Although the crises can be explained in terms of shortcomings in the workings of the financial system, the instability has almost invariably stemmed from macroeconomic and structural problems. A reasonable economic policy is, of course, not just a requirement in emerging markets but also a standing order in the industrialised countries. Yet it is barely five years ago that Sweden regained a fairly firm economic foundation after the profound crisis in the early 1990s. There are many parallels between the Swedish crisis and the crisis in Thailand, for instance. An important factor here is, as I mentioned, the exchange rate regime. Experience has shown that exchange rates that are fixed but adjustable may often contribute to problems and currency crises. They presuppose that fiscal policy is capable of countering economic shocks at the same time as they invite speculation. In the debate it is therefore sometimes proposed that the emerging markets ought to set up currency boards (a system whereby all outstanding currency can be converted into some hard currency) or participate in some well-established regional monetary cooperation. These systems do demand just as much of policy but their stronger links are intended to confer greater credibility. There is a risk, however, of financial players being lured into a false sense of security, giving imbalances more time in which to grow. Another feature that fixed exchange rates and currency boards have in  5  BIS Review 52/1999  common is the negative effects they may exert on other countries if they have to be abandoned.

Against this background my talk today focuses on global capital: its advantages and problems and the remedies for the latter that are being discussed internationally. Let me begin by looking at what has shaped the global financial markets as we know them today. Emergence of today’s global financial markets Today’s global financial markets largely date from the 1970s, when the oil-exporting countries needed to invest surpluses and many western countries had incurred budget deficits that had to be financed. There was thus a need for a more efficient international market for capital. Another factor behind the development of financial markets was that after the collapse of the Bretton Woods system in the early 1970s, the major world currencies started to float in relation to each other. This generated a demand for instruments that would render the exchange rate movements less deleterious for exporters and importers. The evolution of the financial markets has been promoted by rapid technical advances that, besides facilitating international communications and transactions, have aided calculations and made advanced financial instruments available. This has been accompanied by theoretical work on the pricing of risks. A market for risks has accordingly been established. Instruments whereby players could choose a particular level of risk had existed for centuries but could now be made more sophisticated. Before the financial markets could be globalised, moreover, national economies had to be opened up and the existing capital controls abolished. This process got under way in the 1970s and 1980s.