Financial integration struggling to keep pace in asia

This is due to economic disruptions and financial crises that resulted from premature liberalisation. Therefore, 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.

With volatile Asian stock markets moving with the US markets while the recent US sub-prime crisis adversely affects global economic growth and trade prospects, it is not clear today whether trade integration is a safer mode of risk-sharing with the rest of the world than financial integration. Fortunately for Asia, intra-regional trade has strengthened the resiliency of a number of Asian economies as it helped lessen the impact caused by the economic slowdown from G-3 economies, who are Asia's big trading partners.

Over the past 20 years, trade within the region has increased rapidly, from 27 percent of total exports in 1984 to 43 percent in 2006. Going forward, there is plenty of room and potential for it to expand further given the population size and growth of personal income in the region. Indeed, regional integration is likely to change the dynamics of supply, demand, and price developments in the region at the same time as the whole region elevates its comparative advantage in the global economy. Moreover, the transmission mechanism of macroeconomic policies on growth and stability will also change with increasing trade and financial globalisation.

Whether or not Thailand can maximise benefits offered by this regional strength depends critically on a number of factors. First is the economy's ability to sustain economic resiliency against shocks in the short term. One among the prerequisites to achieve this is the right domestic policy mix, which is flexible and forward-looking, accounting for changing growth and inflation dynamics as influenced by external and internal developments.

Second is the ability of Thai entrepreneurs to continue to enhance competitiveness as part of regional production and trading chains. In this context, the economy must improve the productivity of its real and financial sectors in parallel with the progress of trade and financial integration.

Third, policy-makers need to strategize on the overall labour policy that is best suited to the changing economic environment. Key also is better education of the Thai labour force through better alignments of formal education with the vocational training of skills that firms find useful.

Fourth, foreign trade and direct investment strategies will continue to be vital for

promoting productivity. Importantly, policy-makers need to craft clear and coordinated strategies for managing opportunities and risks presented by international trade and investment agreements, together with changes in terms of trade, as export and import prices move quickly, especially those of oil imports and agricultural exports.

My Bank of Thailand

colleagues will elaborate on these issues over coming Mondays.

Chirathep Senivongs Na ayudhya is division executive for External Communications at the Bank of Thailand. (Views expressed are the author's own.)