Malaysia’s Central Bank Governor highlights tough lessons from the global financial crisis
Calls for the IMF and advanced economies to have stronger control on free capital flows
Says trade gets bad rap but unregulated capital flows got free pass
World needs effective frameworks to ensure financial globalisation gives universal benefits
By Uditha Jayasinghe
in Kuala Lumpur
Financial globalisation including free capital flows need stronger regulation for the benefit of developing countries, a top official said here yesterday, pointing out advanced economies have shifted the blame to trade and failed to take adequate action on financial markets.
Malaysian Central Bank Governor Muhammad bin Ibrahim was addressing a conference jointly organised by Bank Negara Malaysia (BNM), the International Monetary Fund (IMF) and the IMF Economic Review titled ‘Globalisation in the Aftermath of the Crisis’.
The Governor noted that in the aftermath of the global financial crisis of 2008 governments of advanced economies increased protectionism but failed to understand the disconnect between free capital flows and economic growth, worsening an already difficult situation.
“The global financial crisis, and the Asian financial crisis, clearly demonstrated the risks and the damage that could be wrought by financial globalisation. It amplified the costs of policy and regulatory lapses and failures in crisis prevention and management. It is interesting to observe that despite consequences primarily associated with financial globalisation, trade has received the brunt of the blame,” he said.
The Governor pointed out that in the wake of the 2008 crisis, between November 2008 and December 2009, 390 trade protectionist measures were announced or implemented by 19 of the G20 members. Ironically, financial globalisation channels were not addressed as quickly, he said. Many major financial market companies were never held responsible for their oversights that caused a subprime crisis in the US that spread to the rest of the world.
“It is surprising how policymakers, particularly in the advanced economies, have yet to arrive at a consensus in recognising the harmful effects of free capital mobility that is disconnected with the real economic activity. This is an issue that many remain divided on until today. While we have instituted policy reforms to better manage our financial systems and institutions, more can be done.”
The world needs effective frameworks to ensure financial globalisation contributes to risk diversification, consumption smoothing and efficient intermediation of productive capital across international borders, the Governor emphasised.
“The global community should decisively address the risks posed by large and volatile short-term capital flows. Not enough is being done at the global level to manage the negative spill-overs to recipient countries.”
Ibrahim called on the IMF to play a stronger role to ensure that global financial aspirations consider diverse circumstances and national objectives. Efforts to encourage a more inclusive process in setting global financial standards and initiatives are positive steps in the right direction, he went onto say. The Governor also hailed the IMF for promoting macroprudential measures to manage capital and use unorthodox policy measures to deal with crisis, which evolves beyond the norms practiced a decade ago.
“Perhaps the most important development of late is the unravelling of a ‘one-size-fits-all’ approach to managing international financial flows. Again and again, previous experiences in crisis management strongly suggest that each crisis at any given time requires a tailor-made solution, given the specificity of each economy’s social, economic and political landscape,” he said.