bank, could improve on earlier efforts to achieve and maintain “ full employment. ” by the 1960s, policymakers seemed to concentrate their short - run objectives on maintaining a “ high pressure ” economy in the belief that such a recipe could virtually thwart economic contractions at little or no risk to long - run stability and growth. if this high - pressure management inadvertently carried the economy beyond its productive potential, some cost in terms of inflation could be expected, but such costs appeared tolerable in light of the employment gains that came with them. furthermore, policymakers hoped that additional tools at their disposal - so - called incomes policies enforced by “ jawboning, ” guideposts, and price and wage controls - were ready to combat and control any resulting upcreep in inflation with minimal macroeconomic cost. by the turn of the 1970s, the ugly reality of stagflation forced an overhaul of this policy framework. the corrosive influence of inflation on our nation ’ s productive potential was beginning to take hold. policymakers slowly came to recognize the adverse long - term consequences of compromising the purchasing power of our currency for economic well being. indeed, by the late 1970s, a consensus gradually emerged that inflation destroyed jobs rather than facilitating their creation. unfortunately, a legacy of failed attempts during the decade to restore stability with gradualist plans and with various incarnations of incomes policies took its toll on business and household attitudes toward inflation and toward the prospects of our nation. by the end of the decade, an inflationary psychology had become well entrenched and complicated efforts to restore a sense of stability in the national psyche. alan greenspan ( 1980 ), “ statement, ” in domestic and international implications of the federal reserves new policy actions, hearing before the subcommittee on international economics of the joint economic committee, november 5, 1979, 96 cong. 1 sess. ( washington : government printing office ), p. 5. little leeway for policy was left before the federal reserve took decisive action on october 6, 1979. in retrospect, the policy put in place on that day was the obvious and necessary solution to the nation ’ s troubles. as events unfolded, however, the federal reserve did not escape criticism, and for a time it was not entirely obvious that the system could maintain the necessary public support to see its disinflationary efforts come to fruition. though widely anticipated even before the actions of october, the recession and retrenchment in employment that followed

. this means that they will need to find alternative means to boost income. one option is to diversify into the sale of products like unit trusts, pensions and life insurance that offer the opportunity to earn fee income. another is to focus on lending to sectors such as the smes that provide higher returns at the expense of higher risk. a common factor in such initiatives is the need to cope with greater complexity in business development and risk management. technology can help to deal with these issues, but this creates its own set of problems. banks need to be able to afford the necessary investment in technology and to develop or obtain the expertise to utilise technology properly. the objectives of our reform measures the kpmg / barents consultancy study broadly anticipated these trends. the policy prescription was that we should not stand in the way of the forces of change, nor should we simply do nothing and see what happens. rather, it was concluded that we should try to manage the process of change through careful reform. the underlying aim of our reform package therefore is to help to improve efficiency and innovation in the banking sector through increased competition. among other things, this might provide incentives for the local banks to think harder about merger and acquisition. if we had simply done nothing and left competitive barriers, like the interest rate rules, in place, this might have sent misleading signals to the local banks, and prevented them from reacting quickly enough to the changes taking place around them. a further objective of our reforms was to increase the attractiveness of hong kong as an international financial centre. also, bearing in mind that increased competition can bring with it increased risk, we were also conscious of the need to take steps to enhance the safety and stability of the banking system. i am not in this speech going to summarise all our reform measures, which are due to be implemented over the period to the end of 2001. instead, i will describe what we have done so far, and the main tasks that remain to be done. the progress on competitive reforms so far we have introduced three main changes that are intended to promote competition : • in september 1999, the one - building condition that applied to foreign banks licensed after 1978 was relaxed to allow such banks to open branches in a maximum of three separate buildings. at the same time we eliminated any restriction on the number of regional and back offices that foreign banks can maintain. • in december 1999, we announced that agreement had been reached with the various parties involved for restricted licence banks to join