a 50% solution

the adult is faced with two options. discourage the behaviour, at the risk of discouraging a fundamentally healthy attitude and impulse, or go along with it, at the risk of going to jail and exposing the child to the hostile and fearful reactions from society."

There is a middle ground between totally discouraging the behavior and totally participating in it.

In the United States, if your child starts flashing or getting frisky, you can use that as an opportunity to teach the socially-required lessons in modesty. You can teach them that there is a place, probably their own room or their bathroom, where they can touch themselves all they want, but that when they are in the rest of the house or outside they shouldn't do that. At the same time, you can teach them where it's okay to be nude - e.g. in the house with the blinds drawn, at nudist camp, or when changing clothes - and when it isn't.

True, this puts a damper on the impulse to explore ones body, but it doesn't shut it off completely the way a "that's bad, don't do that" instruction would. It also offers your child some protection against society by teaching them not to do things that are likely to get child-services-investigators involved.

If it's someone else's child, unless you know the parents very well, the only safe (for you) thing to do is to actively discourage the behavior, either by telling her to stop or ignoring it so she will stop on her own. Sigh.