Mugur Isărescu: Enhancing the role of governance in international
business
Address by Mr Mugur Isărescu, Governor of the National Bank of Romania, at the 37th EIBA
Annual Conference, Palace of Parliament, Bucharest, 8 December 2011.
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Ladies and gentlemen,
Distinguished audience,
It is an honour and, at the same time, a great pleasure to address the 37th edition of the
Annual Conference of the European Academy of International Business. Allow me to
join the organisers in addressing all participants a warm welcome. I am delighted that
Bucharest is hosting today such a momentous event attended by so many guests from
among world-famous professionals.
I am also glad to welcome you this evening to the reception offered by the National Bank of
Romania. Throughout its 131 years of existence, the NBR, established in 1880 as the
16th central bank in the world, has constantly supported and developed strong ties with the
academic community, hosting numerous conferences, encouraging debates and building
partnerships aimed at enhancing financial education. In this context, we are happy to
contribute these days to the annual gathering of your organisation.
Today's theme - governance - is quite a vast topic, and was clearly brought to the spotlight
by the recent global economic and financial crisis.
When talking about governance, one cannot ignore the times we live and the major
economic and financial uncertainties we all are grappling with. Therefore, it is essential to
look at trends and changes in the governance in the light of the lessons to be learned from
the global financial crisis. It would be an unpardonable mistake by exiting the crisis without
learning all its lessons.
Governance can generally be seen as the manner of exercising power in a country's
economic and social resource management to ensure its development. It should also apply
to the regional and global context.
We all know that good governance means drafting appropriate policies, programmes and
regulations that must thereafter be transposed into legislation. The role of the governments,
that is of politicians, is obvious here, and institutions play a major part in a country's
governance, as the American Nobel laureate Douglas North noted. I cannot help
emphasising this, the more so as our host today is a citadel of legislative power.
There are many aspects one can approach when talking about governance. I would like to
say a few words about three levels: macrogovernance, corporate governance and also one
of the key themes of these days - governance in the European Union.
Let me begin with macroeconomic governance which is closer to my area of concern.
I do believe that approaching governance in a broader economic context could prove both
relevant and useful. In this context, I cannot stop short of underlying how important
consistent economic policies are for ensuring a sustainable development, and to
repeat my belief that there is no substitute for consistent, sound and stability-oriented
economic policies.
Therefore, I will share with you some of the lessons from my own experience.
First, I will refer to the importance of having a good fiscal and monetary policy mix. If fiscal
policy is relaxing, then the natural reaction is to tighten monetary policy. But one should take
into account that monetary policy cannot always be a substitute to a sound fiscal policy. In
other words, not always and in any circumstances can monetary policy steps compensate for
fiscal policy measures.
Secondly, I will touch upon the risks related to pro-cyclical fiscal policies. We have
experimented this in Romania and are fully aware on the risks related to the boom-bust
cycles. During booms, as budget revenues pick up there is a strong temptation to spend
more and no appetite to publicly debate the issue of structural deficits. On the other hand,
when bust emerges one realize how limited your toolkit is and that all measures to address
the situation translates in to a prolonged recession and GDP volatility.
Last but not least, I will refer to the monetary policy by underlining how essential financial
stability is to help achieve our overriding goal which is price stability. As I said before, it is my
belief that the two are not conflicting; they may be compatible if your measures are carefully
implemented. Over the past few years the NBR has used all its available instruments to fulfil
its tasks in the area of achieving price stability, seeking to ensure a low volatility of the
exchange rate - an exchange rate which is set by the market. In short, all our steps have
focused on maintaining stability and rebuilding confidence.
In conclusion, over the past 10-15 years most economists have discovered good
governance - with its four pillars: transparency, accountability, predictability and
participation - as a major determinant of economic growth. Thus, economic governance
implies the need to ensure stable, transparent and predictable rules that encourage
competition and fair access to public services. It is achieved through a country's public and
private sector institutions and the civil society.
Moreover, the recent crisis, which today wreaks havoc given the structural
interdependencies worldwide, has underscored the need for an in-depth reform of
economic governance at global levels. As Mr. Jean-Claude Trichet, the former ECB
President, said, in light of the global crisis, "International interdependencies are too large for
purely national or regional rules to be optimal and there is a clear need to strengthen global
governance, in particular in the financial field."
I would also like to share with you a few thoughts about corporate governance. I'm sure the
debates on this topic will be comprehensive during all these days and you, as specialists, will
be able to unveil its very generous facets.
These principles on corporate governance are largely part of those adopted in 1999 and
subsequently revised by the OECD in 2004. They include equal rights and a level-playing
field for shareholders, the role of stakeholders, disclosure and transparency, and board
accountability. Corporate governance has direct implications on the behaviour of the
organisation towards its employees, shareholders, customers, partners, banks included.
Poor governance reduces the potential and, worse though, can lead to financial distress and
even fraud, while well-governed companies will usually be more competitive than their rivals
and will be able to bring in investors who will invest their money in the companies' future
growth.
I will also add that no matter how relevant formal rules are to the proper functioning of an
economy, it is essential to trust in business partners' word given and their honesty.
Whenever this is missing, not only dealings in goods and services, but also financial
transactions are hit hard. Given that integrity, confidence and reputation weigh heavily on the
economy, everyone pins his hopes on the business sector. Future wealth depends now more
than ever on how this issue is dealt with.
This is why we can assert that, in extenso, good corporate governance underpins the
integrity and efficiency of financial markets. Moreover, for the banking field, in light of
recent developments, I truly believe that increased ethics is to be welcomed. Thus, good
practices in corporate governance are an essential ingredient of wealth and sustainable
growth.
In this context, the need for principles of the above-mentioned international
organisations to be supported and adhered to by both private and public sectors
becomes increasingly clear. This should be done by adopting and implementing codes of
conduct at corporate level and industry-wide, as well as by improving the legal, institutional
and regulatory framework pertaining to corporate governance.
Let me now turn to Europe.
In the case of the European Union, the crisis has exposed fundamental weaknesses of the
European economy, revealing growing internal imbalances. The functioning of the European
Monetary Union has been under particular stress as the existing surveillance procedures
proved to be not comprehensive enough. One point that has been neglected was the
relevance of current account deficits. I believe that within the EU, the external deficits of
Member States are relevant as they reveal discrepancies related to competitiveness, and
therefore inconsistent and weak coherence of the economic policies.
The accumulation of imbalances has triggered a slow pace of recovery in Europe. The crisis
took its toll on productivity, and prices and competitiveness remain key issues. Also, the
functioning of the European Monetary Union caused headaches because of insufficient
comprehensive preventive and supervisory procedures.
Moreover, sovereign debt crisis has brought in the limelight not the crisis of the euro per se
but of the institutions that governs the eurozone. In this context, I will repeat what
Douglas North said: Institutions play a pivotal role in governance. And also recall the
words of ECB chief economist, Mr Otmar Issing. When he departed the institution, in front
of 400 strong audience Mr. Issing reminding us that "Euro is an unfinished project",
stressing that it relied on the monetary pillar, while enhanced fiscal policies and economic
cooperation were still needed.
Therefore, as the recent developments also show, a more effective economic governance
in the EU and the euro area is within reach through fiscal discipline, broader economic
oversight, closer coordination, a more robust framework for crisis management, stronger
institutions and a decision-making based on clear and strict rules.
In the particular case of the interdependent economies across the EU, enhanced governance
will boost economic growth and job creation. At the same time, developing a culture of values
and professional conduct and ethics can make a very important contribution to the smooth
functioning of markets and this is a prerogative of the corporate sector, the private sector in
general.
I'm confident Europe will find the right way to move forward, given the common
cultural values, with measures and policies that should avoid both asymmetric and
side effects. We all know how harmful sudden and large capital swings are.
Europe's governance raises also the issue at a more global level. In fact, international
affairs and corporate governance are an integral part of this picture.
High-profile international financial institutions such as the IMF are concerned and involved
particularly in economic governance issues, as they provide assistance in two key areas:
improving public resource management and supporting the development and maintenance of
a stable and transparent economic and regulatory environment so as to foster private sector
activities.
Other institutions such as the OECD and the World Bank are involved in corporate
governance, with the latter formulating a set of principles such as ethics and transparency,
as well as accountability.
To sum up, I should emphasise that corporate governance at present is a matter of
greatest concern to the business environment, just the same as we, those involved in
formulating macroeconomics, are concerned more broadly with economic
governance.
I believe that emphasis now should be placed primarily on discipline, fiscal discipline
in particular, but also on a shift in culture. I also like to add two words that I see essential
when speaking about economic governance: stability and confidence. In my view, all
efforts these days should be targeted to maintaining stability and restore confidence.
Thank you all!