Market abuse rules before financial liberalization

Malaysia's move to further liberalize its financial markets is contingent upon the introduction of mechanisms to protect developing countries from financial market abuses and excesses. This view was expressed by Malaysian Finance Minister, Anwar Ibrahim at the World Bank/IMF meeting in Hong Kong and echoes similar concerns made by him at the ASEM meeting in Bangkok.

by Martin Khor

PENANG, MALAYSIA: Malaysia has insisted that mechanisms be put in place to protect developing countries from financial market abuses and excesses as a condition for further financial market liberalization.

"The pace and speed of liberalization is contingent on the mechanisms being put in place," said Malaysia's Finance Minister and Deputy Prime Minister, Mr Anwar Ibrahim, on 24 September. According to a report in the Malaysian newspaper "The Star", Anwar stood firm on this issue on 24 September, in his bilateral meeting with WTO Director-General, Renato Ruggiero in Hong Kong (where the World Bank/IMF annual meeting was being held).

In the third week of September in Geneva, the WTO press office had said that Ruggiero at Hong Kong would act as a "facilitator" to promote a financial services deal at the WTO, and would listen to concerns of individual country ministers.

A mechanism to protect developing countries

During a press briefing in Hong Kong, Anwar said: "I explained to him (Ruggiero) that we will have to do it (liberalization) in stages, mindful of the repercussions and ramifications of any change done in a drastic manner."

"If they want us to be more positive and supportive of these measures, it should be contingent on their (WTO's) preparedness to introduce mechanisms to protect against abuse and excesses of the system. I don't think it is something odd in the market place. Even in Europe and the US you have such mechanisms in place."

Anwar said, Ruggiero had promised to consider this possibility and would raise the matter with European ministers for further discussion. "We aren't talking at cross purposes because generally we are supportive of the principle of financial liberalization, but there should be adequate understanding of the complexities of each country," the Malaysian Finance Minister stressed.

Referring to the volatility of currency and stock market levels and the financial turmoil in the South-East Asian region, Anwar added: "What we suggest and require is an undertaking by the WTO and other members of the institution to have a mechanism put in place to protect (developing countries) because we have seen the excesses and we have also heard the expressions of concern by many of the Ministers not only of this region but also other regions.... They have now studied the problem and see that it can be devastating to the economy if not well handled."

Anwar's comments came in the wake of pessimism expressed by US Treasury Secretary Robert Rubin, who cited the financial crisis in the region as a stumbling block to financial market liberalization.

Anwar said: "At least he (Rubin) is now able to grasp the sentiments of many of us in the region, of those who have been very supportive, taking the lead towards liberalization but who also sense difficulties because the international institutions and industrialised economies are not responding quite speedily."

"So I think the pace and speed of liberalization is contingent on the mechanisms being put in place. Secretary Rubin is aware of this. I do not want to say we are pessimistic because we still have time...If we can devise a mechanism that is quite acceptable, then there is no reason why we should defer or delay any decisions."

Anwar added, he had in confidence suggested one or two specific measures which would have to be reformulated and submitted for discussions with his colleagues in the region.

[According to other reports, Ruggiero told reporters in Hong Kong on 25 September, that the WTO financial services talks were "on track" despite the South-East Asia turmoil, and practically all the governments he had talked with had a "strong will to participate". Seven new governments had promised him they would present offers at Geneva, Ruggiero said, adding that he was "encouraged" by his discussions with Latin American and Asian ministers, including with Malaysian Finance Minister, Anwar Ibrahim. "The influence of this (Asian currency crisis) is more a perception than a reality," Ruggiero is reported as adding.]

A clear set of rules needed

[Trade observers in Geneva, who have been following the financial services talks, and who are supportive of the concerns of the Asians and other developing countries, doubted however, that the IMF could, or would, put in place the kind of safeguards that Anwar has mentioned. The IMF and its management, like the World Bank, are there to look after the interests of the United States, and its ideology does not permit symmetric obligations on the private sector. Nor will WTO do so, unless the developing countries assert themselves and refuse to agree to a new deal or roll over the talks, as Ruggiero and the EC might cook up as on the last occasion, using the argument that without some such deal the US administration's hands would be weakened for getting fast-track authority, and a new round of negotiations in 2000 to include agriculture and so on.]

[Until and unless clear rules are written into the GATS agreement, and that on the financial sector, creating obligations on home countries and their bank and security supervisors to deal with operations of their firms and nationals abroad (and fully share information with the host countries), crises such as that of Mexico, and now in ASEAN will recur, and countries and their ordinary people will continue to pay the price for rescue packages, with conditionalities, mounted by IMF if the crisis affects the majors and their firms, trade observers said.]

Earlier on 24 September, speaking at the World Bank/IMF meeting, Anwar proposed two initiatives for greater information disclosure and international supervision of world financial markets to prevent destabilizing effects.

The IMF should create rules to regulate market players as well (and not only governments), whilst a framework should be set up to enable more information disclosure on leveraged funds as well as arrangements for the supervisors in the home countries of leveraged funds.

He said work on the IMF's Special Data Dissemination Standards (SDDS) must be expanded to enhance transparency of activities of all market players. For example, the IMF could promote international coordination in the supervision of financial markets through establishing a global trade information system to allow the authorities to monitor trading activities in the international market place.

A regulatory framework

The IMF could also devise a framework to enable countries to adapt to and deal more effectively with market excesses associated with destabilizing capital flows.

It was not sufficient that only member countries abide by IMF advice and observe international rules, said Anwar. "Similar rules should also be designed to encourage capital market participants to contribute towards the efficient functioning of the market mechanism."

This framework, he added, could include rules and principles on ethical and professional standards, stronger disclosure requirements and regular contacts between the managers of leveraged funds and banking supervisors.

"This framework should be facilitated by agreement on the provision of information on leveraged fund activities and arrangements for the home country's supervisors on the activities of these funds."

Anwar's comments and proposals at the World Bank/IMF meetings in Hong Kong echoed similar concerns he expressed during the Asia-Europe Finance Ministers' meeting in Bangkok.

According to a report in the Malaysian daily, Business Times, Anwar on 19 September, told reporters in Bangkok that developing countries may turn their backs on financial services liberalization unless there is a mechanism or regulatory framework to protect them against excesses and abuse in the international financial system.

"It will be easier to go along the path of liberalization if emerging economies feel they are protected and not cheated, which is our immediate concern."

He reiterated that the WTO-sponsored liberalization may not get the support of developing countries if such a mechanism is not created.

In his address to the Bangkok meeting, Anwar said, Asia was confronted with a predicament with regards to liberalization. Asia, he said, is asking itself this question: "Should Asian countries rush forward to liberalize and reap all the benefits of globalization and integration while at the same time face the risk of external shocks and predatory speculative attacks or slow down their liberalization while building their defence mechanisms to enable them to withstand future attacks?"

While developing countries have been receptive to various macro-economic stabilization measures advocated by multilateral institutions, due to varying domestic complexities, each should be allowed to determine its own pace of reform and liberalization.

"But the recent experience in South-East Asia, which has also spread to the entire East Asia and Australasia, will make the pace of liberalization contingent upon the international environment," he added.

He said that developing countries have legitimate reasons in wanting to ensure that their liberalization measures should not expose their economies to destabilizing forces. A mechanism for such protection can be handled by multilateral institutions such as the IMF.

Anwar told reporters he had also "appealed" to his Asian counterparts on the need for such a framework which protects emerging economies as they undertake liberalization measures.

He said the Asian countries were "rather receptive" but that "the Europeans who have been pushing for further liberalization seem quite muted... hopefully they are seriously considering this."

Anwar added, the problem was partly due to the fact that countries such as Malaysia, Indonesia and Thailand were under "intense pressure" to liberalize without adequate infrastructure, supervision and control.

On whether this may be a condition by developing countries before they agree to further liberalization under the WTO, he said: "I won't say conditional but definitely any progress towards further liberalization in financial services must be together with a mechanism put in place to protect against abuses in the system. Otherwise it is one-sided. The rich guys tell us what to do and we have to be obedient and silent."

On whether WTO's liberalization package will be jeopardized if developed countries do not pay heed to the request for such a mechanism, Anwar said: "If we accept the view that democracy can only function if there is rule of law, why is it so difficult to accept that a free market must also be based on established rules? We cannot assume that there is a totally free and liberal regime without the rule of law. This is our concern and we have suggested and requested for indulgence from our European counterparts."

Guidelines for hedge funds and investment houses

Asked to elaborate on the mechanism, he said the IMF had introduced guidelines for prudential regulations and supervision of banks such as the 15-point programme but has none for hedge funds and investment houses. Unlike the banking sector, which has to follow rules on limits on lending and acceptable levels of commission, for hedge funds any commission is considered reasonable regardless of how excessive or risky they are.

It would be helpful if some guidelines are developed which cover acceptable ethical standards that will prevent excessive speculation and also control irrational behaviour of fund managers who tend to take excessive risks to the detriment of countries.

He said, the impact from speculators could be pervasive and detrimental to the entire economy of an affected country. For example, while it may be fair to say Thailand's fundamentals were the cause of its currency woes, this is also not entirely true as hedge funds have worsened the country's instability, and they thus need to be regulated.

The fact that a country has weak economic fundamentals does not give the right to speculators to exploit the weakness in the system and abuse it at the cost of the country's economy and welfare of the masses, Anwar remarked. He expressed confidence that the IMF may consider coming up with such a regulatory framework for hedge funds and investment houses. (SUNS4062)

(Third World Economics No. 170, 1-15 October 1997)

Martin Khor is the Director of Third World Network.The above article first appeared in the South-North Development Monitor (SUNS)