jose dario uribe escobar : globalization and colombia ’ s policy framework speech by mr jose dario uribe escobar, governor of the central bank of colombia, at the lacea - lames 2007 meeting, bogota, 4 october 2007. * i. * * introduction the rapid expansion of the world economy in recent years has contributed to the positive performance of the colombian economy, but has also created new and diverse economic policy challenges. i would like to highlight the following challenges : • to continue reducing inflation and to keep economic growth at a sustainable level. • to help the economy adjust to a sharp real peso appreciation and to worldwide changes in relative prices. all these phenomena are connected. they are also associated with a period of rapid growth in the world economy and with the entry of china, india and the eastern european countries into the global economy. a good share of policy challenges arises from the uncertainty about how long the world economy will continue to expand and from the difficulties in particular sectors or with groups of individuals associated with sharp and rapid changes in some relative prices. i will now briefly describe the main effects of globalization on the colombian economy, before analyzing how, in the past, favorable changes in terms of trade and capital flows have been the impulses for large swings in economic growth in colombia. lastly, i will identify the principal elements of an economic policy framework that helps to smooth economic cycles, placing special emphasis on the role monetary policy plays in that process. ii. some economic effects of increased globalization as is well known, over the last four years the world economy has been expanding as pace not seen since several decades ago. in addition, this expansion, has ( at least ) two elements that make it different from previous experiences. first, the strong contribution that china and – to a lesser degree – india have made to global economic growth. these countries have an abundant labor force but are scarce in natural resources. second, this economic growth phase has been almost even across countries and regions, and unlike what happened at the beginning of the seventies, it has not been accompanied by strong inflationary pressures, up until now. this could mean that the current growth phase of the world economy will last longer than the growth spurt of the seventies ( krueger, 2007 ). colombia, like many other countries, has benefited greatly from the rapid world economic growth and the greater commercial and financial interdependence between countries. the scale of growth in the world economy, coupled with the rapid rise in

implementation of the basel rules as well as on the rigorous application of the new rules. this latter point was actually an important precondition for our approval of the agreement. 3 / 5 bis central bankers'speeches 5. challenges ahead but i have also said that no two economies or financial sectors are alike. in that respect, europe is different from the arab region. each individual european or arab country is different from its neighbours. and each individual bank is different from its competitors. cooperation and shared rules can only be successful if we acknowledge these differences. let me give you an example. in germany, the banking system is very diverse – in particular, there are a large number of small banks. if you compare germany to its neighbour france, you will find that the banking sectors of the two countries are more or less of the same size in terms of total assets. but at the same time, germany has about 1, 700 credit institutions and foreign branches while france has less than 500. germany has one global systemically important bank while france has three. as regulators and supervisors, our task is to remain neutral towards such differences, but nevertheless to acknowledge them. our regulation and supervision must respect them and not put a particular sector, a particular business model or a particular size at a disadvantage. at this point, i see room to improve our current regulatory framework in europe. more precisely, we need to strengthen the principle of proportionality in banking regulation. right now, proportionality is a hotly debated topic in europe, and it will be debated right here as well in just a moment. the key issue arises when the basel rules are – more or less – applied across the board. this is because originally they were made for large, complex, internationally active banks. as a result, the rules themselves have become extremely complex, especially with basel iii. while appropriate for the global players, the rules tend to overburden small institutions. the main problem is the compliance workload – that is, the effort associated with meeting the requirements as well as demonstrating that they ’ ve been met. in europe, we are currently busy fine - tuning our regulatory framework by providing some relief for small, low - risk institutions. importantly, capital requirements will remain untouched. but we are aiming to reduce disclosure requirements, simplify reporting and exempt some institutions from recovery and resolution planning, among other things. proportionality is one task for the near future. but there are many more challenges for the near and for the more distant future.