One approach to this challenge would be for the Bank to return to basics and improve the three channels of financial intermediation, namely, banking, equity and debt, through a number of measures. First, the Bank could increase investment in the financial infrastructure in Asia. Just as physical infrastructure, such as airports and highways, facilitates the movement of people and goods, financial infrastructure, such as the payment and settlement systems for the banking and securities sectors, facilitates the safe and efficient movement of money. The importance of a robust payment and settlement system in this region is underscored by the events of 11 September. Secondly, the Bank could expand the technical assistance programme to assist economies in restructuring the banking sector. Small and medium-sized enterprises employ the most workers in Asia and they are mostly dependent on bank financing. The banking sector in Asia, devastated by the Asian financial crisis, has not fully recovered. Banks understandably are adopting a very conservative lending strategy towards companies with a lower credit rating, such as Small and Medium-sized Enterprises. The Bank’s assistance in speeding up the banking sector reform would help SMEs to get back on their own feet, thereby reducing unemployment and poverty. Thirdly, the Bank could expand assistance in building up the institutional capacity of individual economies to improve corporate governance in the private sector. Emphasis should also be made to improve the auditing, disclosure and transparency standards of publicly-listed companies.

Increases in productivity especially in the agricultural sector are of vital importance and thus call for prompt action for the developing countries that are witnessing a shift in employment from agriculture to nonagriculture sectors. In a similar sense, measures for achieving more effective use of energy by companies and households, and for increasing the use alternative energy sources, especially renewable energy, should be the another issue among the priorities on the part of both advanced and developing countries, dependent on imported energy inputs. Esteemed Participants, A comprehensive literature has been guiding central bankers as to the type of monetary policy responses to be given to commodity price changes. The central banks following to the widely accepted advice put forth by this literature endeavor to contain the second-round effects of the commodity price increases, rather than the first-round effects. It is inevitable for commodity price increases to be reflected directly on prices, because of the high weight of goods linked to energy and other commodities in consumer price indices. That is why the first-round effects cause fluctuations in inflation. Nevertheless, temporary movements in commodity prices, unless they affect the general pricing behavior, do not affect the mediumterm outlook, but just remain as relative price changes. That is why those central banks pursuing monetary policy with a medium-term perspective prefer to refrain from sharp policy responses to the abovementioned first-round effects. Understanding the sources of the price fluctuations prior to making decisions is a prerequisite for policy makers.