the short - term economic crisis that ensued served to bring policies to task and to trigger lasting economic reforms in some countries, notably chile. more recent experience, however, raises serious questions about this view of the role of international capital as a robust, reliable and objective referee of the soundness of economic policies. events during the asian crisis naturally come to mind. the flight of international capital bore practically no relation to a forward - looking assessment of changes in the policies and macroeconomic fundamentals of the region. it is true that some countries were pursuing quasi - fixed exchange rate regimes that may have allowed pressures to build up for too long. but these same exchange rate regimes were in place when the funds were flowing in, which suggests that they were not viewed as a serious structural flaw by investors at that time. similarly, the underlying weaknesses in many asian economies that so many observers ( with the benefit of hindsight ) now point to — ‘ crony capitalism ’, inadequate risk management, speculative lending to the property sector — were all present at the time when the funds were pouring into the region. not only did these weaknesses fail to deter investors on the way in : the abundance of inward investment prior to the crisis tended to exacerbate the problems, rather than act as a corrective force on policies. more recently, we have witnessed what appears to be the start of a new wave of capital flowing back into the region, even though it is far from clear that these structural problems have been fully addressed. i think it is not going too far to say that these ‘ hot ’ capital flows not only failed to act in a way that policed policies effectively, but actually became a powerful destabilising force in their own right. the huge swings in interest rates and exchange rates that resulted from capital flight in this region did far - reaching damage to corporate, financial, and government sectors, which, in turn, reinforced the initial withdrawal of capital. in such an environment, it requires a very courageous investor to be willing to step in against such a speculative tidal wave, regardless of how far out of line with reality markets may have gone. pursuing sustainable exchange rate and monetary policies requires countries to devise defensive strategies against such forces. this is no easy task. capital controls have been suggested by some. in hong kong ’ s case, such controls would be anathema to our free market philosophy : they are anyway prohibited by hong kong ’ s basic law ( as they are, with effect from 20 december

’ financial costs and arbitrage conditions, which could end up undoing the direct effects. at the same time, repeated or frequent interventions lose effectiveness : it is essential for intervention to be an exceptional occurrence in order to transmit the relevant information to financial markets. nevertheless, it is a valid tool, effective in changing the exchange rate and strengthening the international liquidity position. the board of the central bank of chile constantly evaluates the timing and the size of any intervention and in the past few weeks it has certainly been present in our discussions, based on weighing the benefits, costs and the present context. in the central bank of chile we use a variety of methods for assessing the real exchange rate level with regard to its long - term fundamentals and thus we have an ample range of estimates. our aim is not to determine which is the equilibrium – that is the task of the market –, but rather to detect any anomalous deviation. these discussions led us to the conclusion in our latest monetary policy report that the real exchange rate is within the adequate range of levels, albeit in the lower part of it, and this is confirmed by the most recent appreciation. the real exchange rate is currently slightly below its average over the past twenty years but, with respect to said period, terms of trade, even excluding copper, are today much better. similarly, our economy is enjoying a much easier net external position – that is, how much we owe and how much is owed to us by the rest of the world – than in the 1980s and 1990s and the real exchange rate has only appreciated slightly over what it was then. since the floating exchange rate was adopted, there have been three occasions on which the board considered that intervention was warranted. in general, these interventions affected the exchange rate. other episodes, that showed how difficult it is to apply an effective intervention, were experienced in the 1990s, when the real exchange rate was significantly more appreciated that it is today, despite worse terms of trade, a weaker net external position, massive purchases of foreign currency reserves and restrictions on capital inflows. in emerging and industrialized economies that have successfully weathered the crisis, export activity today faces considerable challenges. the financial crisis and the great recession have had profound consequences on the developed world because of their financial excesses. in this sense, they are facing a situation similar to what we lived through in the mid - 1980s, only now the adjustments they make locally have global implications. current account deficits in the advanced world