when growth slows. this is not to argue that the sort of exchange rate changes which have occurred in asia are helping to bring about a new and beneficial equilibrium. they are, in fact, very damaging, not just because of the inappropriate price signals they embody, but because of the high interest rates used to contain the exchange rate movements, and the damage to firms which have borrowed in dollars. much more modest changes would have achieved an improved competitiveness, and as far as capital flows are concerned, big movements in exchange rates seem to be inhibiting rather than encouraging capital flows, by worsening the basic situation in these countries, reducing profitability, limiting gdp growth and creating substantial policymaking uncertainty. it might be worth noting, too, that in the mexican case, the large nominal exchange rate fall which was initially seen ( in 1994 / 95 ) as being an important part of the corrective process has been more - or - less offset by subsequent inflation, so that the improvement in the real exchange rate and competitiveness has been largely lost. when people used to argue about the correct sequencing for the deregulatory process, they recognised that financial deregulation should come last, because if there remained any opportunities for disequilibrium profits in the meantime, a very open financial sector would allow these to be exploited. - 11 - i have already noted how important it is to improve prudential supervision in these countries. this is not controversial, although putting it into practice will be difficult and time consuming. one more - controversial element would be an effort on the part of the prudential authorities in the capital supplying countries to go beyond assuring themselves that their own banks are acting prudently and - in addition - asking whether their actions may be putting the recipient country ’ s financial institutions at risk. this would seem to require a greater degree of co - operation than exists ( or is envisaged ) at the moment. in short large and volatile capital inflows are an inevitable part of the international context in which these countries operate. even with a floating exchange rate, very large medium - term exchange rate changes can be expected. this will put a lot of pressure on the solvency of firms and, more particularly, banks. you therefore need a sound, well - supervised and risk - averse banking system. this is an essential part of a deregulated financial market, but one that many asian countries lack. it may not be possible to return to the highest

banks focus on ensuring that the process of credit risk revaluation can proceed without jeopardizing access to funding and liquidity of solvent entities which, if occur at a generalized scale, could have negative effects on payments ’ stability, economic activity and the financial system at large. so, as time goes by, information on the quality of abss held by agencies and hedge funds should become clear, together with the materialization of equity contributions and / or liquidation of funds that have lost a big portion of their capital. this process is currently under way. although this process of financial market normalization is part of a necessary correction, it is neither easy nor prudent to express what this correction will finally be like. what can be said with some certainty, however, is that volatility will be here for a while and will be associated to lost or reduced access to financing from non - banking financial institutions or even particular banks. the longer and deeper this adjustment, the larger the effects on financial markets and the world economy overall. the most likely final effects will be increased risk premiums ( an inevitable or even healthy correction ), a deeper and more prolonged adjustment in the us housing market, and some less economic growth in the us and in the world. evidently, a deepening of these problems could be more hurtful for global growth and the commodity prices. this adjustment comes on after a long period of very expansionary monetary policies in industrial economies that had begun a normalization process. but still, one should not overlook the fact that this correction finds the world economy close to completing the best five - year growth period since the early seventies, with large commercial banks in a very solid position, enterprises with good profits and the main industrial economies with flexible exchange rate regimes, controlled inflation and central banks that have gained great credibility for their commitment to price stability. in addition, a significant number of important emerging economies are in a very favorable situation of liquidity and external solvency, with more flexible foreign exchange rate systems and low inflation rates. the chilean economy in this new financial setting it is premature and bold to try to quantify the possible effects on the economy of this adjustment that is under way. pass - through channels will be rises in risk premiums, changes in the future path of monetary policy interest rates in industrial economies, adjustments in government bonds ’ interest rates of industrial economies, a slowdown in the us and the world economy and a drop in commodity prices. what we do know is that chile