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.

Furthermore, no exchange rate regime can offer full insulation from cross-market spillovers, particularly where the free movement of capital is allowed. Nevertheless, certain policy combinations can make things far more dangerous. Fixed, but adjustable, regimes look to be particularly fraught with perils when combined with shortcomings elsewhere, not the least of which are the severe after-effects that always seem to follow their forced abandonment. As you are aware, much of the emerging world has moved toward floating rates in recent years. For Thailand and the other countries that have made the change in East Asia, it would appear that the new monetary/exchange regimes, despite their very difficult starts under the most inauspicious of circumstances, now appear to be serving countries well. Inflation is in the very low single-digit range in most of the newly floating economies, and in many instances the successful effort to bolster monetary credibility has been reflected in short-term interest rates that have declined to historically low levels. 4  BIS Review 10/2001  Moreover, authorities have gained new degrees of freedom to manage their economies and to respond to changing internal and external circumstances. But if the promised benefits of monetary discretion are to be fully realized going forward, markets need to understand the objectives and the framework by which the monetary authorities will decide future policy actions. In this regard, I would note that some countries, including Thailand, have looked to inflation targeting as a framework to accomplish that end.