But those that have come further along the liberalization road have to face a different music. 4  From the new External Wealth of Nations Mark II (EWN II) dataset, compiled by Lane and Milesi-Ferretti (2006). 5  Ibid. BIS Review 99/2007  3  Rapid appreciation in the exchange value of the currency renders part of the domestic industries less competitive in the global markets. It is true that with this appreciation, commodity imports such as fuel and energy as well as metal and raw materials have become more affordable despite rising world price trends. But these benefits are spread-out while the cost is centered on labor-intensive, high domestic-content primary sectors, such as agriculture and low-end manufacturing. As a result, even for net primary commodity importing economies, the nature of the problem is as much political economy as it is economic. There are strong and vocal constituencies in emerging markets that are averse to currency appreciation and part of them averse to variability in the exchange rate itself. Meanwhile, hot money, or indeed large inflows in general, can fuel asset prices and encourage excessive risk-taking behavior. Central banks may wish to counter that excess in the interest of financial stability. If the central bank chooses to maintain a high interest rate stance, the pressure on the currency to appreciate will likely mount. Not unlike today’s political economy in advanced countries, emerging market politics also risks being less favorable to openness, but more partial to protection of selected industries or protectionism in general.

Public and private efforts have stepped up significantly to expand the capital markets domestically as well as regionally. Across the region, policymakers are sharing knowledge and expertise to ensure efficiency and pragmatism in the implementation of policy. Most obviously, Asian countries have also built up international reserves to a multiple of short-term external debt or other traditional measures of potential claims on reserves. They have also relied less on foreign debt financing and shifted more toward equity securities and direct investment. 4 This shift in the pattern of capital flows demonstrates to some extent advances in equity market development and corporate governance in the region. For a few countries, reserve accumulation partly constitutes a deterrent to the repeat of the last extreme episode of instability in 1997. As an added benefit, a relatively well-developed system of prudential banking regulation has also helped these countries avoid speculative pressures on their exchange rates. As far as financial integration is concerned, there have been selective and timely capital account restrictions and liberalization on both inflows and outflows over the years. Much of this caution derives from the bitter lessons from the 1990s. But, even so, it is worth mentioning that, measured by total foreign assets and liabilities as a percentage of GDP, the trend from Bangkok to Seoul is that of more financial integration over the past 20 years. 5 Ladies and Gentlemen, These changes in policies and risk awareness make it less likely that financial market disturbances will trigger a sharp and broad-based dent to real economic outcomes.