Over time, they wish to move from incomplete financial market to a better world of risk-sharing, risk absorption, and diversification. But there is tension to be managed in the short run. Under Bretton Woods II, in which much of Asia is still tightly linked to the fortune of the US dollar, and in the context of ongoing “global imbalances,” emerging markets need to strike a balance between financial stability and financial development. In particular, when our markets and institutions are still developing, the struggle between financial integration and financial stability, enterprise and prudence, requires from us a deft balancing act. Ladies and Gentlemen, From a historical perspective, today’s emerging markets are unique in their common experience. This uniqueness is twofold. On the one hand, it is quite apparent that our openness has gained us immense benefit from global economic integration, the phenomenon denied to advanced economies when they started off. At the same time, and as a result of our openness, small developing economies face risks and volatilities that accompany financial globalization, the scale of which advanced economies never had to face in their early stages. In fact, sustained increase in living standards is a relatively new economic phenomenon to emerging markets. Having experienced modern economic growth after 1950, we are late comers. And having much to benefit from being late, it took us a much shorter time to treble our per-capita income than today’s advanced economies did between 1800 and 1950.

The result is improved fiscal balances and better public debt structure, which is heavy toward longer maturities and domestic-currency denominated. Monetary policy’s first priority is to achieve long-term price stability, and in certain countries, Thailand included, central banks actively pursue explicit inflation targets. To be sure, countries have made efforts to ensure stronger prudential regulation and supervision of banks. The evidence is mixed on this front, but increasingly, more countries are adopting risk-based supervision and international accounting standards, including Basel II and IAS 39. A number of Asian emerging economies have also achieved significant  2  The same is true when comparing relative volatility in growth rates of consumption and income (Kose, Prasad, and Terrones, 2005). While this is a broad characterization of emerging markets, some countries, for example Thailand, have experienced a much less volatile consumption to income ratio. (Aguiar and Gopinath, 2007). 3  From the new External Wealth of Nations Mark II (EWN II) dataset, compiled by Lane and Milesi-Ferretti (2006). The extent of financial integration is measured by the total international assets and liabilities as a percentage of GDP and the degree of trade integration is measured by exports plus imports over GDP. 2  BIS Review 99/2007  consolidation and modernization of their financial institutions. They have built up new legal and information infrastructure to strengthen the foundation for financial system capacity for crisis prevention and resolution. In some countries, new foreclosure laws, bankruptcy laws, debt restructuring mechanisms, and credit bureaus, which were absent before 1997, are now in place.