The economy grew rapidly in the early years but the communist system, plus upheavals like the Great Leap Forward and the Cultural Revolution, led to inefficiency, backwardness and chaos. In 1977, after Mao Zedong died, Deng Xiaoping returned to power. He made a decisive break with Maoist dogma, and launched far-reaching market reforms under the slogan "Reform and Open Up". The profit motive, and the new social attitude that to get rich was glorious, unleashed huge energies and transformed the lives of hundreds of millions of Chinese people. By producing widespread benefits across the country, Deng's reforms became entrenched and irreversible, even though they are still far from complete. Deng had accomplished what successive reformers and modernisers had tried and failed to do for a century. 2  BIS Review 19/2003  UK Post-war Britain offers a third example of a remaking of an economy, although on a smaller compass. Emerging from the post-war reconstruction of Europe, Britain shared in the world economic boom of the 1950s and early 1960s. But by the mid 1960s, the "English disease" had set in. The country was plagued by militant trade unions, poor management, and unsustainable state welfarism. Industries that had once been world leaders fell behind. British governments were trapped in a cycle of stop-go policies, chronic balance-of-payments difficulties and sterling crises. The heavy involvement of the state in economic activities and transfers had led to a dead end.
But those that have come further along the liberalization road have to face a different music. 4  From the new External Wealth of Nations Mark II (EWN II) dataset, compiled by Lane and Milesi-Ferretti (2006). 5  Ibid. BIS Review 99/2007  3  Rapid appreciation in the exchange value of the currency renders part of the domestic industries less competitive in the global markets. It is true that with this appreciation, commodity imports such as fuel and energy as well as metal and raw materials have become more affordable despite rising world price trends. But these benefits are spread-out while the cost is centered on labor-intensive, high domestic-content primary sectors, such as agriculture and low-end manufacturing. As a result, even for net primary commodity importing economies, the nature of the problem is as much political economy as it is economic. There are strong and vocal constituencies in emerging markets that are averse to currency appreciation and part of them averse to variability in the exchange rate itself. Meanwhile, hot money, or indeed large inflows in general, can fuel asset prices and encourage excessive risk-taking behavior. Central banks may wish to counter that excess in the interest of financial stability. If the central bank chooses to maintain a high interest rate stance, the pressure on the currency to appreciate will likely mount. Not unlike today’s political economy in advanced countries, emerging market politics also risks being less favorable to openness, but more partial to protection of selected industries or protectionism in general.