Zeti Akhtar Aziz: Brief remarks on managing financial instability and shocks in a globalising world Introductory remarks by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Tun Ismail ali Chair Public Lecture, Kuala Lumpur, 6 February 2004. *  *  *  We are indeed honoured and privileged to have Dr. Yilmaz Akyüz, holder of the Tun Ismail Ali Chair in Monetary and Financial Economics at the University of Malaya, to speak to us today on “Managing Financial Instability and Shocks in a Globalizing World”. The Chair on Monetary and Financial Economics at the University of Malaya was established by Bank Negara Malaysia in recognition of the contributions of the late Tun Ismail bin Mohamed Ali, the first Malaysian Governor of Bank Negara Malaysia. It is our hope that this Chair would contribute to enhancing expertise and knowledge in the area of monetary and financial economics. Ladies and gentlemen, Let me make a few brief remarks on the topic of today’s lecture, based on our experience in managing the Malaysian economy. Uncertainty and instability are the defining feature of the international financial system today, as borders have become more porous, financial markets more integrated and as financial flows have surpassed trade flows as the dominant determinant of the international financial environment. Emerging market economies have become more vulnerable to international shocks which can have a significant adverse impact on the economy. Malaysia has approached this more challenging environment by increasing our own resilience and tolerance level to these shocks.

There are three factors that are key to enhancing our resilience to external shocks. Capacity building: strengthening the economic and financial base The first is strengthening the economic and financial base. A deliberate policy to diversify the economy to achieve a greater balance between domestic and external sources of growth, to avoid excessive concentration in any activity and to reduce over-dependence on any particular market has increased the resilience of the economy. This has required shifting into new areas of comparative advantage and seeking new market opportunities and new areas of growth, while shifting out of those areas where comparative advantage has been eroded. Having flexible labour and capital markets has facilitated this process of adjustment. Of equal importance is the development of a resilient institutional framework and institutions. This includes the promotion of strong private and public institutions. In the public sector, strong institutions can be measured in terms of building efficient and strong delivery systems that promote coordination in the government machinery to provide an enabling environment for operations in the economy. At the same time, sound private sector institutions are crucial. In addition to healthy financial positions, good systems of risk management and corporate governance would ensure better management and a healthy corporate sector. Another important aspect is the availability of timely and reliable financial information and the strengthening of the legal and regulatory framework for enforcement of the laws and regulations. Strong professional organisations can also play an important role to improve and enforce the standards and best practices.