This time mismatch between the costs and benefits of reform is a prime reason why they are hard to sell. And where the costs and benefits accrue to different segments of the economy, the difficulty of instilling reforms is exacerbated since it is hard to create satisfactory compensation schemes while those who lose out tend to be concentrated and thus more effective in organizing opposition to the reform. Next, even if the obstacles to selling the reforms have been overcome, one of the most important issue that follows is the proper pace and sequencing of structural reform. In the context of financial sector reforms, for example, the underlying challenge is the proper mitigation of the additional risks that are injected into the financial system as markets develop and become more sophisticated. These risks consist of both financial risks borne by market participants as well as macroeconomic risks that may be associated with greater financial market volatility. Hence, the consensus on the importance of structural reform efforts does not carry over with the same strength to the issue of the appropriate pace and sequencing of policy changes. And finally, in the context of emerging market, the main stumbling block for structural reforms is the high degree of political fragmentation. The need to accommodate many, and sometimes conflicting, interests not only slows the reform process but often leads to compromised solutions that fail to address the original underlying goal of the reform.

Thus, it is imperative that emerging market devise a proper strategy and process to expedite reforms and develop the financial system. The second long-term reform I want to bring up is on policy institution and framework. On this, two institutions are upmost important for attaining monetary and financial stability. The first is a credible monetary framework that effectively anchors the public’s expectation of inflation. On this, the key issue is the importance of independence and transparency of the monetary policy process. Our view is that lack of independence can come at a great cost in terms of lower central bank credibility and a less favorable trade-off between inflation and output volatility. Likewise, weaknesses in monetary policy transparency can contribute to policy uncertainty and exacerbate the impact of shocks on macroeconomic volatility. The second important policy institution is an effective supervisory policy and domestic financial institution’s capacity for sound risk management. The logic for this is clear. With less effective supervision and limited capacity to manage risk, the ability of the economic system to absorb volatility from global markets is significantly compromised. Reflecting this emerging market has put enormous emphasis on building up the necessary institutions with regards to effective supervision. But the challenges are many. For example, at this time many emerging markets are facing the challenge in implementing Basel II. (i)  Stronger risk management culture  The objective of Basel II is to strengthen the soundness and stability of the banking system through more risk-sensitive capital requirements and rigorous internal risk assessment process.