Apart from being more comprehensive, such approach will help ensure that the economic cost of policy or regulation is spreaded out, thereby avoiding an undue burden falling on a particular sector of the economy or measure. Table 1. summarizes the policy framework along the line I have just described. The framework encompasses a three-pronged approach to address procyclicality, focusing on taming the business cycle, the financial cycle, and the risk-taking behaviour cycle through a combined use of macroeconomic policy, financial regulation, and other education and disclosure measures. On macroeconomic policy, especially monetary policy, the role of policy is to achieve longterm economic growth with stability. This means avoiding too-eased monetary conditions for too long by tightening policy when there are signs that risk is being underestimated and imbalance is developing. For financial regulation, its role is to reduce the procyclical behaviour in the financial institutions by limiting excessive risk-taking. And the role of education and disclosure is to promote greater awareness of risk by making available information to improve risk assessment by market, so that extreme shifts in sentiment and confidence are avoided. Important in this context for emerging markets is the abrupt shift in  BIS Review 160/2009  3  investors’ confidence that drives sudden reversals of capital flows and liquidity. But amongst all these measures, financial regulation remains the core approach to addressing procyclicality. This is because large and sustained booms on credit and asset prices, once they occur, are typically a reflection of the failure of financial institutions to manage risk.

In South Korea and Malaysia, capacity utilisation has returned to pre-crisis levels in many industries. Countries across the region have revised their growth forecasts upwards. For example, South Korea is expecting strong growth this year – 8%, while Singapore has forecast growth between 4 and 5%. Even 1  BIS Review 117/1999  Indonesia’s economy is stabilising, and its prospects have brightened now that Presidential elections have turned out well. This recovery has given the Asian economies breathing space to address structural weaknesses. But the problems have not vanished. Countries must still press on, to deal progressively with hard issues of corporate and financial restructuring, and lay the basis for long-term growth. Otherwise their recoveries will remain incomplete and vulnerable. The sustainability of each country’s recovery will therefore depend on how it tackles its own problems. Countries differ significantly in the problems they face, and their strategies for overcoming these problems. Some will recover faster than others. South East Asia In South East Asia, the situation has stabilised. The mood has totally changed over the last 12 months. Thailand has made some progress in cleaning up and consolidating its financial sector.1 NPLs peaked in May 1999 and are expected to decline steadily by next year, provided debt restructuring and recapitalization progresses. But significant problems remain, and analysts and rating agencies remain concerned about the state of the banking sector in Thailand. Malaysia’s economy has also stabilised, with strong balance-of-payments surpluses and growing foreign reserves.