openness, small developing economies face risks and volatilities that accompany financial globalization, the scale of which advanced economies never had to face in their early stages. in fact, sustained increase in living standards is a relatively new economic phenomenon to emerging markets. having experienced modern economic growth after 1950, we are late comers. and having much to benefit from being late, it took us a much shorter time to treble our per - capita income than today ’ s advanced economies did between 1800 and 1950. 1 indeed, international difference in living standards has declined over the latter half of the parente and prescott ( 1999 ) documents the evolution of international income and growth differences and gives a list of growth facts before and after the industrial revolution. twentieth century as a result of emerging markets ’ fast - pace and sustained growth. during the past 20 years, the world ’ s income gap has narrowed even faster. it cannot be by sheer coincidence that this period has also witnessed growing international trade and financial integration and the entrance of china, and subsequently india, into the comity of trading nations. along these high growth trajectories, emerging markets ’ aggregate real income and consumption are an order of magnitude more volatile than advanced economies ( both in terms of levels and growth rates ). not only is consumption more volatile in emerging markets, but it is also more volatile in relation to income. in fact, over the business cycle, consumption is around 40 percent more volatile than income for emerging markets, while it is less volatile than income for advanced economies. the unique volatility outcomes can be attributed to a distinct set of macroeconomic shocks which are specific to emerging markets or their propagation mechanism, or both. 2 i think that the extraordinary volatility in real aggregate consumption and income can be partially attributed to episodes of financial instability that occur not infrequently in emerging markets. in fact, these bouts of extreme instability have disrupted the potential growth trends, which in some cases have taken years to recover. on the whole, these episodes may be associated with too much financial liberalization too soon. the unique global backdrop, as well as the economic outcomes in terms of growth and volatility that i have just shared with you, presents a real dilemma and at times tension in emerging asia. and nowhere is this tension more palpable than it is in the realm of exchange rate and capital account regimes. while benefits from trade integration are appreciated and shared by billions the world over, net benefits from international financial integration

we will put our best effort in considering its timing carefully. as for dealing with consequences of capital inflows, we see the current managed float exchange rate regime as appropriate and beneficial to the thai economy. we will continue to let the level of exchange rate be determined by market forces, but make sure that it is not too volatile to the extent that it will be too difficult for the private sector to adjust to. and to give the private sector greater flexibility to manage foreign exchange risks, last month we further relaxed restrictions on thai direct investment abroad and on the unwinding of foreign exchange hedges. these moves, which are parts of our ongoing capital account liberalization plan, will also make our capital flows situation more balanced, by facilitating two - way foreign exchange flows. on the fiscal front, you will agree that fiscal policy is one of the key instruments to support the economy during the difficult times when private sector growth engines have been impaired. however, the stimulus packages that the government announced last year, have been done on the assumption that thailand will face the most severe global recession in the last 60 years. but as it turned out, the global crisis was not as severe as thought. given that our economy is on the robust recovery path, the need for stimulus may be less. and the government should also find the way to normalize the fiscal policy stance at an appropriate time. here, the latest development on sovereign debt crises in europe underscores the importance of the restoration of our fiscal discipline. if there are no changes in our policy, the ratio of public debt to gdp will increase to over 60 percent by 2012. this will not only leave little room for the government to use more fiscal stimulus should there be a new crisis in the region or in the global economy but it could also put thailand in the spotlight of the foreign investors who have become much more sensitive to the issue of fiscal sustainability. this is why we have to rethink the stance of our fiscal policy once the short - term political and economic uncertainties fade away. furthermore, to ensure fiscal sustainability over the medium to longer term, thailand will need fiscal reforms that include : • continued fiscal consolidation ; • broadening of our tax bases ; • reforms to increase the efficiency and equality of the tax system ; and • greater allocation of public spending toward investment expenditures. indeed, the government realizes the need for fiscal consolidation and reforms. with the better - than - expected tax revenues, thanks to the solid economic recovery, the budget deficit for this