incidence of financial crises in emerging markets will be lower, and the dynamics significantly different. where these balance sheet improvements are most advanced, future financial distress will look more like what we typically see in instances of financial stress in the major economies - substantial asset price volatility and the potential for substantial financial losses, but less in the way of a significant disruption to either short - run or longrun real economic growth. this is of course a probabilistic judgment, not a certainty. the strong growth performance and greater financial resilience of emerging market we've seen this decade provides some support for this judgment. but, some of this progress was undoubtedly facilitated by the relatively favorable economic and financial conditions of the global economy and only time will tell whether it will prove robust in circumstances of greater macro adversity. of course, these broad trends in balance conditions mask substantial differences across countries. there is wide dispersion around the typical or average balance sheet i have described, and some important areas of vulnerability remain. many countries still face daunting fiscal problems and are only beginning to be able to issue debt in their own currency at longer maturities. the political consensus that provided support for these improvements looks vulnerable to challenge in many countries. for a number of countries, improving financial strength will have to remain at the top of the hierarchy of policy priorities. and even where progress has been most impressive it could be eroded quickly. where progress has been made in reducing important sources of financial instability, policymakers in emerging markets have the opportunity to focus more effort on reforms that can help achieve and sustain higher growth in the future and on developing an institutional infrastructure strong enough to serve as the foundation for further integration into the global economy. this shift in focus brings with it of course a daunting array of complex economic policy challenges. these challenges lie less in the types of things that can be captured in a financial ratio or balance sheet, or in changes to the risk premiums attached to the financial claims on the country. they lie more in the realm of improving how markets work and how efficiently resources are allocated. these factors include the development of the types of institutions that are the subject of desoto's work or the reports. they involve the development of the legal system and world bank's doing business its ability to ensure that property rights can be established and that the protections they engender can be enforced. they are about creating the conditions for more competitive domestic financial and product markets by reducing barriers to starting

, the observed preference for nominal exchange rate stability suggests a monetary policy regime with less independence to sustain price stability over time. emerging market economies have retained controls on cross - border capital flows, some quite comprehensive, some more selective. these come with a range of different justifications, from insulation against volatility and speculation, to protection of the domestic financial system, to limiting variability in the exchange rate or maintaining a specific objective for the level of the exchange rate. by design, these controls limit the degree of integration with the global economy and they necessarily distort incentives in ways that affect all economic and financial activity. their appeal as a source of durable stability has diminished over time, and we now have a greater understanding of the effects they can have in lowering long - run growth potential. for policymakers in many emerging economies, the question is not whether to remove controls, but when and how to do it without significantly raising short - run vulnerability to financial instability. when it comes to undertaking reform in the areas of financial system development, the exchange rate and monetary policy regime, and liberalization of the capital account, there is more consensus on the importance of the efforts than there is on the appropriate pace and sequencing of policy changes. these initiatives are all closely related, and designing sensible reforms in one of these areas requires careful consideration of how to proceed with the others. progress in one requires progress in the others. and market participants and policymakers need to have the chance to adapt to change and learn as reforms are implemented. this is the classic and persuasive argument for care and for gradualism. but it is possible to move too gradually. there is risk in inertia as well as in change. the policy challenges in occupying the middle ground - the middle ground of trying to allow some but not too much variability in the exchange rate, some but not too much freedom for capital movements with the inevitable increase in leakages around the remaining controls, and some but not too much competition in a still fragile domestic financial system - may be harder during a protracted transition. the more protracted the process of agreeing on and initiating change, the greater the costs for the economy as a whole of the distortions left in place. by outlining a path for reform, governments can dispel uncertainty about the overall strategy and enable market participants to begin to adjust, mitigating some of the concern about moving too quickly. governments, perhaps governments everywhere, are probably behind the pace of integration that the market