The Southeast Asian Perspective of Globalisation
Tan Sri Azman Hashim
Chairman
Arab-Malaysian Banking Group
Ladies and Gentlemen,
I am deeply honoured to be invited to speak on the topic of globalization from the perspective of Southeast Asian region. As we are all made to understand, globalization is about breaking down national boundaries and barriers to the flow of goods, services and investments to wherever they can make the most profit. The globalisation process then would bring in new opportunities for the world economy arising from more efficient allocation of resources across borders and thereby adding new momentum to the growth and development process across countries.
Looking back at the last few decades, I cannot but acknowledge that globalisation has enabled a number of us achieved some measure of success in economic development; but there are also many which have yet to achieve any significant profess. Many of us have on our own undertaken liberlisation measures by opening up our markets to trade and investment, evolving our institutional and regulatory systems, orientating our economies to external challenges and eventually welcoming globalisation, in the hope of benefiting from the opportunities afforded by this process.
These developments have occurred against a backdrop of changes over which we have little control. We were once told that political stability, natural and human resources, capital and investment were the only ingredients in the recipe for developments. But today, technological advances, borderless flows of capital and the advent of a knowledge-based economy have complicated the development formula. We are not certain whether we can deal with this new complex environment, and because we are not capable in dealing with it, our developments have been and will be adversely affected.
What we know is that the path to development has never been easy even at the best of times. Despite our efforts we see rising inequality between developed and developing countries, with continued high levels of poverty and unequal benefits from globalisation. We see uncertainty of the global economic environment. We see greater marginalisation as a result of the globalisation process. And we see growing inadequacy of global institutions to deal with developmental problems.
Income inequality is growing. There are growing divergences between the incomes of the richest group of countries and the poorest. The major developed countries have per capita GDP of over US$25,000. Latin American and Eastern Europe have some US$2,000. Asia and Africa received about US$1,000. The poorest who are also the least developed countries would have much less than what Asians and Africans are receiving.
In the wake of Internet revolution and advancement of technology, the challenges will be even tougher. The world is now characterised by the increasing digitisation of information. For instance, in the field of information distribution and E-commerce, borders mean very little now. Placing orders and sourcing products will increasingly take place on line. Developing countries were told if they want to be players in the game they must make baste in facilitating cheap access to efficient communications infrastructures. But how can a less developed country compete if the average user cost is around US$100 per month compared with only US$20 or less a month in the developed country. In fact the growing trend is toward a free service.
It seems that the benefits of international trade and investments have not been equally shared among countries. The current belief by the global community that countries must embrace liberalisation and adopt global rules and development would then follow, have not been proven true. It would seem that the current practices in trade and investments are not capable to distribute wealth equitably.
Ladies and Gentlemen,
More recently, we also saw how globalisation could bring highly destabilising consequences on many developing economies. Just over two years ago, a number of East Asian economies were badly affected by the instability in the global financial system. In fact over the last twenty years or so there have been many countries that have suffered from the simultaneous onslaught of a currency and banking crisis. But the East Asian crisis is only the latest in a series of spectacular economic catastrophes in developing countries.
The effects of the East Asian crisis were unprecedented - a full-blown financial disruption, rapid recession, economic turmoil and political instability in some cases. The frequency with which these financial crises have occurred in the more recent period, the magnitude and scale, and the significant number of countries affected imply that the problems extend beyond those specifically experienced by each individual countries. Rather, the East Asian crisis also reflected the problems inherent in the current global economic and financial systems. It also has a very direct connection with the free flow of capital across borders in a globalised economy.
Some believe that periodic financial crises may be a small price to pay for the development resulting from liberalisation and globalisation. But must financial crisis be this frequent and this painful, especially the severe kinds which affected us recently? Cannot we have globalisation and liberalisation with less disruptions for economies which are as yet not too resilient? I think we can do this if we are not too rigid in our thinking about globalisation and liberalisation.
Ladies and Gentlemen,
Admittedly, the flow of FDI can enhance the economic well being of developing economies. However, a sudden reversal of short-term capital in large magnitude can do massive damage. What had taken decades to build can be destroyed in a matter of months. The economic and social regression had further weakened the ability of East Asian countries to face the challenges of globalisation. The rapid movement of capital had only implied the increasingly short-term nature of the global market, focusing on immediate gains rather than the medium-term perspective that takes into account structural elements, leading to excessive risk taking. Market behaviour under these circumstances has been characterised by sudden shifts from exuberance to over pessimism and does not reflect the underlying fundamentals.
If free capital flows are manifestations of a borderless world, is there any reason why the developing countries should accept globalisation wholeheartedly? The risk and destruction, the lost of economic, political and social independence seems too great for them to endure. This is too high a price to pay for the benefit of gaining access to markets of the developed countries.
The globalisation of trade in goods and services is also not without problems. Many developing countries continue to face difficulties of converting market access commitments made by developed countries into commercial trading opportunities. Markets of the developed economies could easily be closed by raising standards to a level the poor countries could not meet. Attempts were also made to ling trade to non-trade issues, which were perceived by developing economies as a means of discouraging exports. Hence, tariff reductions in industrial and agricultural products, as well as improved trading rules are of little consequence to these countries, if the products of export interest to them are not granted market access. WTO Chief, Mike Moore, has said "...that opening up of the markets of the rich and wealthy nations to exports from the poor and developing countries was a crucial pillar of free trade and that the rich should allow quota-free and tariff free access to goods from the 48 at least developed countries (LDCs) whose exports amount to less than half percent of world trade. It is for the wealthy countries to show sensitivity."
For many developing countries that have benefited from inflow of FDIs, globalisation has also brought about new challenges. The specific advantages that developing countries might have as destinations for FDI have in recent years become less important. In an environment of global production, investment decisions are made based on the relative costs for each stage of the production process. Since production process is now easily subdivided and factories can be moved across borders, the role for the host country or participation of local firms would be very minimal. For the developed country firms, transnational production is necessary to maintain profitability and competitiveness in an international context. Governments, on the other hand seek to spur development within a national context.
Hence, pressures have been mounted on governments to provide conditions that will allow MNCs to operate worldwide. This involves not only the further liberalisation of international trade but also freedom of entry, right of establishment and national treatment as well as freedom for international financial transactions, deregulation and privatisation. At the same time, governments of developing countries would have to continue with direct interventions by way of upgrading skills, improving infrastructure support and fine-tuning of incentive packages. Without conscious efforts and strong linkages with domestic suppliers, host countries will find it difficult to raise the value-added content of their exports in industries dominated by foreign firms.
Ladies and Gentlemen,
For the benefits of globalisation to be equally realised, it must be governed by rules and practices, which can ensure that developing countries will not be faced with repeated economic turmoil and regression. It is possible for this to be done. But it can only be done if the international community including the developing and poor countries are given a say in the interpretation of globalisation. To be able to manage the pace and direction of liberalisation and globalisation, developing countries must be allowed to effectively participate in the decision making process in all international institutions. International institutions must have the mechanism to allow the views of all to be heard. The decision making process must be transparent and must reflect not just the view of big business and big governments but those of the small business and small governments as well.
Hence, in pushing for liberalisation and globalisation, it is particularly important to note that the world economy comprises of countries with diverse backgrounds that are at different phases of financial and economic developments. The imposition of rules and standard relevant for advanced countries across the board may not achieve the desired result. For instance, the industrial economies financial systems have been in existence for a few centuries, while the financial systems in developing countries have only past the stage of infancy. Naturally, the financial institutions in developed economies are stronger and bigger.
Mega mergers and acquisitions moves which make large corporations even larger are now rapidly emerging. In the process, the playing field as well as the players have become more uneven. Many of these corporations are now financially more power than medium sized countries. The "level Playing field" concept promoted by developed countries is not level from the developing countries' point of view. The filed may be level but it cannot be fair or given equal opportunity when one player is so much superiour in many aspects - power, size, resources, technology, skills, etc. Like in golf, there must be some handicapping to even out the competition. In the free market would of survival of the fittest and the stronger and of "winner takes all", how do the developing countries hope to get a fair share of the spoils? How do we compete with the MNC, mega MNCs and after even more mergers, super mega MNCs." The market capitalisation of Bill Gates' Microsoft is US$500 billion against Malaysia's total Reserve of US$30 billion and the hedge funds can leverage funds of substantial amounts that can make Governments helpless and lose control.
While we welcome their collaboration with local companies, their unconditional entry may impede the prospects of our local businesses. These aspects and the special situation of developing countries are often not given adequate and appropriate treatment in trade liberalisation negotiations. Developing countries cannot and should not be expected to undertake obligations at similar levels as developed countries. Market opening measures expected of developing countries must be commensurate with the level of development in those countries.
The process of liberalisation should also take into account the need to have in place the institutional framework to deal with international capital flows prior to liberalising capital transactions. Financial liberalisation that is implemented in an orderly and well-sequenced manner would ensure that the domestic financial structure is adequately developed to cope with the consequences of liberalisation. The East Asian crisis has shown countries that liberalised too rapidly in the absence of preconditions have become relatively more vulnerable. All too often, pressures have been applied to hasten the pace of liberalisation without taking into account the risks that can emerge.
Benchmarks and evaluation criteria for emerging markets need to be developed to provide an appropriate basis for objective assessment of the health of the economy and financial system. In addition, prescriptions that are too rigid and demanding on such systems would result in an overkill. Well-sequenced and structured programmes are required as opposed to prescriptions that result in an overdose. We must also ensure an efficient functioning of the global financial system. This would not only require structural reform in the countries to cope with the radical changes associated with globalisation and liberalisation but also that of the international financial architecture.
Ladies and Gentlemen,
The responsibility to address the globalisation and liberalisation issues is a collective one. Developed countries must play an active role in assisting countries affected by these problems. However, developing countries must accept that we too have to do our bit to ensure that sustainable growth and prosperity can be attained. Developing countries must continue to enhance domestic resilience and capacity. Apart from the efforts of developing countries, industrial countries also have a special responsibility to facilitate this process, by assisting developing countries gain access to knowledge, ideas and interventions, which must be made available at reasonable price. All countries must work together to manage the globalisation process for our own mutual benefit.
These are some of the things that can be done to ensure a more meaningful globalisation process. There may be many more things that can be done which can make globalisation more welcome by all, including the poor and least developed countries.
Allow me now to briefly deliberate on the Malaysian experience in managing the globalisation process. During the period preceding the crisis, Malaysia experienced many years of rapid growth which also helped the country to restructure its society and succeeded in attaining many of its socioeconomic objectives. This growth was accompanied by low inflation rates, rising per capita income and reduction in the incidence of poverty. The favourable macroeconomic environment attracted large capital flows, both long-term as well as short-term, which we prudently managed.
Despite the favourable macroeconomic conditions, it was unfortunate that over-anxiety among investors driven by panic and hysteria has made them to believe all the East Asian economies are identical and facing similar problems. As the crisis unfolded, however, we were advised to follow the conventional prescription of reducing Government expenditure and raising interest rates to support the exchange rate. Accordingly, and on the basis of conventional wisdom, a regime of tight monetary and fiscal policies was put in place. However, as the external and internal instability became more apparent and the recession became more sever, we decided to implement a self-initiated progamme to manage the financial crisis. In doing so, Malaysia deviated from the conventional, in terms of macroeconomic policies and strategies to restructure and strengthen the economy and financial system, while at the same time ensuring the social agenda are given priority.
It is to be noted that Malaysia only moved to impose selective exchange controls after almost fifteen months into the crisis. It was assessed that Malaysia had the preconditions and the machinery to effectively implement these measures. The stability accorded by controls facilitated the aggressive implementation of Malaysia's programmes. This has not only brought an earlier than expected recovery but has contained the cost of the crisis on growth, government financial position, employment, poverty level and social conditions. It is forecast that the economy could show a stronger growth of close to 6% a year after expanding by 5.4% in 1999.
While we are fully aware of the importance eof capital flows in ensuring economic growth, we remain determined in ensuring that unregulated and volatile large short-term flow would not destabilise the economy. We envisage the controls would need to remain for a while until there are discernible normalisation of the currency and global financial markets, and concrete measures are in place to reform the international financial architecture. We are, however, pragmatic in using the capital controls. It has progressively been relaxed as economic conditions improved.
We remain committed to a globalisation process. Malaysia is still and will remain to be part of the global financial system. Foreign investment, especially FDIs in the real sectors will continue to be promoted while portfolio investments which play a key role in financing economic growth will also be welcomed. It must be recognised that Malaysia is one of the most open economies in the world in terms of international trade, direct investment and the financial sector. For instance, in 1999, foreign banks accounted for 47% of profit, 29% of trade finance and 23% of the total assets of the banking sector and the penetration is higher at 30% of the total assets in the insurance industry. We are currently in the midst of restructuring the domestic banking sector; a major step taken is the merger of the banking institutions into ten domestic banking groups. The 13 foreign banks that we now have will even exceed the number of local banks by the end of this year.
The track record thus demonstrates that Malaysia has been very much part of the globalisation process and has been an integral part of the global economy. It is therefore unlikely that this trend will be reversed in the future.
As a concluding remark, I should mention that Malaysia is not advocating exchange controls for other countries. In our case, we believe that our economy had during the time of crisis, the necessary preconditions to ensure the success of the controls. Further, it is important to note that Malaysia did not implement exchange controls as a substitute for policy reforms but as a complement to sound macroeconomic measures. Meanwhile, Malaysia remains committed to the liberalisation and globalisation process that can bring mutual benefits. Globalisation will continue to test the resilience of the individual nations and the ability of the international system to cope with the associated changes, particularly those related with the increasing digitisation of the global economy. Therefore, individual countries need to continue strengthening its institutions enhancing the efficiency of its economy and addressing its vulnerabilities. At the same time, however, deficiencies in the international system also need to be addresses to secure a stable system for the globalisation process to continue.
Thank You.