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.

The framework seeks to reduce poverty through three core areas of sustainable economic growth, inclusive social development and good governance. The strategy is a sound one as it does not focus solely on physical infrastructure, i.e. the building of roads, bridges and other “hardware”, but also on the “software” of policy and institutional reform in the public and the private sectors. The Strategic Framework also attaches importance to private sector development, particularly in the fields of finance, banking and corporate governance. The quality of the “software” of a developing economy is precisely what international investors are looking for as they return to Asia. At a time when Asian economies are showing incipient signs of recovery against an improved external environment, international capital flows are triggering back to the region but in a more cautious and discriminate manner than before. Investors are now a lot more selective about who may lend to and where they put their money. International capital flows from OECD markets to Asia, in the form of bank credits, foreign direct investment and portfolio flows, have dropped significantly in the last few years. In the case of bank credits, total flows declined by about $ billion during the 1997-1998 period, although the decline has been at a more moderate pace in the last two years. In the light of this, it is important that the Bank plays a catalytic role in mobilising resources within and outside of the region.