moderated. this does not bode well for productivity. thailand ’ s infrastructure continuously needs improvement in several areas, particularly logistics, irrigation and quality of education. these public investments will also influence private investment through the “ crowding in effect ” as public and private investment complement each other. therefore, the government policies should be prioritized, be gradual and have specific target in their spending. priority should be given to productivity enhancement project and spending should be selective and targeted to certain areas to ensure policy ’ s effectiveness. at the same time, graduality of policies is necessary to minimize inflationary pressure and allow time for private sector to adjust. second, fiscal stance, like monetary policy, is also required to normalize in order to ensure fiscal discipline and sustainability. in a time of normal trend growth, there is a lesser need for a fiscal stimulus. rising public debt, together with increasing contingent liabilities, may endanger fiscal sustainability in the long run. reforms of the tax revenue collection and tax structure should be implemented along with rising expenditure to ensure a healthy balance sheet of the fiscal sector. third, political stability is a vital condition to the private sector for maintaining an investment - friendly environment. these three challenges, if prevail, will put thailand forth into a competitive frontier. likewise, the private sector contribution is as equally important. one immediate challenge which businesses face today is the problem of labor shortages. under a strong baht environment, this is a great opportunity to import and invest in machinery and equipment which will upgrade thailand towards a more capital - intensive country. the private sector can also help to improve labor quality through appropriate education and training, which is one way to help spread the benefits to workers as their productivities improve. as a long - term prospect, shifting input factor of production towards capital is more superior than using immigrant labor for three reasons. first, other than training, capital investment will improve labor productivity which will fully benefit thai labor in a form of increases in real wage. second, immigrant labor will likely worsen income inequality as wages for low - skilled worker will be suppressed. third, a cutting - edge technology as well as modern machinery and equipment help facilitate r & d activities. therefore, relying on immigrant labor is not a long - term solution for thailand. promoting r & d investment is another key challenge for thailand as current r & d spending is extremely low compared to our peers ’ and only accounted for about 0. 2 percent of gdp. the public and private sector must

s significance for the transmission mechanism. as i have just discussed, one of the consequences of a crisis is that the regulations of banks and other institutions will become more stringent. the intention of this is to reduce the socioeconomic costs that can result from banking. however, there is also reason to consider how the regulations introduced could affect the impact of monetary policy. these regulations usually entail an increased cost for the banks which, to a certain extent, is passed along to customers in the form of an increased interest rate margin. this could be seen as a sort of “ regulation premium ”. this premium can also be seen as the price to be paid by households and companies for more stable real economic development as represented by the broken curve in figure 5. this concept can be illustrated with the equation for the lending rate by adding a variable ( z ) designating regulations affecting the interest rate margin : itlending it t ( z ). i would like to emphasise that this equation is, of course, a simplification. however, as my focus today is on the correlation of interest rates and regulations, this description will be facilitated by viewing regulations as a kind of “ shadow interest rate ”, even if they can also be analysed in terms of the supply of credit. if regulations become more stringent, the interest rate margin and thus the lending rate both increase. new regulations will not be introduced until we have emerged completely from the crisis, and they will be introduced successively. the end result will probably be a higher interest rate margin than was the case prior to the introduction of the regulations. in principle, this can be seen as a “ one - off shift ” upwards in the interest rate margin. adjustment to this higher level may be more or less protracted, depending on the rate at which the regulations are implemented and the degree towards which they are expected by the market. during this period of adjustment, the transmission mechanism will be affected. one criticism of the regulatory framework and supervision of the financial area was that, prior to the crisis, these focused excessively upon individual institutions. the assumption was that the system would remain stable as long as the individual institutions were stable. consequently, processes creating risks on the system level were ignored – processes such as a general underpricing of risk, the increased element of short - term market funding and the increasingly intimate connections between various market participants. one of the components in macroprudential policy, the package of more explicit systemic crisis preventative regulations