are foreigners'claims on the country's residents. data on these claims are from haver and the u. s. bureau of economic analysis. whether the relationship shown in exhibit 3 is causal is not entirely clear, however, as economies that are more exposed to the global financial system also tend to be those economies most open to trade, as can be seen by comparing exhibit 3 to exhibit 2. macroeconomic imbalances and structural weaknesses likely magnified the effects of the adverse global shocks. it is important not to take the wrong lesson from the finding that more open economies were more severely affected by the global recession. although tighter integration with the global economy naturally increases vulnerability to global economic shocks, considerable evidence suggests that openness also promotes stronger economic growth over the longer term. protectionism and the erecting of barriers to capital flows should thus be strongly resisted. instead, as i will discuss, striking a reasonable balance between trade and growth in domestic demand is the best strategy for driving economic expansion. policy responses by and large, countries in asia came into the crisis with fairly strong macroeconomic fundamentals, including low inflation and favorable fiscal and current account positions. good fundamentals, in turn, provided scope for strong policy responses in many countries. china, japan, korea, and singapore were among those employing relatively aggressive policy strategies ; in particular, china undertook a sizable fiscal program, supplemented by accommodative monetary and bank lending policies. the stimulus packages in china and elsewhere have lifted domestic demand throughout the region, boosting intraregional trade. not all asian nations responded so aggressively to the crisis. some countries with weaker fiscal positions no doubt felt constrained in the extent of fiscal stimulus they provided. similarly, monetary policies were likely influenced by differences in inflation performance. on the one hand, countries experiencing low inflation or deflation, such as china, japan, and thailand, were able to implement expansionary monetary policies without concerns about increasing inflationary pressures. indeed, japan used unconventional monetary easing in part to avoid deeper deflation. on the other hand, inflation concerns were more pressing for indonesia, the philippines, and korea, with the result that their monetary policy responses may have been more muted than would otherwise have been the case. the national variation in policy responses likely also reflected differences in the severity of the crisis across countries. generally speaking, the asian response to the crisis appears thus far to have been effective. importantly, as i have suggested, the asian recovery to date has been in significant part the

incremental cost of adopting basel ii advanced approaches should be relatively modest compared with the significant risk - management investments they have already made. for financial institutions with a simpler organizational structure and less - complex processes and services, a less - sophisticated enterprise - wide risk - management framework is entirely appropriate. for these organizations, the incremental cost of developing advanced basel ii systems can be substantial. these organizations may appropriately choose not to adopt basel ii, especially at the earliest possible date. if they choose to opt in, they may want to implement basel ii later, when they can take advantage of vendor models and databases to assist in the development of their systems at much lower costs. in a general sense, basel ii expands advanced risk - management techniques from a set of tools used in an operating and control environment into the basis for making minimum regulatory capital reflective of risk exposures. since individual organizations employ various types of risk - management techniques, moving to basel ii as a minimum regulatory capital framework requires a certain degree of standardization so that risk measures can be compared across organizations and over time. it is composed of the now - familiar three pillars : pillar 1, minimum capital requirements ; pillar 2, supervisory review ; and pillar 3, market discipline. the framework is structured to be much more risk - sensitive than its predecessor ; for example, all commercial loans are not lumped into one risk bucket but are differentiated according to certain indicators of risk. basel ii is designed to address the concern that basel i regulatory capital ratios are no longer good indicators of risk for our largest institutions. basel ii is intended to close this gap by more directly linking regulatory capital charges to the riskiness of the corresponding assets and thereby reducing the incentives to engage in capital arbitrage. basel ii also creates a link between regulatory capital and risk management, especially under the advanced approaches, which are the only ones expected to be applied in the united states. under these approaches, banks will be required to adopt more formal, quantitative risk - measurement and risk - management procedures and processes. for instance, basel ii establishes standards for data collection and the systematic use of the information collected. these standards are consistent with broader supervisory expectations that high - quality risk management at large complex organizations depends upon credible data. enhancements to technological infrastructure - combined with detailed data - will, over time, allow firms to better price exposures and manage risk. the emphasis in the new accord on improved data standards should not be interpreted solely as a requirement to determine regulatory capital standards, but rather as