One year on from the onset of the current credit crisis, what have we learned about the performance of the financial system and such market imperfections? 17 Looking broadly, an important lesson from the past year, is that these frictions appear more powerful than market participants and financial authorities previously judged. They pose substantial barriers and practical limitations to the achievement of a stylised vision of full, complete, and efficient markets in fundamental components of risk. Five areas of potential weakness are highlighted in turn: incomplete information; alignment of incentives; liquidity in financial markets; robustness of market infrastructure; and system dynamics. Incomplete information 18 The vision of a world of complete and efficient markets for risk depends on full information. This full information requirement sounds deceptively simple but is actually extremely onerous. An investor needs to know the mapping between states of the world and the pay-offs they would receive in each state as well as the likelihood of these states of the world materialising. This means not only understanding the details of highly complex contracts but also the effects of the interplay between exposures and contracts of all the other agents in the economy. So not surprisingly, many of the problems that have occurred over the past 10 months have arisen out of incomplete and asymmetric information. There are a number of dimensions. 19 First, it is very difficult to ascertain the pay-off distribution for many instruments.

14  Jonathan D. Ostry, Andrew Berg and Charalambos G. Tsangarides, “Redistribution, Inequality, and Growth,” IMF Staff Discussion Note, SDN/14/02, 2014. 15  Thomas Piketty, Capital in the Twenty-First Century, Belknap Press, 2014. 16  Joseph A. Schumpeter, The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle, Harvard University Press, 1934. See also Philippe Aghion and Peter Howitt, “A Model of Growth Through Creative Destruction,” Econometrica, Vol. 60, No. 2, pp. 323–351, 1992; Katsuhito Iwai, “Schumpeterian Dynamics: An Evolutionary Model of Innovation and Imitation,” Journal of Economic Behavior and Organization, Vol. 5, pp. 159–190, 1984. 17  Hiroshi Nakaso, “Asian Economy: Past, Present, and Future,” Speech at Securities Analysts Association of Japan International Seminar, April 24, 2015. 18  The Wall Street Journal, “Asia Seeks to Reach the ‘Unbanked’,” March 18, 2015. 6  BIS central bankers’ speeches  therefore the prospects for further strong economic growth, will be completely different once the issue of limited availability of banking services is addressed. Conclusion In my presentation today, I have emphasized that productivity growth is crucial to sustaining hitherto robust economic growth in Asia. Among many other things, in my view, the continued accumulation of human capital, market-friendly institutional setups and strong financial sectors, all play an important role in productivity growth. We have seen many positive developments in this respect in Asia, but much more needs to be done. What I have discussed today could be broadly categorized as structural reforms.