The heterogeneity of emerging economies, together with regional trade interdependence may require a more nuanced interpretation. However, that very interdependence raises the stakes of possible trade tensions. Such tensions at the regional and international level create genuine risks of a protectionist backlash, with potentially very high welfare costs. A protracted accumulation of foreign assets in one form or another will likely be associated with negative externalities; whether domestically or at an international level. More generally, the emergence of such large holders of foreign assets contributes to shaping a new “world financial order”, the stability of which remains to be tested. Foreign reserves and the allocation of savings At this point, it is useful to reflect on the savings motives in Asian economies at a more fundamental level, i.e. to explore why people save so much in emerging economies. Besides potentially powerful demographic factors, the precautionary motive is an obvious candidate: it is likely that some emerging economies record high savings rates due to the underdevelopment of their social insurance systems (be it health insurance or pension schemes). Self-insurance against idiosyncratic risks at the household level (as opposed to self-insurance at the central bank level) may cause households to accumulate large quantities of precautionary wealth. 3  Mohanty M. and Turner, P. (2006) - Foreign exchange reserve accumulation in emerging markets: what are the domestic implications?, BIS Quarterly Review. 4  Aizenman, J. (2007) – Large Hoarding of International Reserves and the Emerging Global Economic Architecture, NBER working paper.
This initiative, along with others related to a general improvement of standards and practices in several areas, would contribute to the better functioning of financial institutions and markets, leading ultimately to a full harnessing of the benefits of financial integration. I trust that, with fluent dialogue between regulators, institutions and market participants, we may be able to improve the combination of sound regulation and flexibility that would ultimately lead to a more robust and efficient financial system. I am convinced that this is a most important contribution to the smooth functioning of the world economy. Thank you. BIS Review 31/2003  3