Zeti Akhtar Aziz: Global trends for the emerging market economies
Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the 22nd ACI
Asia-Pacific Congress on Financial Markets in the K-economy, Kuala Lumpur, 31 October 2002.
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The recent decade has experienced a dramatic transformation of financial markets with far reaching
implications on the growth prospects for the global economy. The single most important source of this
change has been the rapid advancement in technology. Indeed, the revolutionary process brought
about by the advances in technology has created new challenges and opportunities. These
developments have been reinforced by the process of financial deregulation and liberalization. The
recent decade has also witnessed a new wave of international crises, although in the more recent
episodes, widespread contagion has been contained. Nevertheless, with highly volatile financial flows
and heightened uncertainty in the global financial markets, the potential for contagion remains.
It is my pleasure to be here at this 22nd ACI Asia Pacific Congress on Financial Markets in the
K-economy. In this more globalised, digitised and knowledge-driven environment, the challenge of
restoring calm in financial markets is no longer a challenge being encountered by small emerging
market economies alone, but is also a challenge being faced by the larger advanced economies.
These developments have indeed tested policy makers across the globe. The focus of my remarks
today will be on the implications of these global trends for the emerging market economies in general,
and the East Asian region in particular and the potential for achieving enhanced growth in this more
challenging environment.
Ladies and gentlemen
The recent decade has also witnessed a dramatic change in the form and nature of the globalisation
process. The initial waves of globalisation in the form of trade have been followed by globalisation of
corporations and in the recent years by globalisation of financial flows. While it has been
acknowledged that these developments have brought more complex and new risks, their impact is
significantly more pronounced and far reaching for emerging economies. In this environment,
emerging economies have been presented with a global landscape in which their very ability to
participate effectively in the globalisation process has been rendered increasingly more difficult.
Globalisation is not a new phenomenon for the East Asian economies. Indeed, the globalisation
process has been an important element in the remarkable growth and prosperity that has been
achieved by the East Asian economies. East Asia was able to ride the successive waves of
globalisation in the 1960s, 1970s and 1980s. Many of the economies experienced a quantum leap into
the industrialisation process as trade flows expanded at double-digit rates during most of this period.
While the East Asian economies benefited from this global trend, the economies have not however,
been immune to external shocks arising from shifts in international demand. The economies were
affected by factors such as swings in commodity prices, significant oil price adjustments, and the
slowdown in the major economies. While the impact of these trade - related shocks on the domestic
economies of the East Asian countries involved costs, in terms of slower growth and dampened
domestic economic activity, these economies were able to adjust to the sudden changes. In such an
environment, there was also greater predictability in the direction of the economic trends, providing the
basis on which appropriate policy responses were implemented to manage the economic adjustment
process.
Emerging economies in particular, in the East Asian region participated in this globalisation process
and benefited from the enhanced trade activities. In the recent decade however, there has been a
distinct change in the nature of the globalisation process. Globalisation is no longer confined to trade
and direct investment, but increasingly involves large cross- border financial flows. Over the recent
decade, these financial flows have dominated the global market place. An emerging concern is that
this trend would result in a widening of the divide between the developed and emerging and
developing economies.
In a world in which the magnitude of the financial flows are significant, in which the financial
transactions have instantaneous implications, in which the flows are unconstrained by any regulatory
framework, then size, the degree of development and the degree of resilience of economies will
matter. Countries that are small, and have less developed economic and financial systems, are open
and liberalized, and that do not have the range of policy options at their disposal, will be highly
disadvantaged in this global market place. It is this globalisation process that will contribute towards
widening the existing disparities between nations.
Against this trend, the current global economic and financial environment has been characterised by
increased uncertainty. There is uncertainty in the global economic outlook, financial markets and
geopolitical developments. The expected strengthening of recovery in the advanced economies has
yet to occur. Financial reporting irregularities and the weakening of the corporate sector has affected
confidence, contributing to the increased volatility in the global equity markets. Further risks also
remain on the horizon, including those emanating from structural imbalances in some of the advanced
economies. These developments have res ulted in unstable and highly volatile conditions in both the
asset and currency markets. However, despite the major declines in asset markets, large shifts in
financial flows, significant movements in major currencies, financial stress in the corporate and
financial sectors in a number of countries followed by overall economic weakness, the East Asian
economies have emerged relatively resilient.
Going forward, it is recognized that a higher tolerance level to sudden changes in economic conditions
and to the more volatile market conditions is necessary. Building such tolerance levels involves
enhancing the capacity, strength and resilience of the economy to cope with the external shocks to the
system. Indeed, the East Asian region has the potential to enhance its capacity to deal with the risks
and vulnerabilities and the potential to continue its growth process.
While countries in the East Asian region have many common characteristics, they are also diverse in
several aspects. Common features include openness and export orientation and a high rate of growth
of manufactured exports. Most countries have a high rate of capital accumulation supported by a high
rate of savings. Macroeconomic stability has prevailed in most countries. Inflation has been relatively
low and any external imbalances were of manageable proportions while the fiscal deficits have been
modest and Government debt levels have been kept low. The countries in the region are, however,
diverse in terms of natural resource endowments, the stage of financial sector development, the
degree of market orientation of their economies, the choice of exchange rate regime and the degree of
public policy activism. The overall growth strategy of the region has essentially been based on an
export-oriented industrialisation drive. This model, which is based on high savings and investments,
has indeed served the region well. In the current environment of slower growth, the strategies adopted
by several of the East Asian economies have been to implement a series of pro-growth policies to
contain the impact of the global slowdown on the domestic economy. The strong initial conditions in an
environment of an improving outlook in the major economies, lends support for increased optimism for
stronger growth in the near term. Going forward, however, the growth prospects in the East Asian
economies are likely to continue to depend to a greater extent on domestic demand. The strength of
export growth will depend on the overall pace of the global recovery.
The strategies that Malaysia has adopted include initiatives to strengthen and diversify the economic
base and to develop and strengthen the financial infrastructure including the regulatory and
supervisory framework. The emphasis was on pacing the liberalisation process according to the ability
of the system to absorb a more competitive environment, and developing important policy instruments
to enhance the effectiveness of policy. Measures were also instituted to strengthen risk management
practices at the national and corporate level, establish an institutional arrangement to undertake
surveillance and maintain an appropriate exchange rate regime that will effectively and efficiently
facilitate international trade and investment. Finally efforts were also focused on promoting regional
co-operation.
There are a number of other reinforcing sources of impetus that have potential of enhancing the
growth prospects for the region. Demographically, Asia as a whole has a relatively young population.
As a result, the region going forward will possess the largest pool of labour in the world. Harnessed in
a productive and efficient manner, this pool has the potential to generate sustained growth for Asia.
There is also potential for intra-regional trade and financial flows to grow in East Asia. The ASEAN
region alone consists of more than 500 million people. The market within East Asia provides an
important new source of endogenous growth within the region. The changing structural pattern of
trade in the region reflects the growing intra-regional trade which now accounts for almost half of
Asia's total trade from just a fifth a decade ago. Intra-regional trade has also been enhanced by the
opening up of large regional markets such as China. The share of East Asian exports to China has
doubled in the past decade to about 10%. While there has been significant attention on the
competition that China will create for other countries in the region, the focus should also be on the
complementarities that are already feeding the regional growth process.
A third discernable trend in the region is the growing importance of domestic demand in the regional
economies, supported by domestic-oriented policies in recent years, which would ensure that the
gains in intra-regional trade could be sustained. In terms of financial flows, the development of
regional markets is contributing towards strengthening the prospects for a deepening of Asian financial
markets and promoting greater regional financial integration. The region is also studying the feasibility
of establishing an Asian Bond Market to recycle part of the region's high level of savings to finance
productive activity within the regional countries. To encourage the regional flows to be recycled into
investments in the region, efforts have been taken to develop the capital market particularly in the area
of securitisation, credit guarantee and market infrastructure. The regional economies recognize the
importance of developing these markets thus co-ordinated efforts through various initiatives have been
undertaken to remove impediments to these developments. With further lowering of trade barriers
under the ASEAN Free Trade Area and ASEAN+3 initiatives, intra-regional investment flows would
further increase.
The intensification of regional co-operation has been enhanced in recent years. In the aftermath of the
Asian financial crisis, there has been an increase in the level of financial co-operation among the
Asian countries. These efforts have revolved around swap facilities to provide emergency liquidity
assistance, regional surveillance and peer review to enhance regional financial and monetary
co-operation, regional capacity building and the enhancement of skills and capabilities of regional
financial regulators and policymakers. Regional surveillance and peer review in particular is an
important step forward as it will contribute to confidence building and would complement the
implementation of the various regional financing schemes. Significant progress has been made in
achieving the objectives of the Chiang Mai Initiative to create swap facilities to provide emergency
liquidity assistance for the region. Closer co-operative efforts in the standardisation of systems and
documentation procedures would also contribute to facilitating intra-regional trade and investment
among economies within the region, as well as with the rest of the world. Effective co-operation in
these areas will augment the foundations for realising the tremendous potential that this region
possesses for future growth and prosperity.
Ladies and gentlemen,
An important transformation in the international financial landscape is the introduction of the euro
which has indeed been a defining event. The objective was clearly to facilitate trade and investment
within the region by removing the distortions in economic relationships introduced by exchange rate
volatility. As a result, where there were previously 12 currencies, there is now only one. Corporations
dealing with the 12 euro countries are now able to keep their books in one set of accounts and make
operating and investment decisions without having to be concerned about exchange rate changes. For
the rest of the world, it has been described as "island of price stability" in addition to the dollar area, to
which capital can flow. Four factors are important in determining a currency's international role:
relative stability, which would reduce the risk of holding assets in that currency; a strong exchange
rate; so that capital losses can be avoided; deep and liquid financial markets for that currency, to
enable holders to diversify, liquidate and adjust their investment portfolios; and finally, a strong
regulatory support to minimise the possibility of crises. Indeed, the international success of the euro in
coming years would depend on the extent to which these criteria are met.
The introduction of the euro has of course given impetus to other regional initiatives to pursue similar
efforts to unify national currencies into a single regional currency. Such initiatives are being pursued in
Latin America, Africa and the Middle East. In ASEAN, a taskforce has be set up to look into the issue.
Clearly, with growing regional economic integration, not just within ASEAN but also among the
ASEAN+3 countres, enhanced regional financial cooperation would play a beneficial and
complementary role. Regional policy makers recognise that a single currency is a long-term option for
the region. An important pre-condition for a single currency would be a significant degree of economic
and financial convergence and integration. It would also require greater labour and capital mobility in
the region.
While the single currency may be not in the region's immediate future, this does not preclude greater
cooperation on exchange rate issues and other forms of financial co-operation among regional
economies. There is indeed potential to benefit from enhanced financial cooperation and for the
creation of mechanisms that would enable the region to better cope with periods of highly unstable
financial market conditions. Institutional infrastructure such as regional surveillance and financial
support mechanisms achieved under the Chiang Mai Initiative can be further enhanced over time to
provide temporary liquidity support to regional countries and prevent the type of violent exchange rate
movements observed during the Asian financial crisis. Such institutional arrangements need to be
reinforced with greater regional economic integration.
In addition, to encourage part of the financial flows from the region to be recycled into investments in
the capital market, efforts have been taken to further develop the capital market, particularly in the
area of securitization, credit guarantee and market infrastructure. The regional economies recognise
the importance of developing the capital market. Thus, coordinated efforts through various initiatives
have been undertaken to remove impediments to the development of these markets.
Confronted by the current climate of uncertainty in the global economy and financial markets, our
resolve has most certainly been to maintain constant vigilance towards all sources of risks and
vulnerabilities and to preserve economic and financial stability. Efforts are also on going in financial
and corporate sector reforms to strengthen our financial and economic foundations. The progress
achieved thus far has strengthened the resilience of regional economies and financial systems. At the
same time, measures have also been put in place by many of the regional economies to manage the
risks from both external and internal sources.
From the Malaysian perspective as a small emerging market economy, the long-term solution is to
enhance resilience and increase the tolerance level to absorb volatility and to be in a position to
withstand external shocks and any slowdown in global growth. It is the underlying economic and
financial foundations and its strength that will determine the capacity and resilience, and thus, the
ability to ride out the storms and take advantage of the opportunities that the external environment
accords to achieve sustainable performance over the medium and longer-term.