Vulnerabilities On a microeconomic level, the still-fragile condition of regional financial and corporate sector institutions remains a real threat to medium-term stability. Notwithstanding significant official rescue efforts, regional financial sectors remain burdened by a high level of problem loans, and require further substantive bolstering of capital and reserves. Authorities, by and large, have yet to articulate a program for reprivatizing banks and liquidating purchased assets. Improvements in the financial system infrastructure depend critically on follow-through on these issues, a long-term process. Corporate sectors similarly remain fragile: recent debt restructurings have involved a high degree of debt rescheduling, and firms across the region remain burdened with significant amounts of debt. The relatively limited restructuring of corporate operations to date across the region raises questions about the medium-term sustainability of recent improvements in bank asset quality. The relative lack of breadth in the region’s recovery also creates vulnerabilities. Asia’s export orientation has long been a key focal point of strength, to which the recent recovery attests. However, too great a dependence on export-driven growth brings increased vulnerability to external shocks. Asia, in particular, will feel the negative effects of a worldwide slowing from last year’s strong rate of growth. Moreover, domestic demand has not recovered sufficiently from the crisis to sustain the region’s economies. With fiscal policy constrained to varying degrees by heavy public sector debt burdens, regional central banks, in some cases with new-found independence, will need to maintain their stimulative policies to support the recovery.

At the same time, authorities in a number of Asian countries initiated a wide range of fundamental enhancements to financial system infrastructure, including strengthening prudential regulation and supervision, bolstering bankruptcy and collateral recovery processes, and improving disclosure requirements. With the full implementation of these measures, standards in Asia will closely approximate international norms. Reform fatigue But with the pace of growth slowing, reform fatigue represents a significant risk to sustained recovery. Crises entail wrenching change and costly solutions that are difficult to bear over a long period. The desire for a return to "normalcy" is strong. Under these conditions, it is human nature to overemphasize positive information, tire of reform, declare victory and move on. These impulses might be expected to be particularly powerful against the backdrop of years of strong and unbroken Asian economic growth. It is no wonder therefore that governments the world over initially tend to underestimate the size of problems, underfund solutions, and postpone loss recognition. It also is not surprising that, given the  BIS Review 10/2001  1  many obstacles involved, authorities may be tempted to prematurely mark a case closed, particularly with the advent of economic recovery. In the new international financial landscape, a government’s perceived ability to deliver on the policy front is crucial, preferably based on coherent, comprehensive, and achievable objectives. Confidence in a government’s ability to deliver is nurtured both by actions and by communication. Complacency and reform backsliding, however, create the dangerous potential for a shift in expectations.