the increase in surplus essentially reflects a fall in investment as opposed to a rise in savings as is the case for china and the oil - exporting economies. in the thai case, a deep currency depreciation after the crisis led to a shift in profitability towards tradeables, and induced a major shift in resource allocation. also, the damage to the banking sector compromised credit growth and the subsequent expansion of domestic demand, as the ability of the financial sector to take risk became more constrained. as a result, there was a sharp fall in domestic demand, especially private investment. and exports, by default, became the key engine for growth. similar adjustment was observed throughout east asia. the adjustment led to a turnaround in the external current account, a decline in external indebtedness, and a rise in international reserves, all of which helped strengthen the region ’ s external position. given the weakness in domestic demand, limiting large currency appreciation becomes a necessity for some economies to support economic recovery. and with weak domestic demand, pursuance of banking reform was an important policy to normalize lending and credit growth. on top of this, liberalization to allow more capital outflows also became an instrument of choice in managing the macroeconomic impact of rapid capital inflows. on the demand side of global capital, policy configuration in the us was instrumental in allowing the external surplus of emerging markets to be absorbed through the us current account deficits. the key mechanism, as i noted, has been the easing of us monetary policy that has helped support global growth through the expansion of us demand. with private investment in the us still recovering from the stock - market correction in early 2000 $ s, lower interest rate and greater access to credit significantly increased us consumption at the expense of a fall in private savings. as a result, the us external imbalance widened while reserves accumulation by emerging markets increased. the next question is can this go on? and is reserves accumulation a temporary or a permanent feature of the international monetary system? to answer this question, one has to distinguish between stock and flows. on the flows side, given reserves accumulation essentially mirrors external surpluses of emerging markets, the pace of reserves increase going forward is more likely to ease. this is because the adjustment process that is now ongoing will reduce the imbalance. the more the adjustment, the less will be the additional flows, and hence the pace of reserves accumulation. but to be successful, the adjustment will require both expenditure reduction, through

first is the export - led development model, i. e. the new bretton woods, which sees reserves accumulation as a consequence of an attempt to maintain export - led development, especially in asia. the second explanation is the global - saving glut hypothesis, of which the glut is driven by the transformation of emerging markets from net borrowers to net lenders in the international capital market. both interpretations i think have merits, and reserves accumulation is probably a reflection of both. but the point that really should be emphasized is that external surplus and reserves accumulation, for the most part, are a reflection of the dynamic of the adjustment in global investment and saving that has taken place since the asian financial crisis. this dynamic has been instigated by the configuration of policies pursued by the major economies and by emerging markets, as well as by the development of financial institutions and markets around the world that has sped up and influenced the direction of global capital flows. but why the asian financial crisis as a starting point? to me, the asian financial crisis marks a number of important watersheds in the global financial relationship. first, the crisis reaffirms the dominant roles of market and globalized capital. second, the severity of the crisis led many emerging economies to rethink their policies of relying on external help for crisis prevention and resolution. and this has led to consideration to selfinsure against risk of crisis, with reserves accumulation becoming an important aspect of this consideration. and third, sharp adjustments in relative prices, especially real exchange rate and real interest rates after the crisis, brought into play the major forces that led to the adjustment in global investment and savings, as well as reserves accumulation. today, i want to identify three factors as the major forces contributing to external surplus and reserves accumulation. the first is the process of global investment - savings adjustment that i have noted. the second is the policy configuration in the us, especially the easing of monetary policy that plays a crucial role in promoting expenditure of us households. and the third is financial innovation and the deepening process of financial globalization, especially in the us, that facilitates risk allocation and enhances access to credit by households. the growth of credit derivatives and sub - prime mortgages are two examples of the developments that have taken place. on the global basis, these forces have led to a widening of the us current account deficits that was matched by surpluses elsewhere. as for east asia, in terms of the investmentsavings gap,