigation, which will be out of synch with any stylized hierarchy of market development themes and the associated sequencing shown in figure 12.1. Nevertheless, the proposed approach in figure 12.1, which is based on principles outlined in box 12.1, can help prioritize future


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.

Подпись: 12Ishii, 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.

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