Combating Global Financial Crisis – Role of International Cooperation

Governor Draghi, Governor Yam,
Distinguished Guests,
Ladies and Gentlemen,

I am delighted to be here among this gathering of distinguished policymakers, financial experts and academia, at this year's HKMA Distinguished Lecture and would like to thank Governor Yam for the kind invitation.  This lecture truly provides an excellent opportunity for us to share our views on the topical issues that are at the center of international financial community.  And, I believe that Governor Draghi has already given an excellent presentation highlighting the roles of international cooperation in combating global financial crisis.

Let me now share with you my views from emerging markets' experience and challenges going forward.

One decade after the Asian financial crisis, emerging markets look less vulnerable to financial disturbances.  Emerging markets, in particular in Asia, are learning to live with heightened uncertainty in the world where the extent and the whereabouts of the risks are unclear, and which necessitates that we have to manage risk better.

Nonetheless, as small open economies, we want to reap benefits from financial globalization to promote growth and development while ensuring our economic and financial stability.  Thus, we always have to lean against the wind and adhere to a set of principles which central banks have been practicing.

In the pursuit of striking the right balance between growth and stability over the longer horizon, we need to be prepared to be unpopular among the public.  Central banks need to think the unthinkable as we should be more risk averse in a good time for the bad time to come.

And, it will remain an integral part of our policy-making going forward.

Ladies and Gentlemen,

Asian economies have come a long way since 1997 to promote economic and financial resiliency.  We see a region-wide move toward a more flexible exchange rate regime, with a disciplined framework in the conduct of monetary and fiscal policies.

As for the financial sector, the framework of policy has moved toward risk-based supervision, to an adherence to international standards, and to the undertakings of formal financial sector assessments under Financial Sector Assessment Program or FSAP.  The macroeconomic policies also become more flexible, yet proactive, in dealing with changes in the market conditions and practices.  When necessary, a tradition fiscal-monetary policy mix has been augmented by appropriate prudential measures of financial institutions.

More importantly, legal and information infrastructure has also been put in place to strengthen the foundation for financial system capacity for crisis prevention and resolution.

These intensive reforms and institution building during the past decade may make it less likely that financial turbulence will trigger a sharp and broad-based dent to real economic outcomes.  But, challenges remain as we have learnt that the key pressure points that can lead to difficulties for small-open economies can be externally-induced, especially when we do not know if we are still caught in the eye of the financial storm or whether the turbulence has ceased.

Ladies and Gentlemen,

Let me now turn the focus of my discussion to the need for closer cooperation as we all face challenges on how to combat the global financial crisis.

The ongoing global financial crisis is not dissimilar to other crises as it is and will be followed by intensive reforms at international level.  It also highlights that international cooperation remains important and necessary in maintaining global financial stability.  In fact, it has become more and more important given globalization process, which makes us better interconnected.

However, we might have taken it for granted that international cooperation is the first best solution and could solve global crisis. We have all learnt that in a number of occasions, when a solution is needed, good implementation comes too little too late

Taking the International Monetary Fund's or the (IMF) Short-term Liquidity Facility as an example, this new facility is somewhat similar to the swap lines extended among central banks to fellow members that do not call for typical IMF-supported adjustment programs.  Emerging markets have been proponents of this facility for several years, but the IMF has previously been reluctant to endorse it due to fear of moral hazard.  It is ironic that only when problems in advanced economies led to contagion elsewhere and large number of central banks entered into such swap agreements with the Federal Reserve, did the IMF agree to such an instrument.

This also reconfirms the need for greater voice and representation of emerging markets in important international financial institutions (IFIs) as highlighted in the recent G-20 Summit Declaration.  While the reform is underway under the IMF, it is only with hope that other fora, including, the FSF will take the issue into consideration more seriously.

Let me elaborate further on the importance of having emerging markets participated in the systemically important international fora.

I think you all agree at this point at advanced economies or emerging markets are all prone to sectoral imbalances, which lead to a full-blown crisis, as it can happen anywhere anytime.  The impacts of the crisis in advanced economies can become broader and deeper, creating a larger scale of world-wide externality.

However, emerging markets, unlike others, have had our share of coping with new challenges brought on by this phenomenon as well as those created by us one decade ago.  It is, therefore, not only the responsibility of advanced countries to be in charge of global surveillance but also the responsibility of emerging markets to share our views and experiences of how to reform ourselves to be better prepared for greater uncertainty.

Against this background, this calls into question whether the surveillance mechanisms available at the moment and the role played by emerging markets in international cooperation are adequate in ensuring international financial stability, the essence of the mission of IFIs.

It is therefore in times of crisis that the value of the international cooperation is measured and the voice and representation of emerging markets be heard in IFIs.  The unprecedented events of the past months present a historic opportunity for the international bodies to rise to the challenge.  The time has come for them to be more proactive and become truly global institutions.

But, until then, we may have to continue our search for the second best alternative to maintain economic and financial stability.

Ladies and Gentlemen,

Having said this, I trust that regional cooperation could play an important role in supplementing both national and global responses on at least two key areas.  This is because countries in the same region tend to possess better understanding and coordination, and therefore, policies and initiatives at the regional level can be to some extent more effective and timely.

First, the global financial crisis highlights the need to put in place the effective regional surveillance mechanism that can detect weakness early on.  Though, international financial institutions will remain useful for global surveillance and financing balance of payments need when necessary.  Waiting for the global community through international financial institutions for regional surveillance may be too little too late for timely policy measures that can safeguard the region from contagion from other parts of the world.

Indeed, it is very important for policymakers with common challenges to put greater efforts in having a clear and in depth understanding of one another's policy and practices.  This will, in turn, help raise the comfort level and can usefully avoid potential policy missteps and create policy synergies that eventually foster confidence of investors.  This is the kind of trust that no amount of legal text, conditions precedent, or covenants can match, but is developed through the friendship and goodwill among friends within the region.

Second, while the Asian financial crisis was a wake up call for Asia on the need for regional liquidity facility, Asian countries need to consider making such facility sufficient and effective enough in size with timely disbursement in light of the current global crisis.  Similar to the past crisis, international supports came too little too late in addressing the global financial crisis.

During the Asian financial crisis, more than 75% of the IMF's financial package for Thailand came from the funding within the region.  The present global situation has also reconfirmed the vision set for the by the Chiang Mai Initiative (CMI) that Asia needs to have its own regional liquidity facility to protect itself from contagion, be it caused within the region or from outside.

It is therefore timely that coordination and cooperation among countries must be further strengthened to ensure that prompt remedial actions can be put in place in light of the ongoing global financial crisis.

Ladies and Gentlemen,

To conclude, I wish to remind you that the present situation calls for the need to greater international cooperation, which requires concerted efforts by international organizations, regional cooperation and national governments, in combating the global financial crisis.  Regional cooperation must be coherent with national policy and work hand-in-hand with international cooperation.

The impact of crisis today and the effect of the unwinding of measures taken would not be a zero-sum game, and all players could potentially lose, thus, going forward, finding the right balance and creating ties between these three, namely international, regional and national interests, will be an important task for national authorities.

Thank you.