But capital flows may also demonstrate an imbalance between demand and output in an economy, which must eventually correct if debt and wealth stocks are not to become unsustainable. Sharp corrections in rates of domestic absorption and/or capital flows could then result, with attendant output costs. In that sense, global imbalances may also be bad cholesterol. 1 So which are capital flows today? Historical evidence is illuminating. Chart 1 plots (the absolute value of) current account balances in thirteen countries, as a % of GDP, since 1880. Other than in wartime, global imbalances are at their highest in well over a century. They have surpassed levels which prevailed during the classical Gold Standard and are more than twice levels during the Bretton Woods period (Chart 2). For some individual countries, these capital flows look larger still, both absolutely and relative to historical norms (Chart 3). It is not just the size of these global flows that is unusual. So too is their direction. Contrary to theory, capital is flowing from developing countries with a low capital stock, towards developed countries with a high capital stock (Lucas (1990)). In other words, capital is flowing “uphill”, away from countries where the marginal product of capital should be high and towards countries where it should be low. This makes the pattern of global capital flows doubly perplexing. 1  Blanchard and Milesi-Ferretti (2009) discuss the causes of “good” and “bad” imbalances. BIS Review 174/2010  1  Perplexing need not mean bad.

Zeti Akhtar Aziz: Islamic finance - dynamic industry in a rapidly changing global environment Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the 2nd International Islamic Finance Conference, Dubai, UAE, 22 September 2003. *  *  *  Bismillahirrahmanirrahim “The Islamic financial industry is ascending to prominence in an environment that is highly competitive and constantly subject to the forces of change. The industry has made significant progress, with the essential fundamentals underpinning financial infrastructure to support its sound expansion in place. The challenge before us is to bring the industry to its next stage of development and reinforce the robustness of the industry in a more challenging environment. Of importance is the need to evolve the strategies that need to be adopted to build key strengths and enhance institutional capacity in the industry. Indeed, collaborative efforts need to be intensified on the global front and integration accelerated. As the decade unfolds, insha-Allah, the Islamic financial industry will evolve into an increasingly dynamic and vibrant industry” It is my honour and pleasure to be here today at this Second International Islamic Finance Conference, organised by the Islamic Development Bank and the General Council of Islamic Banks and Financial Institutions. Globalization and financial liberalization have brought profound changes to our domestic and international financial landscape. These changes have been accompanied by an accelerating pace of financial liberalisation, driven by advances in technology. The advancements in information and communication technology have removed barriers in the market place.