The contrast between North and South Korea serves as a striking example of how institutional differences can lead to wildly divergent paths between two regions that were initially very similar culturally and geographically. This does not mean that a country needs to achieve comprehensive institutional development before growth can occur. “Big bang” institutional reform is typically infeasible. Instead, tackling the most binding constraints one-by-one can yield substantial growth benefits. A country does not need to attain Swiss level of institutional quality in order to be able to compete with Swiss producers in many products. For example, China’s growth miracle has occurred through selective market-oriented reforms against a backdrop of pervasive economic and political institutional weaknesses. But eventually, the growth process has to evolve to be sustained. At this point weak institutions will hamper growth. Transitioning towards a diverse and sophisticated growth model is only possible once institutional strength is achieved along sufficiently many dimensions. This reflects the existence of large complementarities. A strong legal system and enforcement of property rights, for example, won’t boost innovation much if the education system fails to produce a skilled workforce. A highly educated workforce cannot contribute meaningfully if macroeconomic stability is lacking. Good macro policy will make  2  BIS central bankers’ speeches  little difference if corruption is rampant. The individual institutional elements complement each other in such a way that the whole is greater than the sum. Without sufficiently broad institutional development, growth will stall.

More recently, the Central banks in the East Asian region have come together to put in place a comprehensive regional surveillance system that is supported by a comprehensive integrated crisis management framework that would deal with any imminent financial crisis in the region. These initiatives are aimed at effectively preventing or containing developments that could trigger destabilising consequences, thereby promoting regional financial stability. Deposit insurance system Ladies and Gentlemen: Following the restructuring and reform of our financial system, Malaysia has two years ago implemented the deposit insurance system as part of our efforts to build a cohesive and mutually reinforcing financial safety net system. The deposit insurance system has an important role not just in promoting confidence with explicit coverage of deposits, but also in reinforcing sound risk management practices. It therefore has embed features that complements the supervisory process in promoting sound risk management practices in the financial institutions. In addition, the deposit insurance corporation in Malaysia is also mandated with the responsibility for the “least-cost” resolution of problem financial institutions. 4  BIS Review 130/2007  A comprehensive approach was thus adopted in establishing the Malaysia Deposit Insurance Corporation (MDIC). To promote depositors confidence, the deposit insurance scheme was designed to ensure that there was optimum coverage with sufficient reach to retail depositors. In designing the deposit insurance scheme, about 95% of all depositors are covered in full while in value terms about 35% of total deposits is covered.