The Asian financial crisis in the late1990s not only highlighted the welfare consequences oftransparency in the financial sector but also linked thisrelatively narrow problem to the broader context oftransparency in governance. It has been observed thatobjections to transparency, often on flimsy pretexts, arecommon even in industrialized countries. This article arguesthat transparency is indispensable to the financial sectorand describes its desirable characteristics: access,timeliness, relevance, and quality. The authors emphasizethe need to weigh the costs and benefits of a moretransparent regulatory policy, and they explore theconnection between information imperfections, macroeconomicpolicy, and questions of risk. The article argues fordeveloping institutional infrastructure, standards, andaccounting practices that promote transparency, implementingincentives for disclosure and establishing regulations tominimize the perverse incentives generated by safety netarrangements, such as deposit insurance. Becauseinstitutional development is gradual, the authors contendthat relatively simple regulations, such as limits on creditexpansion, may be the most reasonable option for developingcountries. They show that transparency has absolute limitsbecause of the lack of adequate enforcement and argue thatadequate enforcement may be predicated on broader reforms inthe public sector.
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