to the subprime market or to complex structured products in domestic financial systems has surely helped in this regard, but there are more structural reasons. in particular, there has been an important reduction of the financial vulnerabilities that were widespread in the past, and which led to costly crisis with important output losses and poverty increases, as the asian crises ten years ago crudely demonstrated. many emerging market economies have reduced their financing needs and improved their debt management. many more run current account surpluses which reduce their reliance on external funding. most have accumulated massive international reserves, well in excess of what would be needed for precautionary reasons. all in all, this paints a very different picture as compared to past episodes of global turbulence, when these economies used to be not only “ influenced ” by the ups and downs of the changing risk preferences in global financial markets, but simply “ driven ” – even “ drowned ” – by them, sometimes regardless of their economic fundamentals. in my view, this separation from the main stream of the turbulence constitutes an achievement in itself. from other stand point, it is certainly striking that in this period of global financial turbulence inflation is identified as the key economic challenge for emerging economies. indeed, the rise of inflationary pressures on food prices derived from the commodity boom, is becoming a very worrying concern. the large change in relative prices that underlies this prolonged boom is having a stronger impact on developing economies, with very negative and substantial effects on the well being of the poorest portions of their populations. therefore, as inflation creeps up the concern of policymakers deepens, not only in the sphere of macroeconomic stability, but beyond. in connection with this, the fact that monetary policies have remained focused on inflation stability in most emerging market economies is an additional novelty to mention in the context of the present turmoil. going a step forward, it is also noteworthy that emerging market economies, and in particular asia – with china at its centre – may become some kind of a “ spare engine ” to world growth, buffering the impact of the turbulence on global activity. this idea of a “ second pillar ” for growth relies mainly on the observed strength of domestic demand in asia, and the key issue here is whether this strength could be self - sustaining. maybe, we will not be able to answer this question thoroughly until the macroeconomic impact of the turbulence unfolds completely and the trade channel works itself out. but, one aspect that is clear – even now

in all, i would conclude that the financial sector in asia is still lagging behind when compared to other very dynamic and exemplary sectors in the region, such as certain industries, education and technology. i believe that this imbalance may eventually become a drag for the consolidation of a sustained growth path. therefore, the development of the financial system is of central importance for the long - term growth perspectives. under these circumstances, banking reform and restructuring is an important challenge that many asian economies are inclined to face. let me tell you that in spain we know well this challenge and its rewards. the highly successful performance of the spanish economy over the past 20 years cannot be explained without taking into account the significant contribution by the financial sector and, in particular, by the banking system. in turn, the transformation – and improvement – of our banking system in this period has been outstanding. this is evidenced, for example, by its favourable performance in terms of profitability, efficiency and solvency, both on an absolute basis and in comparison with other countries. taking advantage of hindsight, i would like to stress two chief lessons learned from this twenty - year process of modernisation. the first is that regulator and banks have formed a “ joint partnership ”, prompting a fruitful “ virtuous cycle ” and matching goals and efforts in order to attain efficiency and soundness. close communication and constant exchanges of views are the principles currently governing this relationship. the second lesson is that, at the end of the day, there has been no trade - off between profitability and soundness : the competitive capacity of spanish banks has not been dented by supervisory policies. these policies have been oriented towards enhancing the solvency and internal governance of banks, and to increasing the confidence of the public and the markets in the banking sector. however, this transformation has not been painless. it has to be recalled that the spanish financial system had to overcome a deep - seated crisis in the mid - seventies to early eighties. by the end of the 70s, our banking system was weak, closed, corporatist, old - fashioned and highly regulated. such regulation affected many of their operating areas, curtailing competitiveness. interest rates were set administratively and credit institutions were obliged to meet investment ratios to finance certain economic sectors with maximum interest rates. this environment made for weak structures with no incentive to compete and no professional teams or systems to accurately identify and manage risk. at that time a range of new banks were allowed to set up. most