on productivity, has been a key contributor to global growth and prosperity since the second world war. openness to trade brings many benefits to the supply side of the economy. these include : larger markets, greater specialization opportunities, and the increased ability to exploit economies of scale and scope ; faster transmission of technology and innovation ; and greater competitive pressure on domestic firms to increase their productivity. collectively, these forces lead to a more efficient allocation of a country ’ s scarce resources — one that is more closely aligned to its international comparative advantage. as a consequence, consumers can benefit from lower prices, higher real incomes, and greater variety and quality of goods and services. increased openness may also reduce wasteful rentseeking behavior on the part of protected industries and the related costs of corruption. these benefits from open trade are very evident in india. academic research has found substantial gains for india following its dramatic trade reforms in the 1990s, which benefited consumers via lower prices and firms via higher markups. these higher profit margins spurred innovation and provided funds for the development of new products. looking ahead, the upcoming implementation of the goods and services tax in india — which will create a common market internally — is expected to provide many of the same benefits as trade liberalization does internationally. openness to trade has certainly played a large role in the economic ascent of asia. following the rise of japan, korea, taiwan and others, fast growth in china and india has lifted hundreds of millions of people out of extreme poverty — an unprecedented feat in human history. the benefits 2 / 6 bis central bankers'speeches of economic integration and other reforms are exemplified in india ’ s higher growth rate since the introduction of market reforms in 1991. growth has averaged 6. 5 percent annually in the postreform period, compared to about 4 percent annually over the prior 40 years. indeed, india is the fastest - growing major economy in the world today. reflecting these gains, a number of emerging market countries have been strong supporters of open trade, a sign of how much the world has changed in recent years. a few examples can help to illustrate some of the benefits of globalization. india ’ s green revolution — which helped to greatly increase its agricultural productivity and food security — was facilitated by u. s. technology and scientists working with their indian counterparts. similarly, as is well known, indian engineers and entrepreneurs have played a key role in the technology sector ’ s tremendous achievements in recent decades and now lead some of america ’ s largest companies, including google

the european union integration worked consciously to induce a level of economic integration in europe that would induce conditions that more closely met the economist's test for an optimal currency area. for most of the emerging markets today, in contrast, the challenge is to establish the conditions that will enable them to live more comfortably in a world where their exchange rates will adjust more freely in response to changing fundamentals. as these economies become more open to capital flows, they will necessarily find it more difficult to occupy the tenuous middle ground with an exchange rate regime that is neither fully fixed nor flexible, but managed in a way that closely tracks the value of the dollar or carefully constrains fluctuations against the dollar. this does not mean that these countries can be indifferent to exchange rate movements or that the exchange rate is irrelevant to the conduct of monetary policy. for many small open emerging economies, price stability and exchange rate stability are obviously intertwined, and a monetary rule that responds effectively to inflation pressure cannot afford to overlook the signals coming from the foreign exchange market. but attempts to target a particular level for the exchange rate or the slope of the change in the rate in response to different conditions will, as the capital account becomes more open, inevitably, come with substantial risks to monetary and financial stability. managing the transition to a more open capital account and a more flexible exchange rate regime is not a simple task. these transitions need to be handled with care and attention to the development of a strong institutional framework for monetary policy and the financial system. the more successful transitions came in contexts where the monetary authorities were independent of political constraint, where balance sheet problems and currency mismatches in the government and the financial system were not acute, where the prevailing legal framework provided reasonable protections for property rights and the enforcement of contract, and where there was effective supervision of the banking system. where these conditions were weaker, the transitions from fixed exchange rate regimes were more traumatic. these conditions seem exacting, and the understandable need for caution often is invoked in defense of protracted and very gradual transitions. a certain degree of caution is wise : there is a great deal of risk in a poorly managed and premature shift toward flexibility. but there is risk in gradualism too. delay magnifies the costs of living with the distortions caused by a managed rate. once relaxed, exchange and capital controls are both difficult and costly to reintroduce, and even relatively modest steps back from an open regime can be damaging to confidence and credibility, without buying