For instance, with this crisis, we witness a breakdown in the key assumptions that form the basis of our thinking about the efficiency and the self-correcting nature of markets which, for a long time, underpin the rationale for globalization, liberalization, and deregulation. These assumptions are now being challenged. Next, in this crisis, the most damage comes from the most regulated sector of the economy, notably the financial sector. What we saw is that, even with regulation in place, the sector surprisingly exhibited important failure in risk management discipline across a variety of institutions and players, including banks, institutional investors, credit-rating agencies, and regulators. On this, a better way to manage risk to support the process of international financial intermediation still needs to be worked out. And finally, the global economy has never before been put in a position that it might have to deal with the consequences of the  BIS Review 92/2009  1  massive policy response that have been put in place both on the fiscal and the monetary fronts. These 4 consequences are the known unknowns, and the approach we choose to address them will importantly influence the direction that global finance will take going forward. Given the focus of this conference is on the stake of emerging economies in the international financial system, let me share with you briefly how emerging economies in Asia so far have managed in the current crisis, and how we see the direction of global finance evolving.
This is based on significant differences that exist, between the core-crisis countries and the countries affected by contagion, in the relative strength of the economic fundamentals, the state of the banking sector, and the perception of risk by investors. However, beyond the initial recovery, sustained economic decoupling will be difficult without a major restructuring in the sources of growth which, in the case of Asia, calls for a reorientation of the growth driver from exports to domestic demand. Making this transition safely in this era of globalized finance will be the next important challenge for emerging markets in Asia. In the past ten years, the share of domestic demand in the region’s GDP fell by 6.3 percentage point, and the share is now 12.3 percentage point below its peak in 1994. Moving the ratio back will require major restructuring in both the demand and the supply sides of the economy, which needs to be supported by policies that redirect economic incentives from savings to domestic consumption and investment. Such task is gigantic. Chief amongst the polices needed to support this transition will be the development of the region’s financial system, to ensure an efficient intermediation of savings into productive investment. This is really the key issue where the challenge and the constraint to economic decoupling lies. One of the prime reasons underlying the current global imbalance is the limited capacity of the financial systems in emerging markets to generate investment from their local savings.