Emerging economies that can manage the risks have benefited from liberalized inflows in the past, but some of these economies may benefit more if their citizens can unload domestic systematic risk abroad. 7 Timely outflow liberalization may help smooth emerging market’s consumption and income, a significant welfare improvement. Set in this light, the immediate implications for Asian banks from the challenges that I have outlined earlier may initially be the deterioration in the quality of their loan portfolios, including potentially higher non-performing loans. But over time, in response to structural changes undertaken by other economic sectors as well as increasing disintermediation and competition from both domestic and foreign players, we should observe stronger and more competitive banks in emerging markets. This transformed well-supervised, prudent and enterprising banking sector will remain crucial to the dynamism of Asia. Ladies and Gentlemen, Extraordinary emerging market income and consumption volatility may be the result of macroeconomic shocks, their propagation mechanism as well as policy and institutional setup, but it can be ameliorated by better risk sharing with the world. In this welfareenhancing endeavor, international financial integration on top of ongoing trade integration can play an important role. To end my talk today, let me share with you briefly the approach taken by Thailand. The Bank of Thailand has sought a balanced approach to managing capital flows under flexible exchange rate. We also undertake concomitant reforms in the area of financial system and market development. These initiatives are closely related and progress in one requires progress in the others.

Over time, they wish to move from incomplete financial market to a better world of risk-sharing, risk absorption, and diversification. But there is tension to be managed in the short run. Under Bretton Woods II, in which much of Asia is still tightly linked to the fortune of the US dollar, and in the context of ongoing “global imbalances,” emerging markets need to strike a balance between financial stability and financial development. In particular, when our markets and institutions are still developing, the struggle between financial integration and financial stability, enterprise and prudence, requires from us a deft balancing act. Ladies and Gentlemen, From a historical perspective, today’s emerging markets are unique in their common experience. This uniqueness is twofold. On the one hand, it is quite apparent that our openness has gained us immense benefit from global economic integration, the phenomenon denied to advanced economies when they started off. At the same time, and as a result of our openness, small developing economies face risks and volatilities that accompany financial globalization, the scale of which advanced economies never had to face in their early stages. In fact, sustained increase in living standards is a relatively new economic phenomenon to emerging markets. Having experienced modern economic growth after 1950, we are late comers. And having much to benefit from being late, it took us a much shorter time to treble our per-capita income than today’s advanced economies did between 1800 and 1950.