The hoped-for higher returns could not be maintained. Again with the benefit of hindsight, it is possible to identify a number of structural weaknesses in the mechanisms for financial resource allocation in the recipient countries. There was, for example, a general lack of reliable financial information, and a lack of transparency in relation to the financial position, of both public and private sectors. Complex and opaque links between government, financial institutions and non-financial companies made it difficult for outsiders to understand the real nature of their exposures. Financial markets were not well developed, leaving the system heavily dependent upon the banks. There was inadequate regulatory or supervisory oversight. There was widespread, often informal, government influence over BIS Review 36/1998  -4-  financial flows, which importantly also contributed to a perception that much of the borrowing was implicitly under-written by the government. The list could go on. The problem was compounded by the absence of any real perception of exchange rate risk. Borrowers were evidently confident that governments would maintain their exchange rate pegs against the dollar, even when it began to strengthen, so that unhedged foreign currency debt, much of it at short-term, appeared to be a cheap alternative to domestic currency borrowing. The result was a build-up of short-term foreign currency liabilities, by banks and non-banks, which was not fully appreciated, and which left the Asian economies especially vulnerable to a flight of capital in the event of a change in sentiment.

Of course on occasion the flesh proves to be weaker than the spirit - and achieving these macro-economic objectives is not easy in practise even as a technical matter. But the intention - the international commitment to macro-economic stability - is clear and this in itself ought over time to mean a radical change - for the better - in the environment for private sector business activity across the world. Acceptance of the aim of macro-economic stability has brought into sharper focus the structural, supply side, of the economy - that is the whole raft of influences that can affect the underlying growth rate of capacity and thus the growth rate of aggregate demand that can be sustained. In this context there is a strengthening international presumption in favour of open markets and free competition - both domestically and internationally - with a continuing strong presumption against predatory trade or exchange rate manipulation. The argument is that undistorted competition contributes to potential macro-economic growth through increased efficiency and the more effective allocation of productive resources. This in itself is somewhat remarkable, given that, at the micro-economic level, competition invariably constitutes a threat to established producers - and their employees - who may be tempted to make, often highly vocal, pleas for protection in one form or another to their national governments. Consumers, who benefit from competition, tend to make less noise. The threat of protectionism is never, therefore, far away. But in fact the presumption in favour of competition has proved encouragingly robust.