the countries at war. however, the developed countries have not been at war with each other for a long time since 1945 and why did their governments keep on piling up public debts to unsustainable levels? there are many complicated reasons as well some rather simple reasons. let me go straight to the simple reasons today. if a government borrows money to finance productive investments in physical infrastructure, such as ports, airports, roads, bridges and power plants, or to finance the development of human capital, such as education, research and training, then these investments should bear fruit in the future by raising the productivity and competitiveness of the economy concerned. in that case, the repayment of the money borrowed should not be problematic in the future. however, if the government borrows to finance consumption, wasteful investments and excessive welfare, then over time the economy will find it hard to repay the debts. 14. it is difficult for anyone to be overly optimistic on the prospects of an early resolution of the leverage trap in the developed world. leveraging brings about enjoyment and pleasure, as it supports domestic consumption and demand, for as long as the capital market is willing to finance the borrowings at reasonably low interest rates. deleveraging brings the opposite outcome, which is very, very painful. deleveraging could result in economic recession, fall in asset prices, rise in unemployment, drop in personal, corporate and government income etc. in the short run. none of these is pleasant and it is not surprising at all to see the very strong pushback by the people in the crisis - hit countries in europe on measures that attempt to redress the fiscal sustainability problem. excessive government debt and “ collective irresponsibility ” syndrome 15. there is also another simple but important reason why people as well as the politicians elected by them would want to continue to spend beyond their means even though they realise that they could not afford to repay the debts in their lifetime. this is what i would like to call the “ collective irresponsibility ” syndrome. a father or mother will do almost anything to protect their children. some would be prepared to sacrifice their happiness and even lives for their children. it is only in great desperation, such as the great famine in china depicted in the movie “ 1942 ”, that we would witness children being sold by their starving parents. but that was a very extraordinary and tragic situation. we can hardly say that the developed world is now in that desperate situation. there is an

peter pang : policies adopted by authorities in different jurisdictions with respect to international reserves welcoming remarks by mr peter pang, deputy chief executive of the hong kong monetary authority, at the international monetary fund independent evaluation office ( ieo ) / hong kong institute for monetary research ( hkimr ) workshop, hong kong, 24 march 2011. * * * it is a pleasure to welcome all of you to this event co - hosted by the hong kong institute for monetary research ( hkimr ) and the independent evaluation office of the imf. the hkimr, as some of you already know, is a subsidiary of the hong kong monetary authority. its objectives are to promote research on longer - term and wider policy issues of relevance to the monetary and financial development of hong kong and the asia region ; and to foster cooperation and cross - fertilisation of research efforts between academics, international financial institutions and the hkma research activities. for this reason we are particularly pleased to co - sponsor this workshop which deals with the important topic of policies adopted by authorities in different jurisdictions with respect to international reserves and with the advice the imf gives in this regard in its consultations with policy authorities. the accumulation of international reserves has become one of the issues at the center of debates about the functioning of the current international monetary system as well as about reforms of this system. one lesson that authorities in this part of the world drew from the financial crisis in the late 1990s was that strong policy fundamentals are not always enough to guard against the vagaries of international capital flows. a sizable cushion of international reserves is important as a buffer to guard against sudden changes in market sentiments that can lead to capital outflows and pressures on the currency. starting shortly after the asian financial crisis reserves were thus accumulated in the region to build up such buffers. but holding large amounts of reserves is of course costly as they are typically invested in highly liquid assets with relatively low yields compared with some alternative uses of the funds. it is partly for this reason that authorities in the region have taken steps to create a mechanism for pooling some of their reserves in the form of the chiang mai initiative which started in year 2000 and its multilateral extension which was agreed on in 2010. while the size of the pool of reserves under the chiang mai agreement is relatively modest compared to the potential needs for some of the larger economies in the region, the importance of the agreement goes far beyond the aggregate amount of reserves involves. it reflects a desire by authorities in