While we see significant adverse impacts of global integration, Asian economic integration, in fact, has a crucial role in helping a number of our regional economies withstand this enormous external destabilizing shock. Hence, our essential tasks are about determining an appropriate pace of further integration and making us increasingly resilient in response to the fast changing environment. To elaborate the above points, allow me to briefly talk about the developments of Asian economic integration with the world and within the region. On the trade side, there are two important on-going forces. First, international trade with the economies outside the region has risen significantly especially due to the emergence of China and India in the world trade arena, as well as policies to lower trade barriers and establish trade agreements. Second, within East Asia, intra-regional trade has grown rapidly and surpassed trade with the outsiders since 2004. The driver is vertical integration of the production networks of multinational corporations across regional economies. On the financial side, since the Asian financial crisis, East Asian economies have taken various efforts to deregulate and deepen the financial markets and liberalize their capital account. We have witnessed significantly rising financial linkages within East Asia. We have also seen rising FDI activities both within the regional economies and with other regions. Increasing regional FDI is largely a result of the aforementioned regional production networks. Portfolio investment has also increased significantly prior to the period of the subprime problem due to increasing demand of international investors for emerging market assets.

In doing so, first, let me start with the current financial crisis and its relation with global financial imbalances and economic integration. Then I will briefly discuss the stage of Asian economic integration and highlight the benefits it rendered in cushioning a number of regional economies from the adverse effects from the crisis. After that, I will draw the lessons from the current crisis that should further help gear our integration towards the path that reaps the most benefits and minimizes potential risks along the way. Ladies and Gentlemen, During 2004-2006, one of the main potential threats to the world economy centred around the global financial imbalances arising from the chronic and rising US current account and fiscal deficits. Although most economists believed that the situation was not sustainable, no one could predict the timing and extent of the unwinding process, nor whether the US would face a hard on soft landing. The current crisis, unfortunately, manifests an abrupt unwinding of the imbalances. The trigger point of the crisis is clearly the subprime lending problem in the US, a new phenomenon. However, most economists would agree that the root cause of the crisis lies beneath excessively accommodative monetary policy that led to excessive credits, and in turn, to asset price bubbles, a repeating cause of past crises. Other important driving factors behind rising credit expansion and bubbles included rising financial innovation and its complexity and lax supervision. The global financial imbalances could not have heightened rapidly since the early 2000s without fast rising global economic integration.