Skip to Content

Asian Tribune is published by E-LANKA MEDIA(PVT)Ltd. Vol. 20 No. 109

Globalization contributed to emerging markets

By Quintus Perera - Asian Tribune

Colombo, 09 December, ( Dr Anoop Singh, Director, Western Hemisphere Department, International Monetary Fund, speaking at the 26th Anniversary Lecture of the Central Bank, Centre for Banking Studies at its auditorium at Rajagiriya said that though around 10 years ago Asia was engulfed in a capital account crisis of unprecedented proportions that shook them, it was striking that none of those countries retreated from globalization.

He was speaking on the theme ‘Economic and Financial policies for Emerging Countries’. Dr Singh, was the first IMF Country Director in Sri Lanka.

He said that policy makers in those countries remained committed and integrated to global trade and capital flows. The integration moved remarkably fast where investors in Tokyo could now buy Brazilian bonds or Russian equities. Banks that were small locally-owned 10 years ago have now become regional conglomerates, with subsidiaries in a range of countries.

Dr Singh said that a clear sign of this remarkable change can be seen in the US as by 2006, less than ¼ of all financial assets were held by the core banking system The vast majority of the remainder were on the balance sheets of the ‘periphery’ of hedge funds, nonblank intermediaries, etc held widely by a range of financial vehicles.

He said that the most recent bout of financial market volatility the world continues to experience has shown that the lessons learned during the Asia crisis were still highly relevant today. He said that these lessons should be understood by emerging markets, developing countries and mature economies alike.

He said that these lessons include: the importance of cross-border linkages, transparency and balance sheets, the critical discipline that a more globalized financial market imposes on macroeconomic policy and the policies and the need to maintain social consensus as a prerequisite to any credible reform programme. He said that the first major test of the world’s financial system of the 21st century undergo were a product of the crises of the 1990s which remained important.

He said that the Asian crisis brought home the reality that all countries were inextricably intertwined. Policies in Thailand for example affected not only its regional neighbors but also touched the countries of the other side of the planet. He said that over the past ten years the global economy has become markedly more integrated as the total corss-border bank claims have raised to US $ 17.6 trillion while foreign direct investment flows reached US $ 6.4 trillion in 2005

He said that at the same time financial innovation has dispersed risk across national boundaries. There has been an explosion of flows across borders and between markets. Countries have vastly improved the functioning of their capital markets and banking systems. He said that they validated Asia’s crucial decision a decade ago to remain integrated and resist political pressures to retreat towards more inward-looking economic strategies. He said there were downsides too as securitization and other financial innovations have allowed for better management and distribution of risk between countries.

He said that the role of the IMF was that it continues to leverage its unique status to strengthen the global financial system. The institution facilitated the fist ‘Multilateral Consultation’ to examine the interactions between various countries’ policies and sought a coordinated, multilateral approach to lessen the risks from a disorderly unwinding of global imbalances.

He said that Transparency clearly remained of critical importance for a well-working financial system. He said that one of the key lessons of the Asian Crisis was that in order for market mechanisms to work fully, the market must be in possession of as broad and accurate information set as possible. Dr Singh said that accurate and timely information about underlying risks and the probabilistic structure of those risks are critical for market mechanisms to properly price that risk.

He said that responsible country authorities and market regulators have understood the essential importance attached to transparency in a more integrated work economy and in the past 10 years vastly increased the provision of comprehensive information on their own operations, financial intermediaries and listed corporations that they oversee.

He said the global events this August have been a reminder of the importance of transparency. The implied losses from declining credit quality in US asset backed securities have been estimated to be in the range of around US $ 200 billion. But there was little comprehensive information on where these losses currently reside in the global financial system. This has led some to term current event as a global crisis.

He said that there would be significant losses being borne along the mortgage supply chain and some of these losses have become dramatically apparent in certain specialty finance institutions at the periphery. He said that however, a large portion is probably outside of both the mortgage industry and the core regulated banking system.

Dr Singh said that another lasting consequence of events in Asia in 1997-98 has been the increased attention to balance sheet interactions and said that on the whole, policymakers across the globe now very much appreciate the insight from Asia on balance sheet linkages. In Latin America, the governments have made great strides in lowering sovereign exchange rate risk by increasingly financing through local currency instruments and buying back foreign currency debt.

He said that in some cases the balance sheet risks present in Asia have morphed into subtle variations upon the theme of maturity and exchange rate mismatches. He said that past episodes of financial turmoil have in may cases either been caused or magnified by a conventional run on banks as a result of these institutions inherent maturity mismatch.

Dr Singh said that increasingly globalized financial markets and the free flow of capital across both markets and nations imply that market discipline would be quick to punish inconsistent or inappropriate macroeconomic policy frameworks. He said that Argentina was forced to abandon the fixed exchange rate ‘convertibility’ regime ultimately as a result of the inconsistent fiscal policies pursued by previous governments.

He said that the Asian crisis caused a fundamental rethink of how monetary policy should be conducted in emerging markets and which type of exchange rate regime a country should adopt. He said the Asian experience showed that as governments moved away from fixed exchange rate and allowed for larger movements in their currency, the private sector realized that the state no longer provided a guarantee as to where the exchange rate would be in the future.

In conclusion Dr Singh said that much of their presumptions about the efficiency of market determined outcomes relied on the implicit assumption that market liquidity was sufficient to provide reliable price signals to agents. He said that they have seen often times from the crises in emerging markets in the late 1990s to the complex structured finance products in the US – which the existence of fluid and continuous markets for complex instruments might not be counted on in periods of market stress. He said that this can mean that information was not revealed by price discovery in a timely manner which could ultimately result in perverse and volatile outcomes. This is not to say that financial innovation and globalization should be avoided but rather that the downsides should be identified and steps taken to mitigate them. In said that in particular they needed to be continually reminding themselves that:

Continued vigilance was needed, through an incentive compatible, risk-based regulation, to ensure consistent credit discipline; supervisors and regulators need to think carefully about the implications of greater cross-border integration and larger international capital flows for their working in maintaining financial stability; transparency is a key factor in allowing markets to do their job of processing and encapsulating all available information into market prices. As markets become more complex the sophistication of the informational requirements rise in tandem; balance sheet risks remain of central importance and financial innovation and global risk transfer have made these risks even more difficult to analyze and understood. In addition, non-banks and off-balance sheet risks have become increasingly relevant; the quality of the macroeconomic policy framework has become more vital than ever as the first line of defense against external shocks and global financial volatility. Inconsistent or reckless policies will be quickly punished by global capital flows and social cohesion is key to the success of policy efforts end close attention needs to be paid to protecting the most vulnerable.

- Asian

Share this