achieve greater fiscal and external sector sustainability. among the developing countries, emerging countries in asia continue to remain a bright spot. they have shown extraordinary resilience in the face of the recent global slowdown and continue to exhibit healthy recovery. while timely and complementary policy actions taken by a number of countries to facilitate the revival of external demand and expand intra - regional trade are promising, medium - term prospects would depend on the recovery in major industrial countries. the scope for exchange rate flexibility, particularly in view of the recent build up of reserves in many countries, has generated a lot of debate over the last few months. this calls for a more dynamic and pragmatic approach in the analysis of recent trends in exchange rates and reserve management practices keeping in view country specific circumstances. the recent strengthening of external position of many developing countries through building up substantial foreign exchange reserves can be viewed from several perspectives. first, it is in part, a reflection of the lack of confidence in the international financial architecture. international liquidity support through official channels is beset with problems relating to adequacy of volumes, timely availability, reasonableness of costs and above all, limited extent of assurances. second, it is also a reflection of efforts to contain risks from external shocks. private capital flows which dominate capital movements tend to be pro - cyclical even when fundamentals are strong. it is therefore necessary for developing countries to build cushions when times are favorable. high reserves provide some self - insurance which is effective in building confidence including among the rating agencies and possibly in dealing with threat of crises. third, the reserve accumulation could also be seen in the context of the availability of abundant international liquidity following the easing of the monetary policy in industrial countries. the resultant excess liquidity flowed into the emerging markets. in the event of hardening of interest rates in industrialized countries, this liquidity may as quickly dry up ; in that situation, emerging market should have sufficient cushion to withstand such reverse flows of capital. fourth, and most important, the reserve build up could be the result of countries aiming at containing volatility in foreign exchange markets. it should be recognised that the self corrective mechanism in foreign exchange markets seen in developed countries is conspicuously absent presently among many emerging markets. it is also necessary to recognize that developing countries face major challenges in their effort for sustained economic growth which could enable them to make a significant impact on poverty reduction. recent studies by the world bank indicate that there would be considerable shortfalls in achieving

breaching of ceilings on fiscal deficits, especially in countries where this could trigger recovery. we welcome the reforms undertaken to improve the accounting and auditing standards and corporate governance practices both in the us and the eu. these improvements are partly reflected in the strengthening of corporate bond and equity markets. the primary bond market issues have become more buoyant. sovereign yields, in general, have declined, combined with a compression of yield spreads. we consider these developments as supportive of increased capital flows into emerging markets and for the general strengthening of intermediation in international capital markets. though there was a temporary upward shift in the long - term yields of bonds in the us, potential for significant risks of further increase in bond yields appear remote. first, the policy interest rates have declined to historically low levels and upward hikes in quick succession are therefore unlikely. the housing and mortgage markets as also bond markets cannot withstand such sudden shocks. second, the probability of inflation undershooting and the consequent adverse implications for deflationary expectations are feared by many. the question also remains as to how long and to what extent the us would lead the global recovery. it is important for the eu and also japan to intensify structural and financial sector reforms with redoubled vigor. in some countries, labor and product market reforms should receive priority as important components of such reforms. we encourage the euro area countries to take steps to promote productivity and efficiency gains, given the minimal scope, in the short - run, for achieving higher labor participation rates. the necessity of achieving these gains, and a general increase in demand arises from the impending medium - term fiscal risks associated with demographic trends and the attendant pension reforms. similarly, we recognize that more vigorous steps may help japan counteract deflationary expectations an address the fragility of the financial system. in the mediumterm japan also requires further restoration of fiscal stabilization. growth is expected to remain robust in most emerging market economies and, to some extent, in africa. these are propelled in no small measure by stronger macroeconomic policies, structural reforms and improvements in the institutional structure. prospects have also improved due to general improvements in major industrial countries, favorable terms of trade due to non - oil commodity price increases, and improved financial market conditions, especially in the bond markets. it is imperative that greater resources flow into these countries to help sustain growth. the current favorable financial market conditions, no doubt, provide an opportunity for these countries to steer ahead with remaining structural reforms and