Given the weakness in domestic demand, limiting large currency appreciation becomes a necessity for some economies to support economic recovery. And with weak domestic demand, pursuance of banking reform was an important policy to normalize lending and credit growth. On top of this, liberalization to allow more capital outflows also became an instrument of choice in managing the macroeconomic impact of rapid capital inflows. On the demand side of global capital, policy configuration in the US was instrumental in allowing the external surplus of emerging markets to be absorbed through the US current account deficits. The key mechanism, as I noted, has been the easing of US monetary policy that has helped support global growth through the expansion of US demand. With private investment in the US still recovering from the stock-market correction in early $ lower interest rate and greater access to credit significantly increased US consumption at the expense of a fall in private savings. As a result, the US external imbalance widened while reserves accumulation by emerging markets increased. The next question is can this go on? And is reserves accumulation a temporary or a permanent feature of the international monetary system? To answer this question, one has to distinguish between stock and flows. On the flows side, given reserves accumulation essentially mirrors external surpluses of emerging markets, the pace of reserves increase going forward is more likely to ease. This is because the adjustment process that is now ongoing will reduce the imbalance.
the net borrowings, lie almost entirely with the US, the surpluses or the net lenders are identified with Japan, China, East Asia, the oil exporting economies, and other emerging markets including Latin America. And the third is the financing of the deficits, as well as the reinvestment of official reserves, which are now a major component of global capital lows. The key issues therefore are whether this process can go on? Is it a permanent or a temporary phenomenon? And what would be the implications for the global economy and financial markets. Today, I want to comment on these issues. Specifically, I will discuss the major forces underlying external surplus and reserves accumulation from an Asian perspective. Next, I will comment on policies that are needed globally to address this problem. To begin, reserves accumulation is essentially the mirror image of the evolution of the US external deficits. Two popular views explaining this phenomenon have been put forward. The first is the export-led development model, i.e. the new Bretton Woods, which sees reserves accumulation as a consequence of an attempt to maintain export-led development, especially in Asia. The second explanation is the global-saving glut hypothesis, of which the glut is driven by the transformation of emerging markets from net borrowers to net lenders in the international capital market. Both interpretations I think have merits, and reserves accumulation is probably a reflection of both.