Durmuş Yılmaz: Role and responsibilities of emerging economies in the
global monetary system
Speech by Mr Durmuş Yilmaz, Governor of the Central Bank of the Republic of Turkey, at
the conference on "Where Is Global Finance Heading?", Istanbul, 2 October 2009.
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Dear Guests,
I would like to welcome you all to Istanbul. It is a great pleasure for us to host this conference
and such a distinguished group of central bankers, academics and experts. I hope this
meeting, together with the upcoming events, will be helpful in shedding light on the future of
the global financial system.
It has been almost two years since the surfacing of global financial crisis of epic proportions
and we are still dealing with its repercussions. One can easily identify a variety of reasons for
its occurrence: Global macroeconomic imbalances certainly played a key role. Deficiencies in
financial regulations and lack of coordination among monetary authorities and regulatory
institutions played even a bigger role. Policy makers were quite complacent during the build
up in asset bubbles. Accommodative monetary policies enabled access to cheap money.
High leveraged transactions magnified the amount of liquidity created through financial
system. Search for high yields led to excessive risk taking and use of complex instruments.
Compensation scheme in the financial sector encouraged short-term bias. Above all,
believed that with the use of complex financial instruments, one can wipe out the risk from
balance sheets. However, risks only changed form and address in the financial system, just
like the energy continuously transforms in the physical universe.
Almost all economists agree that we are heading to a slow, gradual and painful recovery.
And as a central banker who has spent almost 30 years in this profession, I can tell you that
it is a miracle itself to have so many economists agree on one issue with so much vigor and
conviction.
The future of the global financial system will be shaped by the lessons we derive from our
current experience. The ongoing crisis revealed that preventive measures put in place at the
local level by national authorities may not be effective to address global problems.
It also underlined the importance of international cooperation and coordination in designing
and implementing economic policies. It is clearly understood that the only way to prevent
future crises at the global scale is multilateral cooperation. However to establish and sustain
multilateral cooperation is not an easy task. As (John Maynard) Keynes once said, "The
biggest problem is not to let people accept new ideas, but to let them forget the old ones." It
is very likely that economic agents will try to hold onto their old habits when the effects of the
crisis subdue.
Appeals on regulators will pile up for a more lenient implementation of rules, regulations, and
policies. Politicians will face pressure from their constituents to give priority to local concerns
at the expense of global coordination. Dominant academic paradigm may restrict those who
radically incorporate lessons of these days into their studies. And of course, central banks,
as always, will be criticized for spoiling the party at its hottest moment by taking away the
punch bowl. We should be aware that keeping the old habits will only give us a new and may
be more severe crisis in the near future.
Thanks to the global efforts, lessons derived from the crisis have already started to initiate
dramatic changes in the global financial governance. There have been encouraging
developments in recent months to design a new global financial system to prevent future
crises. In the recent meeting of G-20 finance ministers and central bank governors, member
countries confirmed their commitments to the principles of strengthening transparency and
accountability, enhancing sound regulation, promoting integrity in financial markets, and
reinforcing international cooperation. I believe the establishment of Financial Stability Board
with increased participation of emerging countries is a critical step in achieving these
objectives.
In recent years, as a byproduct of market-oriented structural reforms and prudent
macroeconomic policies, the share of emerging countries in world output and their role in
global financial markets has significantly increased. Now, we are faced with a more
diversified group of countries with different objectives and interests. Since the rise of
emerging economies has dispersed economic power, decision-making process and
international cooperation has become more complicated. For legitimacy and effectiveness of
measures and also for better global governance, emerging economies should involve in
decision-making process and be part of the solution.
However, emerging countries should also be aware of the fact that more power in
decisionmaking process comes with more responsibilities. Both developed countries and emerging
market countries share the blame in global economic imbalances that worsened the
magnitude of current crisis. In theory, the adjustment of imbalances should have taken place
through either exchange rates or interest rates or both. Mainly developed countries
prevented that adjustment on the interest rates, whereas emerging market countries joined
their counterparts by preventing adjustment on the exchange rates.
Today, many people debate the need for a new global reserve currency, creation of an
international clearing system, enhancing the role of central banks, and establishment of a
supranational body to safeguard global economic and financial system. These discussions
are necessary and maybe overdue.
A global reserve currency might be needed to alleviate the tension between appropriate
monetary policy of the reserve currency country and that of the global economy. Creating an
international clearing agency between trade partner countries may be useful to reduce the
need for accumulating foreign exchange reserves.
A supra-national body may be the only solution for the externality problem in the Bretton
Woods system and its successor, so called, the Bretton Woods II. Main responsibilities of
central banks may be enhanced to the stability of asset prices as well as prices of goods and
services.
Of course, as a central banker, I am fully aware that identifying asset bubbles is not an easy
task and it may also be challenging to convince the public and politicians about the necessity
of raising policy rates at a time when economy is booming but the prices of goods and
services are stable. However, the recent crisis has demonstrated that central banks may
ignore imbalances in financial markets at their own peril.
Today, we have a unique opportunity to discuss the future of the global financial system and
the role and responsibilities of the emerging economies. I believe that the timing and the
framework of this conference will provide ample opportunity for sharing new ideas and
highlight some critical lessons to reshape a better global financial system for a more resilient
and stable global economy.
Once again I extend my warm welcome to all participants. I also want to thank the
distinguished participants for their valuable contributions. I hope you enjoy both the
conference and your stay in Istanbul.