The report identifies the specific weaknesses in surveillance, program design, and internal governance.

• IMF surveillance was more successful in identifying macroeconomic vulnerabilities than in recognizing the risks arising from financial sector and corporate balance-sheet weaknesses and the governance-related problems that contributed to those weaknesses. Even in areas where the diagnosis was broadly accurate, the impact of surveillance on policy was relatively limited because of insufficient candor and lack of transparency.

• In all three cases, macroeconomic outcomes turned out to be very different from program projections. This was partly because there was insufficient appreciation of (i) the large currency depreciation which might occur in view of the possibility of multiple equilibria, and (ii) the severe balance-sheet effects that might result.

• All three programs proposed fiscal tightening, which was relatively mild in Indonesia and Korea and fairly strong in Brazil. In view of output developments and the initial stock of debt, fiscal tightening in Indonesia and Korea was not warranted. However, it was relaxed relatively quickly when the extent of output collapse became evident and therefore was not the cause of the output collapse. In Brazil, fiscal tightening was much sharper and this was appropriate because fiscal sustainability was a major issue driving the evolution of the crisis. However, it turned out to be insufficient to achieve the objective of stabilizing, and then reducing, the debt-to-GDP ratio.

• Monetary policy in all three programs was initially set tight, with a recognition of the tradeoff between higher interest rates and a weaker exchange rate. However, the experience of the three countries does not provide a definitive answer to the ongoing debate on the effectiveness of high interest rates in stabilizing the exchange rate. In Indonesia, the monetary policy envisaged in the program was initially not implemented, as the monetary base expanded rapidly and real interest rates became increasingly negative. In Korea, monetary policy was tightened but this was not by itself sufficient to stabilize the exchange rat. In Brazil, there was a premature easing of interest rates--over the IMF's objections--which may have contributed to the timing, if not the eventuality, of the collapse of the crawling peg. However, decisive tightening of monetary policy in March 1999 coincided with the restoration of stability in the foreign exchange market.

• The official financing package for Korea was inadequate because of the ambiguity over the availability of US$20 billion in bilateral assistance pledged as a "second line of defense" and contributed to the failure of the first program. The IMF was aware of this danger and discussed the possible need for a coordinated debt rollover with major shareholders but initially did not receive their support. When a decision was made by the major shareholders to involve the private sector, however, the IMF played a useful facilitating role.

• The experiences of Indonesia and Korea suggest that a successful bank closure and restructuring program must include a comprehensive and well-communicated strategy in which transparent rules are consistently applied. The report considers the issue of whether a blanket guarantee, instead of the partial guarantee actually offered, should have been introduced in Indonesia in November 1997. It concludes that the banking crisis was not yet systemic in November, so that the partial guarantee was appropriate. The problem in bank restructuring was more with the initial lack of a comprehensive and well-communicated strategy, and not the nature of the guarantee.

• While all three programs involved structural reforms, the Indonesian and Korean programs were particularly heavily loaded with extensive conditionality in this area. Measures to rehabilitate and reform the financial sector were necessary in both countries, but many of the nonfinancial structural reform measures were unnecessary as part of immediate crisis resolution, though they may well have been beneficial in the long run.

• A program for restoring confidence must include a strategy to communicate the logic of the program to the public and the markets, in order to enhance country ownership and credibility. None of the three programs initially contained such a strategy.

• While the close involvement of the Executive Board and the major shareholders was proper and necessary, close contacts at multiple layers unnecessarily subjected staff to micromanagement and political pressure.

Recommendations:

The crises reviewed in this report have been intensively studied, and a great deal of learning has already taken place within the IMF. New guidelines have been issued, or are being discussed, to incorporate that learning into policies and operational procedures. The report provides six sets of recommendations by suggesting some specific areas where these initiatives could be enhanced.

• Recommendation 1. To increase the effectiveness of surveillance, Article IV consultations should take a "stress-testing" approach to the analysis of a country's exposure to a potential capital account crisis.

• Recommendation 2. Management and the Executive Board should take additional steps to increase the impact of surveillance, including through making staff assessments more candid and more accessible to the public, and providing appropriate institutional incentives to staff.

• Recommendation 3. A comprehensive review of the IMF's approach to program design in capital account crises should be undertaken.

• Recommendation 4. Since restoration of confidence is the central goal, the IMF should ensure that the financing package, including all components, should be sufficient to generate confidence and also of credible quality.

• Recommendation 5. The IMF should be proactive in its role as crisis coordinator.

• Recommendation 6. Human resource management procedures should be adapted further to promote the development and effective utilization of country expertise within the staff, including political economy skills, and to ensure that "centers of expertise" on crisis management issues allow for a rapid application of relevant expertise to emerging crises.

The full text of the report and summing up of the Board discussion are available on the IEO's website at www.imf.org/ieo.