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.

In fact, these bouts of extreme instability have disrupted the potential growth trends, which in some cases have taken years to recover. On the whole, these episodes may be associated with too much financial liberalization too soon. The unique global backdrop, as well as the economic outcomes in terms of growth and volatility that I have just shared with you, presents a real dilemma and at times tension in emerging Asia. And nowhere is this tension more palpable than it is in the realm of exchange rate and capital account regimes. While benefits from trade integration are appreciated and shared by billions the world over, net benefits from international financial integration have not been so apparent in Asia and emerging economies in general. This is consistent with an observation that Asian emerging markets rely increasingly more on trade integration because it is judged to be a safer mode of risk-sharing with the world. As a result, while the pace of financial integration has far outstripped trade integration in advanced economies, it has only managed to keep pace with trade integration in emerging markets. 3 Ladies and Gentlemen, Asian economies and policymakers have come a long way in their attitude toward macroeconomic risk management since 1997. Countries have taken unilateral actions to promote economic and financial resiliency. Having appreciated the evidence that macroeconomic stability provides an environment that is conducive for sustained growth, Asian emerging markets have continued to pursue fiscal discipline and more flexible exchange rates on the whole.