##duit followed in the contagion process, was not the same for all countries. initially, with countries in east asia, perceptions played an important part in the process. once the thai baht came under pressure in the middle of 1997, it did not take long before international investors discovered many similarities in the economies of korea, the philippines, indonesia and malaysia. the serious collapse of the russian financial system, and particularly the action taken by the russian government in the unilateral restructuring of its sovereign debt, gave rise to an indiscriminatory withdrawal of funds previously invested in sovereign debt of other emerging market governments. it was also noted at the time that the imf, the world bank, and governments of other countries were rather reluctant to provide the massive amount of assistance needed for propping up the russian balance of payments problem. the following quotation from a recent imf publication summarises the russian events of mid - 1998 : “ more important was the role of russia ’ s default as a defining event that challenged widely held views about the default risks associated with all emerging market investments, and the willingness and ability of the international community to provide assistance to countries in difficulty. ” ( world economic outlook and international capital markets, december 1998 ) the flight to high quality assets and, at a later stage, a major “ de - leveraging ” process of multinational investment institutions, reduced international capital flows in general, and therefore provided a second conduit for contagion. it is estimated at this stage that net private capital flows from the industrial countries to the developing and emerging markets, including countries in central and eastern europe “ in transition ”, declined from us $ 118 billion in 1997 to $ 70 billion in 1998. in the case of the asian countries, it changed from an $ 100 billion net inflow in 1996 to an $ 18 billion outflow in 1998. a third obvious conduit for the transfer of the economic ills of the east asian economies to other countries, and particularly countries with vulnerable balance of payments positions, is the deterioration of current account positions caused by the generally depressed world economic environment. the negative effects of this development are only now beginning to filter through to some of the poorer, developing countries in the world that do not have developed financial markets but are nevertheless dependent on the exports of basic commodities, metals and minerals. examples in southern africa can be found in botswana ( diamonds ), and zambia ( copper ). finally, the weakening or full collapse of

sector soundness. adherence to these international best practices and codes should help to ensure that economies function properly. the third area is the strengthening of the financial sector. the assumption is that banks and other financial institutions need to improve internal practices, including risk assessment and risk management. at the same time the official sector needs to upgrade the supervision and regulation of the financial sector to keep pace with the modern global economy. to achieve these objectives, the basel committee has developed the core principles for effective banking supervision, while the committee on payments and settlement systems has drawn up the core principles for systemically important payment systems. universal principles for insurance as well as security market regulation have also been developed. the fourth area of financial sector reform concerns involving the private sector in crisis prevention. the involvement of the private sector should limit moral hazard, strengthen market discipline and improve the repayment of loans. the fifth area of reform concentrates on the prevention of systemic instability. most of the international best practices and codes have been established to minimise the effects that the insolvency of a financial institution may have on other institutions. in addition, the imf has created a contingent credit line facility as a precautionary defence for countries with strong economic policies. this facility has been designed to prevent the balance of payments problems that could arise from international financial contagion. south africa has been actively involved in discussions on the new international financial architecture. we recently also participated in a financial system stability assessment undertaken by the imf and the world bank. the report on south africa has not been published, but found that the south african financial system is robust and that the financial sector ’ s legal framework is impressive. the assessment was further that south africa is in broad compliance with recognised best practice in the fields of security, insurance and banking regulation and that we are making substantial efforts to ensure transparency. despite this favourable assessment, we must nevertheless continue to strive for sufficiently accountable, transparent and effective cooperation between the various agencies for the smooth running of south africa ’ s financial markets. this should instil public confidence in the financial system. the banks act and the regulations governing the activities of the banks have been amended to bring them into line with international developments. in addition, the reserve bank has established a financial stability unit ( fsu ) to focus on the overall stability of the financial sector and its preparedness for global competition. one of the functions of the fsu is to keep abreast of international developments as far as stability issues are concerned