a number of countries have turned the corner on economic growth in the second half of 2001, after a period of contraction. for the region as a whole, the global downturn of 2001 was much less traumatic than the asian financial crisis of 1997 and 1998 ( though this is not true for every individual country ). there are a number of reasons for this but one contributing factor, in my view, was that economic policies responded differently. floating exchange rates were allowed to decline when under pressure, which helped to avoid any sense of crisis and associated contagion from one country to another. monetary and fiscal policies were generally eased, something which, in many instances, was not possible during the initial phase of the earlier crisis. this meant that while the global slump did affect east asia, the effects were ameliorated, rather than exacerbated, by the policy structures and responses. nonetheless, the recent experience may prompt some of the east asian economies to think about the extent of their exposure to the high - technology sector. a notable feature of performance after the asian crisis was the way in which the global boom in that sector drove growth for the exposed economies. and in the subsequent downturn, there seems to have been, not surprisingly, some association between the degree of technology exposure and the extent of the economic slowdown across countries ( see chart ). a question which these countries may face - probably they are already asking it of themselves - is whether the sorts of growth rates they want to sustain can be so reliant on a relatively concentrated, export - led approach in industries where the products are increasingly commoditised, or whether a more diversified approach, including more growth in domestic demand, would be better. the answer which emerges will no doubt be important for trade and capital flows in the region in the future. no less important than that set of issues, and in many respects quite related to it, is the potential longrun impact of the rapid growth and internationalisation of the chinese economy. china ’ s economic growth, at least as recorded by the official data, is remarkable for its pace and consistency during the past decade. china is fast becoming quite large as both a source of, and a destination for, goods and services. it is the second largest regional economy after japan, for example, by a large margin. it is also a very large destination for international capital, receiving a significant share of the world ’ s crossborder flows of direct investment in recent years ( see table

to some elements that remain a work in progress. i hope that our experience might be of some use to authorities in many emerging market economies, which are now developing their own local - currency markets. and their efforts are bearing fruit – the outstanding stock in these emerging economies'local bond markets now exceed $ 4 trillion us – a four - fold increase in value over roughly the past decade. i'll also consider how these domestic markets can fit into, and do their part in stabilizing, the global financial structure. now, these are my personal observations which are based on 40 years experience in public finance, and as seen from two perspectives : both as a central banker, and before that, as a federal finance department official. over the years, i've come to appreciate that a sound local - currency government bond market helps on three distinct policy fronts. first is the discipline that it can impose in terms of macroeconomic policies. second, it supports economic and financial efficiency. and third, it helps in the development of a stable financial system. let me now deal with each of these points in turn. in terms of macroeconomic policy, a government must build credibility with its own citizens first of all. citizens need comfort that the government bonds that they hold will keep their value ; that governments won't default on their obligations, or resort to large tax increases or inflation to ease the real burden of repayment. this initial hurdle of building credibility can be difficult to get over, as many emerging markets can attest to today. but once this hurdle has been cleared, a well - functioning, localcurrency government bond market brings with it the incentives for authorities to keep in place the sound policies that i mentioned in my introduction. those policies should include monetary policy aimed at maintaining low, stable, and predictable inflation, which leads to an environment of lower interest rates – both nominal and real – and lower debt servicing costs in the future. they also include prudent fiscal policies, which then reinforce public confidence in the government and, in turn, in the domestic markets. of course, none of this suggests that all government borrowing must be denominated in the local currency. there will be times when a government will borrow in foreign currency, perhaps for projects that will support a future flow of foreign currency that can, in turn, help repay this borrowing. the real risk here comes when governments find themselves repeatedly borrowing in foreign currencies, to finance current domestic spending. let me now mention