More recently the Fund adopted a set of criteria designed to limit the risk that the Fund would make largescale resources available too frequently and in conditions where they would be unlikely to contribute to a resolution of the crisis. These various reforms gave the Fund a substantially more effective insurance mechanism for emerging market economies than it had before. Building on this progress, I see the key elements of a credible insurance mechanism as including the following: •  Finance must be conditioned on a policy framework strong enough and timely enough to restore confidence. Fund resources can’t compensate for a lack of policy credibility, and lending official resources to fund an inadequate policy effort may make the situation worse. •  The scale of finance provided has to be calibrated to the need, and the needs can be substantial in today’s world. The Fund can only fill part of the gap, but it has to be able to fill a credible share of the gap if it is to play a successful part in catalyzing other resources to flow. •  Flexibility to structure programs appropriate to the circumstances and the borrower’s policy efforts is essential. The Fund needs to be able to substantially front-load financial packages, when this is warranted. Making available small tranches of resources over the life of a program does little to address the realities of open emerging market economies facing liquidity problems.
•  International reserves have increased substantially, providing a larger cushion against adversity. Among the largest borrowers, half now hold reserves greater than 150 percent of maturing short- and long-term debt; less than one-sixth had such coverage heading into 1997. •  There have been improvements in fiscal performance, with some notable cases of governments achieving and sustaining large primary surpluses. BIS Review 37/2004  1  •  External balances have improved, with current accounts in most of the emerging world in surplus or modest deficit. Only 2 of the 20 largest borrowers now are running deficits in excess of 3 percent. •  Exchange rate regimes are more resilient and less fragile, as a substantial majority of the largest borrowing countries have moved to flexible regimes, and away from the fixed-butadjustable pegs that proved so dangerous in the crises of the last decade. •  Important progress has been made in building credibility for new monetary policy regimes, and inflation is generally moderate. •  Governments have made major investments in recapitalizing and restructuring their troubled financial systems. For example, in Asia, where some of the most severe problems were encountered, governments have spent over $ billion carving out problem loans and bolstering capital. •  Growth rates have improved with the restoration of domestic stability and recovery in external demand. Indeed, aggregate growth currently is running at its highest rate since the onset of the crisis in 1997.