country which over time can endanger the competitiveness of exports. in addition, the fixed exchange rate encourages residents to borrow in foreign currency at relatively favourable nominal interest rates. however, they expose themselves to substantial risks if their own currency has to devalue. in this way the policy of rigid exchange rate pegging helped to make some countries vulnerable to a change in mood in the markets and hence to a rapid reversal of financial capital flows. moreover, in some cases the domestic financial sector was underdeveloped and not very efficient. not infrequently the financial institutions were subject to political pressure. and the supervision was not particularly effective. when the capital began to flow back out of these countries, this soon led, in conjunction with a vulnerable financial sector, to a massive disruption of the economic system. hence mistakes in monetary policy, omissions in supervising financial institutions and insufficient domestic competitive structures in some cases made the crises possible in the first place and were largely responsible for the scale of the crises. a number of asian countries tolerated the emergence of a bubble economy and evidently did not correctly assess the associated dangers. however, the financial and foreign exchange markets cannot move out of step with real economic conditions in the long run. a reversal will occur one day suddenly and mostly in an exaggerated form. that is dangerous for the countries concerned, but also quite often for others, too. an overall analysis of the problem must include some further aspects : firstly, the crisis has not yet been overcome, despite the imf ’ s intervention and despite the reforms initiated in a number of countries. the causes - but also the resistance to solutions - are often deep - seated. it is very hard to change long - established patterns of behaviour and accustomed routines. yet policy makers in the countries concerned cannot and should not shy away from these challenges - in the self - interest of the countries concerned but also in the interest of others. it is encouraging that certain countries have taken important steps to tackle these challenges and are reaping the first rewards. that also confirms that the imf has pointed these countries in the right direction. and secondly, some structural problems of the asian emerging economies are by no means unique. such problems also exist elsewhere, and often have similar causes : in some countries in transition the financial sectors are too weak ; external debt is often rather short - term and denominated in foreign currency to an excessive extent. in some industrial countries there are at the moment tendencies towards exaggerated asset prices. one

, the gradual opening of markets is the main cause of the problems. but that view is too short - sighted. the main causes are the misguided or at least risky policies pursued by the countries in question. essentially that also applies to the countries affected indirectly. their own internal weaknesses make them vulnerable. it is also true that the global financial markets, with their tendency towards short - termism, are sometimes a factor in making the magnitude of the potential reversal so great. if a country then loses the confidence of investors because of a political error, it is punished hard - sometimes too hard, at least for a time. ii the outbreak of the crisis in some asian countries poses some new questions because some of the key fundamentals were quite sound : in many cases the public fiscal balance was in surplus or at least was not in excessive deficit. unemployment was fairly limited. the monetary policy stance was mostly quite restrained, and inflation remained moderate for a long time. for quite a while current account deficits were financed by capital imports apparently unproblematically. some indicators even showed an exceptionally positive trend. in particular, the saving and investment ratios were comparatively high, and real growth in this region was stronger than elsewhere. until a short time ago, the title of such a symposium might well have been “ the asian economic miracle ”. on closer inspection, however, it can be seen that the economic successes of recent years already carried the seeds of the later crisis : massive short - term capital inflows, asset inflation in the equity and property markets, in some cases a misallocation of capital, currency appreciation in real terms, decreasing competitiveness and growing current account deficits. these symptoms also pointed to internal weaknesses and political mistakes : for example, an over - rigid pegging of the exchange rate to the dollar and inadequate efficiency of the domestic financial sector. certainly, there are good reasons for pegging an exchange rate to another currency. credible pegging to a stable anchor can help to reinforce internal discipline. and it can help to lower the risk premium demanded by investors. but there are other considerations which can become a danger if the exchange rate is pegged too rigidly : they can make it hard to pursue the objective of internal monetary stability. interest rate policy becomes a hostage to the exchange rate, for - given strong capital inflows - an interest rate rise often has an opposite impact on monetary expansion than the one intended. a persistent stability gap can then arise in comparison with the anchor