he was the senior deputy governor ) : “ it will take a while, partly because we have a very rotten legal and accounting system … the most important thing is that we have very weak bankruptcy procedures. ” 3 the social values of each country underpin the formal structure of laws and institutions. a relationship - based approach towards doing business is part of the culture of most asian societies. few asian societies have the “ contract - based ” commercial culture of the west, particularly the us, with its robust emphasis on legal and impersonal obligations. few have made a practice of separating the ownership of firms from their management. in some countries, there are close ties between the state, the banks and industry, e. g. the state - owned enterprises in china, and the chaebols in korea. all over the region, family - based firms and conglomerates are the norm, especially in banking. companies in the same group would do business with one another, maintaining trust on the basis of family ties and shared ownership. even in japan, where ownership of large corporations is not in the hands of families, long - term corporate relationships and cross - shareholdings have dictated business. this was how entrepreneurship evolved in east asian societies, and among the overseas chinese in south east asia. many of these family firms were hugely successful, driven by the business acumen and entrepreneurial drive of the founding patriarchs, and supported by a web of networks, or guanxi. but the world has changed. family relationships may be an adequate basis for running a medium sized company, but not for an mnc employing tens of thousands of people. to be world - class, companies need to be led by the best man for the job, and this person is not likely to come from the same family, generation after generation. and business based on relationships rather than hard - headed commercial calculations is prone to abuse and under - performance, as was shown in the asian crisis. it will not be easy for the families to relinquish control. the instinct to hand an heirloom down the generations is still strong. there are also real practical difficulties. if the families sell out, who will the buyers be? who will take charge of the companies? most asian countries lack a group of institutional shareholders who can exert market discipline and defend minority shareholder interests, like the straits times, 26 january 2000. mutual and pension funds in the us. nor have they developed a class of professional entrepreneurmanagers, like

seen how a shock in the european periphery can send money that was invested in emerging markets rushing back to the us or other safe havens. to be clear about it, there is a lot that is good about capital flows, including even short term flows. they add liquidity to markets, by bringing more buyers and sellers together. however, we know too that capital inflows can also be too much of a good thing. they can lead to asset prices, or exchange rates, becoming disconnected from fundamentals. and the sudden withdrawal of capital from emerging economies when investors switch from ‘ risk on ’ to ‘ risk off ’ in their portfolios can be destabilising. as i mentioned, the current global condition is unprecedented. the policy responses in the advanced countries too are without precedent. globally therefore, we need some humility in understanding the benefits and costs of qe3 and easy monetary policies in the advanced countries. but it will be wise to strengthen our policy toolkits in asia, so that we can deal with unpredictable and often excessive capital flows. there are some lessons that come out of our experiences in asia and elsewhere, and policy responses that we can learn from each other. i will mention three sets of policy responses that will inevitably have to figure in our toolkits. first, there is much sense in curtailing volatility in the exchange rate over the short - term. the costs of volatile and uncertain exchange rates are high in small open economies especially – which is what most of our asean economies are. accordingly, malaysia, singapore and several other asian countries have not felt comfortable leaving their exchange rates entirely to market forces. their central banks, within each of their monetary policy frameworks, have sought to instil a focus on longer term fundamentals. there is merit in allowing exchange rates in asia ’ s emerging economies to appreciate gradually over the long term, reflecting their more rapid growth. if we resist these long term trends, we are likely to see more inflation in our economies. but some stability in the short term is wise. second, macro - prudential policies are now an important part of the policy tool kit. many asian countries have introduced new macro - prudential measures to try and avoid bubbles in bis central bankers ’ speeches their property markets over the last two years. malaysia brought in stricter limits on loan - to - value ratios on housing loans. singapore and hong kong have done similarly, and have introduced additional stamp duties or transaction taxes to