The risks of globalisation

inSight

21 Oct 1999

The risks of globalisation

Globalisation brings efficiency and prosperity, but it also carries risks that need to be managed at the international, regional and domestic levels.

Extensive travel over the past few months has reminded me once again of how the powerful interaction of financial liberalisation, information technology and the globalisation of financial markets has brought prosperity to this world. But these processes have also brought risks, most notably in the volatility of large capital flows, to the extent that many small and open economies have found it difficult to cope, even though their macroeconomic policies may have been largely free of mistakes. Indeed, the instabilities produced by volatile capital flows have been the main cause of the financial turmoil in our region during the past two years.

In order to manage these risks prudently, there is, I believe, a need for efforts on three levels: international, regional and domestic. At the international level, given that the financial crisis of the past two years is one of globalisation, there is a need for reforming the international financial architecture. There is general consensus about this, although there are still strong differences of opinion about what exactly needs to be done. The HKMA is actively participating in international discussions on this issue. I hope that significant progress will be made in the coming months on proposals to enhance the transparency of markets, in particular the activities of those who are moving large amounts of capital around the globe, and to regulate, whether directly or indirectly, the highly leveraged institutions. This is the task of the Financial Stability Forum, of which Hong Kong, represented by the HKMA, is now a member.

At the regional level, I have in the past expressed the view that if small, open markets are vulnerable, consideration should be given in the longer term to building bigger markets. Regrettably, Asia is in many ways different from Europe. An Asian Monetary Union, in which Asia becomes a big single market able to cope with the volatility of global capital flows, following the example of the European Monetary Union, is a very remote ideal, to say the least, at this point in time. But a useful step might be to build a strong network of financial infrastructures to facilitate more effective financial intermediation in the region. This would involve, among other things, the linkage of payment systems and securities clearing systems for markets in the region - an idea that has been pursued by the HKMA for some time, and with some success. In its leadership of the APEC initiative on domestic bond market development, the HKMA has also played a prominent and widely recognised role in encouraging the expansion of markets in the region. The Compendium of Sound Practices, recently endorsed by the APEC Economic Leaders, is a milestone in our efforts in this regard.

At the domestic level, there is a clear need to make our small, open markets less vulnerable to the shocks brought about by the volatility of international capital flows. What needs to be done depends very much on domestic circumstances. There is first the basic need, where applicable, to strengthen regulation of financial markets and supervision of financial institutions, and to raise standards to the international level. Then there are the more specific measures ranging from the imposition of controls or restrictions to guard against market concentration or manipulation to the building of cushions to absorb shocks. The seven technical measures introduced last September effectively built for the monetary system of Hong Kong a big cushion and greatly reduced the sensitivity of interest rates to short-term capital flows. We must, of course, be careful in the imposition of controls and restrictions, and Hong Kong in particular is, for good reasons, constrained in the measures it can take by the stipulation in the Basic Law about the free flow of capital. But it is interesting to note that ideas about restrictions have been gaining in popularity among monetary authorities and regulators. This response is understandable in view of the difficult experience. But it is also regrettable, given the enormous benefits that international capital has brought to the region. The task ahead must be to devise a system which at all levels - international, regional and domestic - allows capital flows to continue to do their work while managing more effectively the risks that they carry with them.

Joseph Yam
21 October 1999

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Last revision date : 21 October 1999