This highlights the need to focus reform efforts on the international monetary and financial system (IMFS). There are, therefore, both “good” and “bad” imbalances. On the one hand, the advantage of globalisation is that it allows savings to flow to where the rate of return on new investment is highest. On the other hand, imbalances can be a symptom of distortions to the price signals in the economy, leading to unsustainable patterns of capital flows and spending that are costly to correct. Distinguishing between them will never be easy, but is necessary when setting monetary, fiscal and financial policy. But we should assess imbalances in terms of whether their consequences are “good” or “bad” – that is, whether they are creating a distorting externality. So how should we reform the current system of monetary arrangements? If problems abound, there is certainly no shortage of proposed solutions. Since Bretton Woods, there have been regular suggestions for changing from fixed to flexible exchange rates, or the other way round, returning to the gold standard, creating a new international currency, changing the composition of the currency basket comprising Special Drawing Rights (SDRs), abolishing or introducing controls on capital flows, and providing new ways of holding currency reserves. What is much less clear, however, is the problem to which these proposed solutions are thought to be the answer. I have suggested that we need to analyse more carefully the imperfections, or frictional costs, which make a regime of floating exchange rates an insufficient answer in itself.

Indeed, the return to net inflow of foreign investment since the beginning of April, indicates the return of foreign interest in Thailand. However Thailand’s structural improvement needs a long way to go. Furthermore, economic fundamentals can be eroded if political uncertainty and global risks intensify. The prolonged political impasse will further reduce confidence, financial positions, and government spending. The labor force is already beginning to feel the stress, as recent surveys show the number of overtime hours worked has begun to shrink. Now I have presented to you the future conditions, from sound fundamentals to possible risks. With these conditions in mind, I believe that maintaining status quo while waiting for the political situation to resolve is not the appropriate way out because sound fundamentals alone cannot lead to growth. Thailand should use the current lull in activity as an opportunity to reposition for future growth. Indeed the private sector is already in transition, but still has a way to go. Further investment will both jolt some energy back into the economy and build an even stronger foundation for long term growth. 2  BIS central bankers’ speeches  Supportive roles of the Bank of Thailand and financial institutions An economy in transition needs support from all sectors of the economy. The real sector, financial institutions, and the Bank of Thailand have their own important roles which I would like to elaborate. Thailand’s economy should transition from efficiency to innovation to build competitive advantages. Up to now, we have increased productivity by reallocating labor and capital.