But even if we don't have enough experience or enough distance from the crisis to resolve these questions definitively, we know a lot more about these questions than we did a decade ago. I want to talk about two dimensions of this broad policy debate. How much progress has been made toward addressing the factors that made emerging market economies so vulnerable to crises in the past? What are the most important policy challenges ahead for those governments? These are my personal views. I should start by noting that your view on what constitutes progress is naturally shaped by your view of the factors that rendered emerging economies most vulnerable to crisis in the first place. While no broad characterization can do justice to the different conditions at play, I believe the available evidence supports the view that the crises were generally most acute where there was a large buildup in short-term external debt, encouraged by the presence a fixed exchange rate regime and perverse incentives in the capital account, tax, or supervisory regimes. In most cases, these balance sheet weaknesses left the economies concerned acutely vulnerable to adverse shifts in confidence and the inevitable break in exchange rate regimes, with little flexibility for macroeconomic policy to cushion the damage. As domestic and foreign investors rushed to reduce exposure to the country, the exchange rate fell further, increasing losses for the banks and corporations that had borrowed in dollars and magnifying fear of default.
Fiscal balances have improved, with the median deficit the lowest it has been in three decades, and the high public debt countries are running primary surpluses large enough to stabilize if not reduce the debt-to-GDP ratio. Exchange rate regimes are more flexible, removing the implicit guarantee in a fixed regime and providing greater independence for monetary policy. Monetary policy frameworks have matured, with greater institutional independence for central banks. Better monetary policy, along with improvements in fiscal balances, have helped to bring about a dramatic reduction in inflation and the volatility of inflation rates in emerging economies. It is hard to look at this record and find support for the argument that the financial resources deployed by the IMF and the major economies in the crises produced a damaging degree of moral hazard moral hazard in the form either of governments more prone to profligacy or investors prone to excess risk-taking in lending to banks and sovereign in emerging markets because of the expectation of financial resources from the IMF. Of course, those interventions must have produced some increase in moral hazard, but the effect on incentives does not seem to have been powerful relative to the countervailing effect of the economic and financial losses incurred in the crises. These changes in policies, and the reduction in external vulnerability that they have brought about, make it less likely that financial market shocks will trigger the types of acute, broad-based crises we saw in the late 1990s.