be completely inadequate in the present volatile environment. even after the completion of the current round of increases in the quotas of the fund, the imf will not be in a position to supply the needs of its member countries in times of serious global financial crises. many recipients over the past year of imf assistance are also of the opinion that the conditionalities attached to imf loans are no longer appropriate for the present world environment. disruptions in international financial markets are no longer created by structural or temporary imbalances in international trade, but rather by volatile international capital inflows and outflows. the imf ’ s conditionalities are still directed, however, to the restoration of equilibrium in the current account of the balance of payments. a fourth conclusion from the developments of the past year is that the present international financial system of floating exchange rates and free capital movements provides increasing incentives for speculators and short - term profit explorers to exploit weaknesses of individual countries, often at the cost of the impoverished and the poor people of the world. 2. a hobson ’ s choice for the emerging markets smaller countries such as south africa can do little to change the world financial system, but may still be able to isolate themselves from the volatility of the world environment. this will, however, require comprehensive restrictive exchange controls on both residents and non - residents in respect of all international capital transactions. in the process, a country that moves in this direction will most probably be excluded from the ongoing process of financial globalisation, and will be barred from access to international capital markets. a few countries recently nevertheless opted for this alternative and rather preferred the route of isolation to the continued exposure of their economies to fickle foreign fund managers and international currency speculators. in the case of malaysia, it was judged that the country ’ s high domestic savings rate will generate sufficient funds to provide for its needs for future economic development. in the case of russia, the government had no other choice but to close its financial markets after a major collapse in the public and private sector financial systems. south africa, with its low level of domestic saving and massive needs for future economic development, has no choice. unless this country can rely on some regular substantial inflow of capital from the rest of the world, its economic growth rate will not create sufficient jobs for the already large number of unemployed and the annual addition to the labour force, or provide the resources needed for the social upliftment of the population. south africa must

therefore remain part of the global financial markets, and must pursue macroeconomic policies and introduce structural adjustments regarded as necessary to make the country attractive for foreign investors. it is not precluded that some important changes may be introduced to the world financial system over the next few years. south africa will, to the extent that it participates in this debate in various international fora, press for the introduction of measures that will reduce the volatility of the markets. we know from experience, however, that proposals for change to the global financial architecture can take a long time to find consensus, and changes will most probably only be introduced gradually. in the meantime, south africa will be exposed from time to time to volatile capital movements, and the domestic economy will remain vulnerable to external disturbances that may in the short term force macroeconomic policies inconsistent with domestic economic objectives. the question remains, what can, or should, south africa do to make sure that the domestic economy will, over the medium and longer term, be better protected against the disadvantages of international financial market volatility and still gain maximum advantage from international capital inflows? 3. the need for financial flexibility globalisation is about markets. it is markets that are being integrated in a worldwide system of unrestricted capital movements, and markets that are being opened up for participation by investors from all around the world. acceptance of any country in the global financial markets therefore requires a recognition of the principles of the market economy, and an adherence to the rules of the game. one of the basic rules of the game in a market economy is that governments must allow market forces of demand and supply to determine prices. intervention by governments in the markets for whatever purpose, if necessary, must always work through the markets, without suspending or restricting the forces of demand and supply. the price mechanism indeed provides the core discipline of the market economy, and through price changes, markets signal messages and activate automatic adjustment processes intended to hold demand and supply in equilibrium. in the context of international capital flows, the exchange rate is, of course, the most important price. it is important for the smaller countries therefore to ensure flexible adjustment processes for exchange rate changes in the environment of a volatile global financial environment. it is almost impossible to maintain a fixed exchange rate for any currency once large amounts of capital start flowing out of or into a country. efforts to maintain a fixed and unrealistic exchange rate in such circumstances will only entice speculative transactions that will eventually exacerbate