Chartered Institute of Management Accountants

The Impact of the Current Economic Crisis on Globalisation

Tan Sri Datuk Rajandram ChellapahExecutive Deputy ChairmanRating Agency Malaysia

CIMA WORLD CONFERENCE 2009

THE IMPACT OF THE THE IMPACT OF THE CURRENT ECONOMIC CURRENT ECONOMIC

CRISIS ON CRISIS ON GLOBALISATIONGLOBALISATION

Tan Sri Datuk C. RajandramExecutive Deputy Chairman

RAM Holdings Berhad

14th July, 2009

DISCUSSION TOPICS

Globalisation: What It Means and Implications

PART 1

DEFINITION

Business and economic perspectives:

“Globalisation has changed us into a company that searches the world, not just to sell or to source, but to find intellectual capital - the world's best talents and greatest ideas.”

~Jack Welch, world-renowned business and motivational speaker

Globalisation "is the closer integration of the countries and peoples of the world ...brought about by the enormous reduction of costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge, and people across borders."

~Joseph Stiglitz, economist and 2001 Nobel Prize Winner, author of Globalisation and Its Discontents

Interesting take on globalization as a ‘flat world’ as it levels the playing field:

“the dawning (of a) 'flat world' is a jungle pitting 'lions' and 'gazelles,' where 'economic stability is not going to be a feature' and 'the weak will fall farther behind.”

~Thomas Friedman, award-winning New York Times columnist and author of The World is Flat: A Brief History of the Twenty-First Century

Not a new concept:

“Human societies have always interacted intensely, through trade, inter-marriage, war, conquests, plunder, the transmission of ideas and technological diffusion. The only thing special about our era is that we interact more intensely and more quickly than ever before, across the globe.”

~ Martin Wolf, chief economist at Financial Times

IMPLICATIONSPositive effects:

Increase flow of goods and services, capital and labor across borders, leading to higher growth and productivity through international specialization of productionFaster diffusion and adoption of new technologiesIncrease flow of information and learning/knowledge spillovers through ‘demonstration’ effectsImprove governance - reduced corruption and stronger institutions through openness in trade and investment

Negative effects:Encourages trends such as outsourcing that may have negative consequences such as retrenchments and ‘hollowing out’Benefit a few (rich countries); widening the gap between the poor and the rich nationsOver-emphasize development at the expense of environment degradation and over-exploitation

PART 2

Current Economic Crisis:

Causes and Consequences

CAUSESThe current global economic crisis started with the bursting of the housing bubble in US in 2007. While the underlying causes continue to be researched and debated, the proximate causes include:

Macroeconomic causesGlobal imbalance caused by under-savings and over-consumption in the US and excessive savings in China and other exporting Asian economies.Monetary policy failure arising from too low interest rate regime in the US and other European economies that stimulated the lending boom.Housing and credit market bubbles in US and other European countries.

Microeconomic causesExcessive lending and imprudent lending practices by banks and mortgage institutions.Excessive leverage by home owners, financial institutions, and investors including hedge funds.Greed and excessive risk taking by sub-prime borrowers, financiers and intermediaries, including investment banks.Financial engineering and innovations that de-coupled risk of underlying assets from the financing instrument (collaterised debt obligations and credit derivatives)Over-reliance by rating agencies and investment banks on quantitative models in evaluating risks.Misaligned incentives that encouraged excessive risk taking and greed in the housing and financial markets.Regulatory failure

CONSEQUENCESUnited States

Housing market bubble burst in 2007

Sub-prime industry began to collapse with more than 25 specialist subprime lenders going bankrupt

Major banks filed for bankruptcy, including Lehman Brothers and Washington Mutual. Multinational companies also suffered huge losses, with some currently filing for bankruptcy (GM)

Unemployment rate increased from 8.9% to 9.4% (from April to May 2009)

Source: Robert J. Schiller, Irrational Exuberance, Princeton University Press, 2005.

GlobalGlobal economy is expected to contract by 1.3% this year, the first since the WWII according to the IMF.

Synchronised downturn in the developed economies resulting in a sharp plunge in world trade.

UN figures indicate that global FDI will contract 30 to 40 % this year.

Unemployment is on the rise in both crisis and non-crisis economies.

Major stock exchanges suffered huge losses.

Use of public money (government debt) to bail-out private firms (printing of money).

CONSEQUENCES

PART 3

Implications for Globalisation:

Back to basics:

Preventing market excesses and human

failures

IMPLICATIONS

The world has become so integrated; the US subprime mortgage crisis has staggering consequences on a global scale.

David Crane, an award-winning Canadian journalist for YaleGlobal suggests that US export of complicated financial instruments, with their hidden risks, rivals Chinese exports of toys with lead paint.

Since the impact of the current economic globalisation is exacerbated by the event of globalisation, how does this augur for globalisation in the future?

Should globalization be reined in? Stopped? Stalled?

Two schools of argument: Yes and No

Yes: Significant impact on business environments which would be characterised by lower cross-border capital flows, tighter regulation and less risk-taking

No: Current economic crisis has integrated countries more than ever

~ Example: China has adopted a 4-trillion yuan stimulus package to spur the Chinese economy, by giving handouts to the farmers, entrepreneurs to aid businesses. This has also encouraged other countries to join with China for investment and partnerships

Current economic crisis has re-shaped the path of globalisation – free markets not a panacea, neither is heavy-handed government intervention.

While some measures of protectionism may be adopted and stricter regulations adhered to, countries are brought together to combat the current economic crisis and seek a more stable global financial architecture.

Greater collaboration in a multi-polar global economy.

The key is to prevent market excesses and human failures, as markets cannot be solely relied upon to correct supply-demand imbalances and price bubbles.

PART 4

Key Lessons: Reshaping business

policies and strategies and the

role of professional bodies

RESHAPING BUSINESS POLICIES

Need a new way to handle businesses: innovation is the key

Cost-cutting and restructuring are only 1st steps

Need real innovation that drives jobs and create economic growth. Every business, large or small, needs to think of itself as a "new venture“ - rethink offerings, markets, business processes, and organizational structure and processes; employing new dimensions for innovation: technology, off-shoring and outsourcing.

Opportunities in exploring non-traditional export markets and new sources of growth

New globalisation parameters:

Greater regulatory oversight especially those pertaining to ‘too-big-too-fail’ entities

New corporate governance models and business ethics to curb corporate and individual greed and excessive risk-taking.

ROLE OF PROFESSIONAL BODIES

Key role in restoring public confidence in financial markets, banking, corporate reporting and industry self-regulation.

A greater need for fine-tuning of regulations as well as a politically-free and transparent accounting standards

Shared responsibility to restore public confidence among policymakers, accounting bodies, lawyers, enforcement and regulatory authorities as well as credit rating agencies.

Though partly-held responsible for the US subprime mortgage crisis, these agencies should work together with lawmakers and regulators to ensure better transparency regarding the evaluation of financial products and avoidance of conflict-of-interests situations.

Chartered Institute of Management Accountants