Address by Dr Chris Stals, Governor of the South African Reserve Bank, at the Tenth Annual "Beeld" Economist of the Year Banquet Johannesburg.                1. Lessons from the East Asian crisisRecent developments in certain East Asian countries focused attention on the many pitfalls for the smaller economies of the world on the road to financial globalisation. The reasons for the collapse of financial markets in east Asia may differ from country to country, but a few common shortcomings in the economies of the afflicted countries were identified:Firstly, in many countries, inappropriate macro-economic policies were applied to defend artificial exchange rates, and/or to maintain interest rates at untenable low levels. These countries were highly successful for many years and they achieved remarkably high average economic growth rates over an extended period of time. Based mainly on an industrious and frugal labour force, they were able to remain competitive, despite the emergence of underlying weaknesses in the economic fundamentals.Secondly, the financial systems did not keep pace with the changing macroeconomic environment. Banking institutions were not properly regulated and monitored, and financial markets were distorted by undue governmental intervention. In some cases, there were insufficient disclosure of basic information that could have enabled investors to make a better assessment of the deteriorating situation at an earlier stage.Thirdly, the countries became overly exposed to foreign capital flows, and vulnerable balance of payments positions developed that could not be managed once confidence faded. Large current account deficits were no longer covered by total capital inflows, and the withdrawal of short-term funds from some countries exacerbated the situation.Fourthly, bad governance in public and private sector institutions did not realise the seriousness of the underlying adverse developments, and did not take timely corrective action. When the bubble finally burst, the situation had already advanced to a stage where only costly and painful macroeconomic restructuring could salvage these economies.The experience of the afflicted East Asian countries provides ample evidence of the vulnerability of the smaller, emerging market economies in the environment of financial globalisation. Other countries, including South Africa, can also be subjected by the global financial markets to similar painful corrections, although it might be for completely different reasons. The lesson for South Africa from the East Asian crisis is therefore to be alert, to be cautious, and to be aware of the harsh but not unreasonable disciplines of the global markets. 2. South Africa and financial globalisationOver the past few years, the South African financial sector has moved quite fast on the road of globalisation. In the Annual Report for 1997 of the Bank Supervision Department of the Reserve Bank, interesting information has been made available about developments in the South African banking sector in 1997.There are now more than 20 foreign banks operating in South Africa through locally-established branches or subsidiaries, and more than 60 foreign banks with representative offices in South Africa. South African banks are also extending their activities to the rest of the world and during 1997 obtained permission from the Registrar's Office to establish more than 45 branches, subsidiaries, and representative offices in other countries around the world.At the end of 1997, the total South African banking sector utilised more than R35 billion in foreign funding, and carried loans extended by them in foreign currencies of about R17½ billion. The foreign liabilities and foreign assets of the South African banking sector, respectively, represented but small percentages of the total assets (or total liabilities) of the banking sector, estimated at about R440 billion as at 1997-12-31. Foreign funds as a source of financing of the activities of South African banking institutions are, however, still increasing.It is well-known that non-