Supervisors should also stand ready to act if bubbles like phenomena appear in some markets. For emerging economies, measures aimed at stabilizing capital inflows may help and relieve the pressure on domestic financial conditions and prevent further asset bubbles. International financial architecture In the longer run, however, we may need to work together towards a more efficient and stable international financial architecture. Let me highlight three possible avenues for progress. First, we have to find ways of dealing with international capital flows volatility. For one given country, capital controls may temporarily reduce the pressure on its capital account or even permanently limit the volatility of its exchange rate. For the whole international system, however, they may simply displace the pressure to other countries or asset classes and exacerbate, rather than reduce, overall volatility. There might be ways to eliminate those  2  BIS Review 160/2010  negative effects by creating a predictable framework defining the circumstances, modalities and conditions through which temporary controls would be implemented. Second, there would be benefits in finding ways to disconnect reserve accumulation from exchange rate management and, more generally, from balance of payment situations and monetary policies. At present, reserve accumulation can only occur through a conjunction of balance of payment surplus and some degree of exchange rate intervention. Emerging countries have increased their foreign exchange reserves from 4 percent of GDP in 1990 to over 20 percent on average today.
The really hard question for us is could we - or should we - attempt to protect those businesses most affected by the strong exchange rate even if that meant putting the economy as a whole at significant risk of rising inflation. The reality is that, were we to do so - notwithstanding our specific mandate from the Government - we would not succeed in protecting even the suffering sectors except possibly in the very short term; and in the medium to long term our overall economic performance - in terms of growth and employment would - on all past experience - almost certainly be worse. As it is, Mr President, the recovery in the world economy, and the extraordinary efforts of UK businesses themselves to cope with the hostile international environment, are already resulting in a stronger net external trade performance. That in turn is contributing to the recovery in our own economy, particularly in manufacturing output growth, and to the more encouraging news in recent surveys. To the extent that this improvement in external demand persists, it will help to ease the exceptional pressures on the most internationally-exposed sectors, and contribute to a better balance within the UK economy. But it needs, of course, to be accompanied by corresponding moderation of the growth of domestic demand - after the offsetting stimulus of a year ago - if we are to maintain overall stability. That essentially is why interest rates have had to rise since last autumn.