And indeed, inflation targeting would seem to have much to recommend it, provided that it is approached not as a panacea, but rather as a pragmatic organizing framework for policy. In other words, policy frameworks such as inflation targeting can be useful where they signal a disposition towards continuous and predictable communication, and a forward-looking, informative policy approach. But as I said, inflation targeting per se is not a sure-fire solution – for example, the costs of disinflation do not appear to be lower in inflation-targeting countries – nor is it a prerequisite for effective communication and ultimately effective policy. Role of fiscal policy Clearly, crisis prevention through promoting stable and sustainable conditions in the macro-economy is not solely the province of central banks. Sound fiscal policies are needed to complement the effectiveness of even the soundest monetary policies. Chronically loose fiscal policy is a persistent threat to macroeconomic stability, through the build-up of internal and/or external debts that can be devastating. For the countries of East Asia, the public sector’s generally low initial indebtedness provided important latitude for dealing with the recent crises. Governments had room to stimulate aggregate demand recovery through fiscal ease; moreover, extensions of public guarantees and capital helped to contain the banking crises. However, while initially strong fiscal positions provided flexibility to address financial sector problems and aid recovery, public debt has since risen to high levels in a number of countries, and contingent liabilities often remain significant, raising some concern about potential future debt growth.

Thus, governments now face the challenge of moving to retighten fiscal policy in the face of slowing economies, and over the longer term, gradually restoring their earlier prudent levels of net indebtedness. These considerations further underscore the importance of quickly completing the process of banking sector rehabilitation and of attracting new sources of capital. Such decisive action would allow the banking sector to again be an engine of growth, capable of offsetting the eventual withdrawal of fiscal stimulus. Conclusion In closing, the recovery in Asia has been impressive indeed, and owes much to the energy and hard work of its people, enlightened political leadership, and the substantial and focused efforts of policymakers to implement sound macroeconomic and financial policy. But the recovery is not yet complete and much remains to be done. While the crisis did substantial damage, it has not fundamentally affected Asia’s prodigious economic strengths. But if Asia is to realize its potential, it is critical that authorities attend to the unfinished business that remains while continuing to put in place longer-term measures to promote financial resilience, ensure the sustainability of public sector debt burdens, and encourage sustainable growth. Asia is at an important crossroads and there is now a unique opportunity to consolidate recent reforms and implement lasting change that will pay dividends for years to come. Thank you for your kind invitation and attention. I would be happy to take any questions you may have. BIS Review 10/2001  5