Bulletin Spring‧Summer 2004

capital flows into and out of an economy. This affects the resilience of the economy in the face of speculative short- term capital flows. In each of these sectors, three to five key indicators are selected which will reflect the state of strength and weakness of the sector. Most of the indicators are developed from the financial soundness indicators (FSI) recommended by the IMF 1 , but the researchers have also included new indicators that are statistically significant, such as net international investment positions in the assessment of the resilience of the external sector. The structure of the resilience framework is given in Figure 1. To u n d e r s t a nd this process, consider the external sector for example. The sector consists of five indicators, E1 to E5. Each indicator is assigned a range of percentile values to identify ‘strong’ or ‘weak’ signals. This assignment is based on the expert opinions of economists and the distribution of the data. This is illustrated in Figure 2. In this example, the 20th percentile of E5 is '-36%' and the 80th percentile is '+7%'. An observed value higher than or equal to '+7%' is regarded as a 'strong' sign (the green region) and hence, the probability of this value being a ‘strong' sign is ‘1' and the probability of its being a 'weak' sign is '0'. Similarly, an observed value less than or equal to '-36%' is regarded as a 'weak' sign (the red region) and hence, the probability of this value being a 'weak' sign is '1' and the probability of this value being a 'strong' sign is '0'. For an observed value between the two thresholds (the yellow region), a probability of this value being a 'strong' sign is assigned based on the relative closeness of this observed value to the two thresholds using the Mamdani inference of fuzzy logic systems of artificial intelligence techniques. The next step is to combine the five signals of E1 to E5 into one resilience score on a scale of 1 to 5 for the external sector of an economy. A resilience score of '5' F i g u r e 1 : Four Steps of Resilience Assessment F i g u r e 2: A s s i g n m e nt of 'Strong' or 'Weak' Signals for E5 1 For a detailed discussion of financial soundness indicators, see 'Financial Soundness Indicators: Analytical Aspects and Country Practices', V. Sundararajan et al., IMF occasional paper 212. 4 4 Chinese University Bulletin Spring • Summer 2004