to allow financial markets exchange markets, interest rates, and stock and bond prices - to take the strain, and to seek to restore confidence, and moderate the impact of market movements, by restrictive macro - economic policy adjustment. the second is to limit the financial market impact and the extent of the associated macro - economic adjustment by providing or arranging alternative external financing. in practice these options are not, of course, mutually exclusive and the real question is the appropriate balance between them. where a country has transparently been pursuing an undisciplined and unsustainable macro - economic policy, most people find it easy to accept that that country should bear the burden and adjust, painful though that may be. many people find that harder to accept where, as in the present case, conventional macro - economic policies have, for the most part, been relatively responsible. there were certainly adjustments to macro - economic policy that needed to be made - a more flexible exchange rate regime in some cases, for example, or a somewhat tighter overall macro - economic stance, with perhaps some adjustment between fiscal and monetary policy. and, once the capital outflow had started, adjustment needed to be more abrupt than might otherwise have been necessary, in order to re - establish confidence. but there are real dangers in extreme market movements or in excessively severe macro - economic adjustment to contain them. that could cause a vicious circle of domestic default and systemic financial weakness in the affected country. and it would have seriously adverse implications - in terms of both financial and economic knock - on - effects - for the global economy. that, essentially, is why it is in the self - interest of the international community to attempt to mitigate the market and macro - economic adjustment pressures in asia by providing financial support. it is why the international community responded to the crisis in asia by promptly offering very large amounts of official assistance - $ 17 billion in the case of thailand, $ 43 billion for indonesia and $ 57 billion for south korea. but such official financial help cannot be unlimited and it cannot be provided without strings. it, too, has real dangers. if it were too readily forthcoming it could encourage “ moral hazard ”, partly by encouraging macro - economic laxity in other potential borrowing countries, but especially by encouraging commercial lenders - particularly foreign currency creditors - in the belief that they will be bailed out if things go wrong. that would be likely to add to the problem of potentially volatile capital inflows next time around. not surprisingly

but, with the benefit of hindsight, the increasing scale of the inflow, and particularly the form that it took, became an important part of the problem. it was not all effectively employed. there was overinvestment in some production sectors ; much went into ambitious property development ; and much went into financial rather than real assets. the hoped - for higher returns could not be maintained. again with the benefit of hindsight, it is possible to identify a number of structural weaknesses in the mechanisms for financial resource allocation in the recipient countries. there was, for example, a general lack of reliable financial information, and a lack of transparency in relation to the financial position, of both public and private sectors. complex and opaque links between government, financial institutions and non - financial companies made it difficult for outsiders to understand the real nature of their exposures. financial markets were not well developed, leaving the system heavily dependent upon the banks. there was inadequate regulatory or supervisory oversight. there was widespread government influence over financial flows, which importantly also contributed to a perception that much of the borrowing was effectively under - written by the government. the list could go on. the problem was compounded by the absence of any real perception of exchange rate risk. borrowers were evidently confident that governments would maintain their exchange rate pegs against the dollar so that unhedged foreign currency debt, much of it at short term, appeared a cheap alternative to domestic currency borrowing. the result was a build - up of short - term private sector foreign currency liabilities, by banks and non - banks, which was not fully appreciated, and which left the asian economies especially vulnerable to a flight of capital in the event of a change in sentiment. the problem is that national authorities can create their domestic currency, if they choose to do so, even if it leads to inflation, but they cannot simply create foreign currencies in the same way. so, once the run started, it was violent and contagious. there are certainly all sorts of lessons to be drawn from asia ’ s experience for the future relating to the structural weaknesses in the financial system that allowed the problem to emerge. these weaknesses certainly need to be addressed in the borrowing countries ’ own interests if they are to continue to reap the great benefits of the free international movement of capital without similar extreme volatility in the future. but the immediate question was, and is, how to contain the present problem. essentially there are two broad options. one is simply