BOI - A Regional Perspective on Global Financial Issues

Ladies and Gentlemen,

In a way of a summary I would like to mention three of the points discussed in
our Session on "A Regional Perspective on Global Financial Issues" - As I
see them.

1. The background issue was: Prevention and management of financial
crises.  One general lesson may have been learned so far:

there is no substitute for proper policies implemented on the national level.
International institutions and cooperation can help by setting standards for
macro-economic management, formulating codes of good conduct for various
supervisory authorities, and organizing world-wide bulletin-boards where
comparable data monitor events in increasing number of countries. Domestic
policy makers may find it easier to adopt such norms-of-behaviour if they
know that they are part of a world-wide consensus, and that their
implementation is accompanied by IMF and world Bank surveillance.

On the other hand, all the ideas to devise new international financial facilities
to prevent, contain, better manage financial crises, did not take off. Industrial
countries in particular prefer to deal with the matter on a case by case basis.
They don’t want to commit themselves in advance, fearing, perhaps, moral
hazard effects; constrained, sometimes, by their own legislators; or, simply,
feeling that they have no reasonable way to anticipate likely events and tailor,
in advance, specific programs to deal with them.

Hence the onus is on the individual economy.

The second point is:

2. What can a given economy do to benefit from the global economy
and, at the same time, minimize the chances of financial crises?

One can offer three rules.

Rule No.1.

- Take the government out of business decisions:

  * Either directly by privatizing government corporations, making sure not to
     replace government ownership by private monopolies.

  * Or indirectly by lifting regulations that support a non-competitive behaviour
     in the market.

Governments should provide the legal framework, enforce property rights,
take care of social safety nets, put a lot of emphasis on upgrading education
and health standards, limit monopolistic behaviour, but avoid - as far as
possible - managing business corporations.

Rule No. 2.

Governments have a crucial role in macro-economic management. What we
mean by that is the following:

- Design macro-economic strategy to ensure price stability and fiscal
discipline, namely: low government debt and low, but equitable, tax burden.
We have many examples, including lately, that ignoring this basic tenet is a
prescription for financial crisis, due to loss of credibility in the system.

- Minimize customs and abolish non-tariff barriers, to be able to compete on
world markets, not only abroad but also at home. Changes in this regard
should not be abrupt but gradual. Implementing it gradually means also
having a publicly known time-table and a definition of the final destination.
This is necessary in order to leave a reasonable amount of time for the
required adjustment by the business sector, and render credibility to that
policy.

- Think carefully about your exchange rate regime. Your chances to get
foreign direct investment are probably greater if you don’t maintain exchange
controls. In this context I would like to take note of Mr. Yilmaz Akyus
conclusion that the autonomy of developing countries "in managing capital
flows… should not be constrained by international agreements on
capital-account convertibility" ("The Debate on the International Financial
Architecture", April 2000). However, if you don’t maintain exchange controls,
you probably need a flexible exchange rate regime. The conventional wisdom
now is that there is no optimal exchange rate regime; that more countries are
moving towards the floating end of the spectrum; but that currency board or
currency union are also legitimate options, depending on the circumstances
of each country. In a way, this is emphasized by Heiner Flassbeck who
critizises the one-size-fits-all approach to the determination of the exchange
rate regime ("Wanted: An International Exchange Rate Regime", March
2000).

- A special attention should be given to the need to avoid the explosive
combination of a fix exchange rate with large amounts of short-term foreign
debt. This case, among others, leads us to Rule No. 3.

Rule No. 3.

One of the important walls that a country can build to minimize the risks of a
financial crisis is strengthening the financial sector.  There is no need to
repeat here the recommendations of the Financial Stability Forum in its
"Report of the Working Group on Capital Flows" (March 2000). Not all of
them, by the way, were accepted by the speakers in our Session. I would like
to emphasize here just two elements:

First, the banking system should not be allowed to take excessive exchange
rate risk and should be directed not to let its customers to expose themselves
unduly to such a risk. Effective supervision in this regard is a must. Borrowing
abroad to invest in government domestic bonds, certainly if there is also a
maturity mismatch; taking short-term foreign currency loans to invest in
long-term real estate projects at home; tilting the loan portfolio towards
foreign currency borrowing to benefit from interest rate differentials - those
are just a few of the examples for exchange rate risk exposure. These are the
breeding nest for financial disasters.

Second, attention also should be paid to the structure of the financial services
industry. This is a long-term proposition but very relevant to the stability of the
financial system. It requires to make constant progress on two fronts:

- The promotion of a non-bank financial intermediation system, that will rely
on the capital market - one that should be nurtured;

- And improving the competitive structure of the banking system itself.

Time does not allow me to further elaborate here on these two points.

The third, and last, point:

3. Is there a regional solution?

In dealing with this question one should distinguish between trade and
financial issues. I will limit myself here to a few remarks on financial aspects
of regional cooperation in the context of crisis prevention and management:

- Attempts at regional cooperation have not been encouraging so far:

* The idea to create an Asian Monetary Fund, in the wake of the financial
    crisis in the region, did take off.

* The experience with the world Bank’s regional subsidiaries seems to be less
    satisfactory. than

* The jury is still out with its sentence on the experience of some Latin
    countries to collaborate with the U.S. on dollarization. American

- The experience of the European Union may indicate that one cannot base a
strategy to prevent, and efficiently manage, financial crises just by arranging
credit lines, or by agreeing on exchange of information, or by jointly
intervening in the foreign currency market. The degree of integration required,
encompass fiscal and public debt policies, very detailed directives regarding
all aspects of the working of the financial system, rules on cross-border
provision of financial services and one currency.

Hence, regional cooperation may be helpful, but it is certainly not the main
road for averting and treating financial crises. As a matter of fact, the
semblance of regional go-together may be sometimes harmful, as it raises
the risk of contagion.

We thus end up with our basic observation: there is no substitute to prudent
policies on the national level. International initiatives may be useful, but
certainly not enough.

Thank you