Say No To Over-Regulation, Protectionism and Anti-Globalization

Don't Let the Economic Downturn Lead to Over-Regulation

Following is an edited report on statements made by a director (Tony Tan) of the Singapore Sovereign Wealth Funds:

There is a danger that politicians and policy makers will learn the wrong lessons from the current financial and economic crisis. This could lead to over-regulation in the developed world, and the consequence would be to stifle the healthy development and recovery of the financial system.

No doubt there has to be an evaluation of the financial systems. Governments will have to evaluate how they regulate and supervise the financial sector so as to prevent a recurrence of the current madness. The resultant costs could be high in terms of prosecution of erring key players, shareholder dilution and regulation.

In the emerging countries, on the other hand, there could be a delay in liberalising the financial markets because of fear of a repeat fall-out. For instance, securitisation (the practice of repackaging cash flow, such as income from mortgages, and selling it to investors) may be prevented from entering in these markets. But securitisation is still an important tool, even if it did contribute to the mortgage crisis.

But it is possible that regulators in the emerging countries would use the above excuse to re-think the pace of liberalisation.

Furthermore, the rising inequality amd stagnating real wages over the past decade have led to many people becming disenchanted with globalisation. The current environment of weaker growth and rising unemployment is likely to accentuate the trend towards protectionism.

To many people, it would seem that emerging markets are doing better economically and financially, even though the developing countries remain by absolute measures, still far behind the developed countries. This perception could create temsions especially if combined with a view that emerging economies are doing better because they are not being 'fair', such as through restrictive trade policies, weaker environmental regulations or currency management.

Financial institutions need more capital now, and an important source of such capital would be from the emerging market economies, through Sovereign Wealth Funds (SWF).

The new agreements on a set of Generally Accepted Principles and Practices for SWFs would help improve the understanding of SWFs as financially-oriented entities, allay protectionist fears and help to keep the investment climate open and stable.

It is mutually beneficial, if not essential, for developed and emerging countries to maintain an international regime that allows for the free flow of capital. Restrictions on investments would hurt both investors and recipients who would have to pay a higher cost for capital. It could also be part of a more pernicious trend that threatens the fundamentals of global prosperity offered by globalisation itself.