MAIN PAGE | EVENTS & PROGRAMS | 2001 | IGM | SPEECHES | TAN SRI DATO AZMAN HASHIM
PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | EVENTS & PROGRAMS | 2001 | IGM | SPEECHES | TAN SRI DATO AZMAN HASHIM
Regional Vitality in the 21st Century
April 6-10, 2001 — Tokyo, Japan
Tan Sri Dato Azman Hashim
THE CALL FOR REFORM Let me start by recalling that Malaysia was amongst the first to ask for reform in the international financial system. As early as in September 1997 at the IMF/World Bank Annual Meetings in Hong Kong, Malaysia had suggested the need for some form of regulations to avoid the destabilizing effects of currency trading. At that time, we were criticized on the basis that the East Asian financial crisis was caused by economic mismanagement, lack of transparency and corporate governance in the affected countries. That aside, Malaysia continued to pursue the issue of changes in the international financial system through bilateral, regional and multilateral channels. In August 1998, several developments - including the Russian crisis, problems in Brazil, and the bailout of the LTCM Fund - prompted a reassessment of the international community's approach to the crisis. These developments had threatened the stability of the international financial system, and led to the growing recognition that the crisis was not just a problem of economic mismanagement, but was also due to weaknesses in the international financial system. By the time of the IMF/World Bank Annual Meetings in Washington in October 1998, the international community acknowledged for the first time that the crisis required a comprehensive global solution to reform the international financial system. MALAYSIA'S PROPOSALS At a minimum, Malaysia's call for financial reform includes a five-pronged proposal. Firstly, transparency of the market players must be enhanced. Greater disclosure by offshore financial centers and other large market players - notably the highly leveraged institutions (HLIs) and hedge funds - would ensure that they do not conduct destabilizing speculative and manipulative activities in small emerging economies. At the same time, regulators in industrial economies and other financial centers must also ensure effective supervision on internationally active banks as the latter's action could exacerbate the crisis. Secondly, a global mechanism to supervise or regulate the international financial markets must be established. A mere disclosure of information cannot guarantee that the destructive volatility of international capital flows would not occur again. Thirdly, formulating a mechanism to make international rating agencies more accountable for their actions. Fourthly, review the role of private sector that is happy to receive risk premium but are not willing to face the actual risk. Fifthly, review the role of the IMF and other international financial institutions and arrangements. WHAT HAVE BEEN ACHIEVED? Malaysia is encouraged to note that the global community is receptive to our views and proposals. In particular, the decision by G-7 to undertake a comprehensive action plan to reform the international financial system represents the biggest acknowledgment that the crisis is a global problem which required a global solution. Now, after more than three years since the outbreak of the crisis, the international community has moved forward, from developing ideas and solutions, to reaching agreements on conceptual approaches, and finally towards active implementation. In the IMF, World Bank and Financial Stability Forum (FSF), there were significant efforts towards encouraging national authorities to implement agreed initiatives to enhance transparency and risk management to reduce vulnerabilities to financial crises. In this regard, a notable development that Malaysia saw was the decision by the FSF to establish a working group to explore issues related to market and official incentives to encourage the public sector as well as private sector to implement international standards. Another significant development that we observed was the international recognition that the adoption of international standards and codes would need to take into consideration the implementation capacity and specific circumstances of the country concerned. Malaysia's concerns with regard to the activities of HLIs, and the need for some form of regulation and monitoring of the activities of the HLIs have also been recognized. Some progress had been made in terms of an international consensus on the indirect regulation of HLIs. In this regard, the FSF Working Group on HLIs has responded with recommendations that included measures on the regulation of bank lending to HLIs, transparency requirements and adoption of industry codes of conduct by HLIs. These measures were aimed at strengthening the disclosure and transparency of HLI activities, as well as the financial institutions' risk management and practices when dealing with HLIs. We noted that several international banks active in the global foreign exchange markets have recently released a set of voluntary guidelines for good trading practices. Certainly, this is a step in the right direction. THE UNFINISHED JOB While Malaysia welcomes these clear signs of progress, many areas still have room for further improvement. Broadly, Malaysia thinks the proposed reform measures, to date, have tended to focus on ensuring that countries become more transparent, adhere to international standards and codes, and adopt better risk management policies. Such measures are supposed to enable markets to make better-informed decisions and reduce the country's vulnerability to unexpected shocks. While Malaysia supports many of the initiatives under way to encourage countries to adopt the international standards and code, I must also say that the work on the important issue concerning activities of HLIs could be further improved. Although the need for direct regulation of HLIs was recognized by the FSF, Malaysia regret to note the Working Group on HLIs has opted for more disclosure rather than some form of direct regulation. The reluctance to accept the damaging role of the HLIs in the crisis appears to again reflect the belief among many developed economies in the superiority of the free market system. The concern that large HLIs can again dominate or manipulate markets, especially in smaller economies, indeed, remains valid. Although the degree of leverage that LTCM once had could probably no longer be achieved, the aggregate size of global hedge funds remains huge. Figures we gathered from TASS Research, which tracks more than 2,000 hedge funds, show that assets under management have quadrupled to US$200 billion from US$50 billion six years ago. Altogether, consultants estimate that there are some 4,000 funds with about US$350-400 billion in assets under management. Multiply these assets on the back of leverage facilities that they can muster from giant international banks, their capacity and resources are tremendously huge. In the case of the LTCM episode, they were able to leverage US$4 billion of assets into a US$100 billion portfolio with a notional value closer to US$1.25 trillion. Therefore, we think that even if there exists some form of indirect regulations, the fact remains that the volume of funds available to HLIs are excessively large relative to the size of the foreign exchange and capital markets of emerging economies. For Malaysia, our external reserves are less than US$30 billion. In fact, no central bank in the world can match the aggregate resources of HLIs. Defending a currency under attack is an exercise in futility. On capital flows, progress was limited and fell short of Malaysia's recommendation. Malaysia still hold to the view that a global mechanism to monitor and manage capital flows is necessary so as to achieve an efficient functioning of the international financial markets, and to minimize the risks of excessive volatility in international capital flows. We noted that current international efforts on capital flows are focussed mainly on the surveillance of foreign indebtedness and less on non-debt capital flows. It is important we recognize that it was the latter, which is the reversal of portfolio capital flows, which aggravated the crisis and caused sharp exchange rate depreciation. The importance of non-debt flows is supported by the fact that even countries with low external debt, good debt monitoring systems and ability to meet their external debt obligations during the crisis experienced sharp depreciation of their currencies and declines in stock prices. In the IMF, a Capital Market Consultative Group and an International Capital Markets Department have been established, while a survey on "High Frequency Monitoring of Positions and Transactions in Foreign Exchange Market" has also been conducted. However, a recurrent theme that we hear from the IMF is the need to undertake more detailed studies on capital flows. Malaysia remained skeptical on the merits of more studies being undertaken without any constructive and concrete proposal to ensure stable capital flows in the financial markets. Another significant development related to the capital market was the growing international recognition of the need for appropriate sequencing in the liberalization of capital account transactions. The global community also acknowledged that no specific exchange rate regime was appropriate for all countries at all times. The choice of exchange rate regime should be supported by macroeconomic fundamentals and reflect country-specific circumstances. Meanwhile, efforts to ensure orderly and stable conditions in the international financial system must also include measures for substantive and meaningful reforms in the operations of international financial institutions (IFIs). The IMF, in particular, needs to enhance its own transparency and accountability, just as it insists that member countries be transparent and accountable for their policies. Reforms of the IMF should also include enhancing its diagnostic capabilities, in the light of the lessons from the Asian financial crisis. The IMF program design must be more tuned to local conditions, especially the capacity of the countries concerned to implement the program and meet the conditionality, and not to overload its lending programs with issues that are not relevant to the problem at hand. Additionally, there is a need to ensure greater accountability by the IMF for its policy prescriptions. This could be achieved by allowing Asian countries a greater voice in the decision-making process of the IMF. In this regard, some progress were achieved, particularly in streamlining IMF facilities as well as in stetting up an independent external evaluation office to ensure greater accountability by the IMF in its policy recommendations to members. IMF lending conditionalities had also been reviewed to ensure that they focused on critical areas and took into consideration the country's implementation capacity. Overall, I think some progress had been made to reform the international financial system. Nevertheless, much remains to be done. My biggest worry is over the risks of complacency among the international financial community on the reforms, following the strengthening of economic recovery in the crisis-affected countries in Asia and the restoration of a more positive global economic environment. In the absence of comprehensive reforms, particularly in terms of international rules on capital flows, emerging economies should not be condemned for implementing appropriate safeguards, including temporary controls, to curb excessive volatility of cross border capital movements. FINANCIAL REFORM AND GLOBALIZATION - ARE WE ON THE RIGHT TRACK? Malaysia's call for the international community to persevere with the financial reforms is also to ensure that globalization worked for the benefit of all countries and economies. Under the present situation, the global financial system clearly does not provide a level playing field, as large players can overwhelm small markets. Any meaningful financial reform must also ensure that, as small emerging economies liberalize their capital account transactions, such liberalization will not result in unstable markets arising from excessive foreign exchange speculation. In this regard, we noted that there was growing international recognition of the need for appropriate sequencing in the liberalization of capital accounts transactions, depending on the stage of development of the domestic financial system and supervisory framework. The current period of relative calm in the financial markets should not distract the international community from expediting financial reforms to promote a more responsible behavior by the private sector. Private market participants have an equal role with governments in effecting good practices that contribute toward maintaining efficient and stable markets. Many developing countries are already responding to the challenges of globalization by strengthening their economic and financial systems, liberalizing their markets, and disengaging their governments from many economic activities. Many have also embraced the adoption of codes and standards, and good market practices as set out by developed countries. However, the unevenness of the starting point and the backlog of deprivation and inequity of the past decades are significantly constraining the developing world in benefiting from the gains of globalization. In fact, rapid globalization and integration is paradoxically widening the economic and social gap between rich and poor nations. At the Trilateral Commission Meeting, which I attended last month in London, I was struck with some interesting figures on those who have and the have-nots. There are about two billion people who live on less than a dollar a day. There are hundreds of millions people who are illiterate and malnourished. There are 2.6 billion people who even lack basic sanitation. On the other extreme, the assets of the 200 richest people in the world are greater than the combined income of the poor two billion people. Of the 100 largest economies in the world, 51 are corporations - the remaining 49 are countries. In our eagerness to liberalize our markets, it is critical for us to reduce this globalization divide, such that benefits of globalization are equitably distributed. Some management of globalization is required to maximize its benefits. Malaysia cannot accept that globalization must be pursued at any cost. Malaysia had experienced the globalization of capital and we were severely affected by it. Fortunately, we were able to develop our own methods to defend ourselves and rebuild our economy. For the region, Malaysia has proposed the establishment of an East Asian Economic Caucus (EAEC). Although this idea, conceived more than ten years ago, had been strongly opposed, there are signs that the ASEAN+3 could well be the forerunner of a regional institution. Meanwhile, Japan had also proposed to establish the Asian Monetary Fund (AMF) to provide funds to member countries with more flexibility and less stringent conditions with a view to ensuring a more speedy and timely response. Despite the many obstacles in the setting up of the AMF - latest being the question of conditionality - Malaysia and the rest of Asian countries will continue with their efforts to make such a regional self-help and support a reality. As a closing remark, I would think that any meaningful reform of the financial system must therefore seek not only to manage globalization to ensure efficient markets, but also with equitable rules applied to both the suppliers of capital and the host countries where these capitals are being invested. Thank you. |
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