•  The emerging market economies need to deal with a weak external environment and incipient domestic cost pressures especially in the context of volatile capital flows and asset market pressures. •  And both advanced and emerging market economies must undertake structural reforms to boost their economies’ potential and create jobs for their people. Let me elaborate on each of these three themes. Advanced economies: restoring time-consistent macroeconomic policies 19. First, the advanced economies need to restore time-consistency in their macroeconomic policies. Governments are borrowing money and central banks are printing money. This is unsustainable. Implementing growth-consistent fiscal consolidation 20. The choice in Europe and in America is not between growth and austerity. Debt sustainability requires both a reduction in the numerator, by reducing deficits and borrowing, as well as an increase in the denominator, by restoring economic growth. Focusing excessively on the former will lead to an ever-deepening recession that will only make the debt trajectory unsustainable. Equally important, fiscal consolidation should not compromise long-term growth potential. 21. The debate on fiscal policy should focus on the pace and composition of fiscal consolidation and not just its scale. 22. Pace matters. It is more important to reduce the fiscal deficit of 2016 than of 2013. But it is equally important that something be done in 2013 that will reduce the 2016 deficit than to leave it to 2016 to do so. Only then will markets have confidence that policies are time-consistent.

As of 2011, fiscal deficits in the region have narrowed once more to an average of 1.1% of GDP. 35. Asian economies must continually recalibrate their monetary and fiscal policies, as external demand conditions and domestic cost pressures pull in opposite directions. Maintaining flexibility in macroeconomic policies must go hand-in-hand with reforms to strengthen domestic demand. Breaking new ground in macroprudential policies 36. The de-synchronisation of global macroeconomic cycles between the advanced economies and emerging market economies poses more challenges for the latter than the former. As long as monetary conditions in the advanced economies remain easy, emerging market economies face the risk of misallocated resources and disruptive capital flows, which in turn can affect both price stability and financial stability. 37. Low interest rates and abundant liquidity have contributed to asset price accelerations in some Asian countries, especially in real estate markets. Residential property prices in Korea, Taiwan, Hong Kong, and Singapore, for example, have increased by 35% on average since 2009, while nominal wages have risen by only 13%. 38. No doubt, increased capital flows to emerging market economies reflect the superior growth prospects of these economies. There is a structural rebalancing of global investment portfolios towards emerging markets in general, and Emerging Asia in particular. A multi-pronged policy response is needed to ensure that inflationary pressures remain contained in the face of this “wall of money” – including a gradual appreciation of nominal effective exchange rates.