size, favourable business environment and sound economic management have reinforced the strengths of these economies to take full advantage of the opportunities provided by globalization. i do not see any serious signs of slack in the asean + 3 group. of course, the question of currency alignments will remain highly contentious in the near term. in south asia, liberalization and deregulation have, by and large, removed the incentives for rent seeking activities although the debris has not been completely thrown off the grounds. removal of subsidized credit, reduction in import tariffs, current account and partial capital account liberalization, increased dependence on market mechanism to allocate resources, withdrawal of the government from running businesses have ushered in higher rates of investment, greater efficiency in resource use and promoted more rapid export growth in most of our countries. this raised platform has, therefore, heightened the potential of the south asian economies to achieve accelerated growth and reduction in poverty. while continuation of sound policies and prudent macro economic management is a pre - requisite, there are several challenges ahead which have to be confronted by each of our countries. south asia is still way behind the east asian countries on almost all economic and social indicators. although we started from the same place the divergence over the last forty years has created enormous disparities in the per capita income growth, incidence of poverty, share in global trade, adult literacy, enrolment ratios, status of females, health and well being, physical infrastructure, etc. to give you just one example : our region has almost the same number of people as east asia. but fdi flows to east asian in 2004 were about ten times as high as those to south asia. we have, therefore, a lot of catching up to do and that too, quite fast. the paradigm shift that is taking place in our region makes me confident that we will be able to meet these challenges successfully. but all of us, in whatever capacity we are working, will have to strive hard to bring about the result. in the short run, the impact of uneven monsoons and higher oil prices will have to be managed carefully and inflationary pressures arising from these shocks have to be moderated. fiscal deficits will have to be brought down to manageable levels and business climate will have to be improved by removing bureaucratic controls, hassles and irritants to allow the private sector to operate in a healthy competitive environment. financial sector which is now exposed to international interest rate and exchange rate risks

ishrat husain : regulatory strategy of the state bank of pakistan address delivered by mr ishrat husain, governor of the state bank of pakistan, at the 18th annual general conference on pakistan society of development economics held at islamabad on 15 january 2003. * * * the two major determinants of functional efficiency of financial system are market structure and the regulatory framework and the challenge for any central bank is to strike a right balance between the two. over regulation can stifle financial innovation while an imperfect market structure can impair the efficiency of the system and penalize the consumer interests. market structure consists of the degree of competition, and interlocking control between financial institutions and business enterprises as well as the degree of specialization within the financial sector. it is influenced by the internal organization and management of financial intermediation. these in turn, are affected by the degree of government ownership and control. the regulatory framework includes regulations imposed both for monetary policy as well as prudential purposes. an adequate framework can help ensure financial stability by reducing the probability of bank failures and the costs of those that do occur. regulation is about changing the behavior of regulated institutions because unconstrained market behavior tends to produce socially sub - optimum outcomes. the regulator therefore has the responsibility to move the system towards a socially optimum outcome. the strategy followed by the state bank of pakistan aims at improving the market structure and competition on one hand and optimizing the overall regulatory regime on the other. the steps taken to stimulate completion and improve the market structure consist of lowering entry barriers, abolishing interest rate ceilings, privatizating government owned banks, promoting mergers and consolidation of financial institutions, enlarging the economies of scope for banks, liberalizing bank branching policy, and removing directed credit regulations. the so called dichotomy between regulation and market mechanism is in practice a false one. there needs to be appropriate internal incentives for management to behave in appropriate ways and the regulator has a role in ensuring that internal incentives are compatible with the regulatory objectives. market imperfections and failures, information asymmetries, externalities and moral hazards associated with safety net arrangements make it difficult in developing countries for incentive structures within financial institutions to be aligned with regulatory objectives. let us first define as to what the regulatory objectives of the state bank of pakistan are. these can be summarized as : ( a ) avoiding adverse selection in bank entry by ensuring that individuals likely to misuse banks do not get bank