Need for countries to coordinate regulatory policies

COUNTRIES should coordinate counter cyclical regulatory policies to overcome high volatility in the global financial system, 2003 Nobel Prize Laureate for Economics Professor Robert Engle said.

Similar to that of counter cyclical monetary policies such as increasing interest rates when the economy is good, a regulatory-based one will disallow banks to take too many risks when the economy is good.

Engle said there is a lot of interest in this area around the world now in view of the current financial turmoil but implementing it would be another challenge.

"If all countries can coordinate this and adopt similar policies, like tell banks when it is taking too much risks, that would lower the volatility in the system but it has to be a global initiative," he said in a dialogue session organised by the Malaysian Institute of Economic Research (MIER) yesterday.

Engle said the current financial crisis no doubt has called for a lot of changes in governance and regulation but "it can't be too strict that we will lose the benefits that we have seen over the last decade due to liberalisation".

He pointed out that the financial system in the last 10 years has brought about benefits to the world economy like the reduction of world poverty, but unfortunately it took too many risks than what it could bear.

"The cause of this crisis is very complex ... the financial system set up for the world economy has turned out to be more fragile than we had expected but we have seen in the last decade extraordinary growth in most parts of the world like India, China, Russia and Brazil."

Speaking to the media later, Engle said Malaysia's proposition that Islamic finance should be looked upon as an alternative financing to the conventional one is good.

He said Islamic financial system is a very important part of the global economy "but I assume its best role is that of a cooperative one with the rest of the system".

He also said that so far, Asian economies have fared well in the current situation but next year would be hard as he believes that China would struggle too.

MIER executive director Datuk Dr Mohamed Ariff Abdul Kareem agreed that the Asian economies rely heavily on China.

If China's unemployment rate goes up, so will Malaysia's, he said, adding that MIER expects Malaysia's employment rate to rise to 4.5 per cent next year from the 3.5 per cent forecast this year.

Business Times- Roziana Hamsawi