A senior World Bank official yesterday said East Asian economies are fundamentally strong and have the capacity to address the institutional problems exposed by the recent turmoil in the currency and equity markets. But regional manager for strategy and partnerships Javad Khalilzadeh-Shirazi said reforming the financial sector should be a top policy priority for regional governments. Mr Khalilzadeh-Shirazi and the bank's principal economist in East Asia and Pacific, Stijn Claessens, were launching a study: 'Are Financial Weaknesses Undermining the East Asia Miracle?' Mr Claessens said: 'In a world that is increasingly integrated financially, in which international capital chases opportunities and is constantly taking bets on both success and failure, East Asia no longer has the luxury to postpone difficult choices, to avoid bad borrowers from either repaying or being liquidated, and to allow weak and insolvent financial institutions to continue to operate. 'The penalties for maintaining a fragile, under-developed financial system are severe, and the time to correct structural weaknesses is much more compressed.' The report recommends sweeping reforms to financial services and banking institutions across East Asia by: Boosting supervision and developing effective mechanisms to resolve failures of banks. Developing capital markets to foster institutional investment. Upgrading workers' skills and developing the financial mechanisms to meet infrastructure demands. Mr Khalilzadeh-Shirazi, who praised the quality and competence of Hong Kong's financial sector, said: 'The recent experience in East Asia demonstrates that prudent macroeconomic management does matter. 'We remain confident that the economic prospects of the region remain bright and the fundamentals remain strong.' He identified high savings rates, fiscal discipline, open trading regimes and an educated and industrious workforce as examples of the region's inherent strengths. 'With renewed emphasis on macroeconomic management and structural reform the current turbulence should prove to be transitory,' he said. He said recent regional economic problems offered several lessons for future management. 'Firstly, We have seen again that large and growing current account deficits are unsustainable,' he said. 'When financed by short-term borrowing it sharply increases the vulnerability to shocks. 'Secondly, real currency appreciation needs to be avoided to help ensure exports remain competitive. 'Thirdly, capital, whether external or domestic, needs to be utilised very efficiently.' He said a greater strengthening of the financial sector is vital to promote the efficient allocation of capital. Mr Claessens said the recent turmoil in the regional economies had highlighted the weaknesses in financial systems across the region ranging from poor supervision to undisciplined lending.