One fine day we can see hot money flowing into the country on account of foreign investors’ confidence in our economic growth prospects. Not long after, we can easily witness a reversal of such flows simply because investors have become more risk averse on emerging markets overnight. Such volatilities are not conducive to a stable development of any economy, and greater exchange rate flexibility alone is not a universal cure. Indeed, the risks and volatilities that accompany financial globalization, which small developing economies face today, are of the unprecedented scale that advanced economies never had to face in their early stages of development. To withstand volatility and safeguard against financial instability that may eventually disrupt real sector activities, Thailand requires stronger resiliency for the domestic economy. This means the significant ability of the domestic economy to adjust flexibly in keeping with changes in the financial environment. This also implicitly means that the economy should be able to depend more on domestic demand as growth driver. Meanwhile, policy and regulation must also be designed in such a way that can help foster better risk management, deal with market excesses, and reduce distortions and unproductive risk-taking behaviours in the economy. Over the longer term, competitiveness must come from productivity growth so that increases in wages and employment can be sustained. What I have said are the key components of an ideal economic policy package not just for Thailand but also for any emerging market economy.
On trade and financial integration, we all have to wait for the resolution of WTO negotiations. In the meantime, Thailand and ASEAN have made progress on a number of free trade arrangements with Japan, China, Korea, Australia, and New Zealand. Within ASEAN, more progress on the ASEAN blueprint, which lays out the strategic plan to achieve further trade and financial integration within 2015, is in the pipeline. On this topic, I also like to share with you an observation that Asian emerging markets, in general, rely increasingly more on trade integration because it is judged to be a safer mode of risk-sharing with the world. While benefits from trade integration are universally appreciated, net benefits to overall economic development from the international financial integration have not been so apparent in Asia. As a result, while the pace of financial integration has far outstripped trade integration in advanced economies, it has only managed to keep pace with trade integration in emerging markets. Turning to the financial sector side, nowhere are the international rules of the game closer to my heart than the international standards for banking supervision. Early this year, the Bank of Thailand’s capacity and performance in supervising financial institutions  BIS Review 107/2007  3  has been assessed against international best practices in the context of the joint IMF/World Bank Financial Sector Assessment Program or FSAP. This FSAP assessment confirmed the strength and capacity of our supervisory process, which have been significantly strengthened over the past decade.