##al narrative does not obviate the fact that important structural impediments do exist and need to be addressed. according to the latest global competitiveness report, thailand compares less favourably in terms of capacity to innovate, quality of workforce, and infrastructure. labor market efficiency has fallen 42 places in less than four years, against the backdrop of labor shortage that could worsen as the society ages. improving education and labor market reform are therefore critical as a foundation for innovationdriven development. the integration of manufacturing sector into the global supply chain needs to be a more dynamic and forward - looking process. the old days of easy wins are bygones. knowledge and vision are necessary preconditions for innovation - led growth. the current government ’ s reform agenda indeed places a great focus on providing the right incentives and environment for the private sector to undertake the next big leap of improving their productivity and innovative capacity. but the ultimate success will hinge on the private sector rising to these challenges and following through with their actions and ingenuity. third pillar : strengthening the economy & development ladies and gentlemen, let me now turn to the final pillar, that of strengthening the structure of the economy towards a sustainable long - term economic development. i have touched upon several real sector issues that could pose challenge to thailand ’ s prosperity. but there are also important financial sector areas that are no less important, despite the immediate consequences being less evident. financial development, indeed, is an integral part of economic development. the relatively small financial market in thailand means that largescale cross - border activities, especially mergers and acquisition, cannot take place without adversely affecting financial market volatility. promoting deeper financial market would help facilitate more long - term direct investment that is needed for the economy to upgrade its technological capability. financial development also entails broader banking and payment issues. for example, diversifying the sources of financing and reducing the degree of dependence on banks, would help the financial system better absorb shocks and improve efficiency of funding. upgrading the financial infrastructure and payment system is necessary for the economy to reap full benefits from regional trade integration in the new digital age. implementing financial development is not a straightforward task, and among other things, it is complicated by the need to ensure financial stability. bigger financial system can increase the system ’ s fragility, which if left unchecked, could undermine economic development efforts. financial innovation, in some instances, could encourage risk - taking activity that raises rather than

additional pressure. this is to say some smaller emerging markets will face an aging population and the increase in demand for wealth management, while the supply of local products are limited for diversification. this will pose challenges for inter - temporal allocation of resource and risk. thus, it is imperative that emerging markets devise a proper strategy and process to expedite reforms and develop the financial system. the second longer - term reform i want to bring up is policy institution and framework. on this, two policy institutions are of utmost important for attaining monetary and financial stability. the first is a credible monetary framework that effectively anchors the public ’ s expectation of inflation. the key issue here is the importance of independence and transparency of the monetary policy process. the usual case is that the 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 markets have put enormous emphasis on building up the necessary institutions with regard to effective supervision. but the challenges are many. for example, at this time, many emerging markets are facing the challenges in implementing basel ii. 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. this has a direct bearing on ensuring financial stability. but because basel ii is developed from the current practice among banks in developed countries, some banks in emerging markets may have a large gap to fill. for example, in moving away from collateralbased to credit - based loan approval, banks must focus more on the ability to pay of customers and to make loan decisions in a forward looking manner. this requires a different set of expertise that focuses on risk assessment in the environment of changing economic cycle and asset quality. next is the information system which is the most important foundation for achieving financial stability through capital adequacy. whereas developed countries generally already have in place the necessary infrastructure in this regard, financial institutions in emerging countries have to build the system from the ground up, involving