International Economic
Overview
Being a small and open economy, developments in the international economic arena and general market forces will have an influence on the direction of the Malaysian economy. International markets are further linked through advancement in globalisation, improvement in telecommunications and resources allocation flows around the world.
Objectives
– Provide an understanding of the process of globalisation.
– December the inter-relationship of international economies and markets, and
– Illustrate the impact of globalisation on the Malaysian economy.
International business and international factors
Over the last 30 years, the world economic system has undergone significant and profound changes. These changes were brought about by the deregulation, expansion and opening up of world economies. This can be seen from the following developments.
– the development of interest and exchange rates.
– removal of foreign exchange controls, and
– the growth of the fund management industry (which seeks to maximise the return to its stakeholders by seeking the best returns on a global basis.
These changes, combined with rapid advancements in information technology, have led to a massive increase in global capital flows.
The deregulation of international markets was driven by a continued increase in the speed and volume of information flow. Malaysia has been a part of this process, with the initial floating of that ringgit exchange rate in 1979, followed by a deregulation of its interest rates. The Malaysian equity market is influenced by world equity markets. As a result, overseas influences play a significant role in domestic market trends. However, they are not all encompassing as the Malaysian economy reacts to a mix of domestic and international influences.
Expansion of international markets
The international globalisation of markets has led to a rapid expansion of financial markets in foreign exchange. Every 3 years, the Bank for International Settlements (BS) conducts a survey of the global foreign exchange market.
Another factor contributing to the growth of the global foreign exchange markets is the development of 24-hour trading in foreign exchange markets. Between the early morning trade in Australia and New Zealand markets and the late evening in American West Coast, foreign exchange trading is carried out non-stop around the world. Through the 24-hour trading market, positions can be passed around the world. Most significant players in the foreign exchange global markets have trading desks located in different countries around the world so that their positions can be monitored around the clock and trading opportunities are maximised. Typically, this would include operations in the Asian time zone (Sydney, Melbourne, Tokyo, Hong Kong, Singapore and Auckland), the European time zone (mostly London, but also Frankfurt, Zurich and Paris) and North America (New York, Chicago, Los Angeles and San Francisco.
The world expansion of the foreign exchange markets has far outpaced the expansion of world trade, accompanied by a significant increase in cross border investment flows. These investment flows comprise activities by the global fund management industry and speculative activity by international hedge funds. Since the Asia Pacific markets are the first to open after the closing of the North American markets, these markets are the first to open after the closing of the North American markets, these markets will be influenced by developments in the United States of America (US) markets, especially with their strong trading links to the US and the overall importance of the US market for global markets.
Inter-relationship of markets
Markets have not only grown in size and volume of transactions but have become more inter-related. The movement towards free trade has resulted in the world economies becoming more open, with an increase in both export and imports. This relationship has increased the international linkage between economic growth and inflation. As a general observation, as financial markets become more highly linked, events over the last decade have seen an increase in the co-movement of financial markets around the world.
The benefits and risks of globalisation
Globalisation is normally defined as a free flow of trade, investment and funds across borders. In short, globalisation requires that there be no constrains, no limitations and no hindrances to these flows and the world is deemed to be borderless.
In some ways, cross-border flows of capital have helped to promote optimal resource allocation in individual countries and regional growth and development. The availability of external funding has allowed domestic investments to exceed domestic savings. Given the enormous financing requirements of development projects in South East Asian economies and China, capital will have to be mobilised from both domestic and external sources.
The movement towards globalisation has its risks. Greater financial integration and increasing openness have led to instability of the financial system (characterised by increase volatility), increase risk-taking by financial institutions and pressure on international payment and settlement systems.
International influences on Malaysia economy
Malaysia’s economy inter-linkages with the rest of the world
Malaysia promoted economic linkages with the rest of the world as a means to foster greater prosperity throughout the world. As a part of the international economic system, the Malaysian economy has many linkages to the external trading environment. These linkages are via economic, trade, financial and policy interactions.
During the past two decades, the internationalisation of the Malaysia economy has contributed to robust growth in export volumes. Prior to the imposition of the ringgit peg and capital controls in 1998, Malaysia had relaxed its foreign exchange control requirements in consonance with global financial reform and economic liberalisation undertaken in other developing countries. Interest and exchange rates were allowed to be more market determined, while the public sector was restructured to facilitate a more vigorous private sector participation in the economy. Market forces were allowed to function smoothly, as the players were generally small with no one player exerting undue influence on the outcome.
Another indication of this important linkage was the trend towards globalisation of domestic financial markets. Consequently, international developments were transmitted rapidly to the Malaysian economy, often through the investment decisions of international fund managers. Recent volatility in the global equity markets has been quickly translated into volatility of the Malaysian market.
The credit assessments and commentaries of the major international ratings agencies also provided another important link. The two major agencies, Moody’s Investors Service and Standard & Poors, regularly appraise the economic and financial performance of governments, as well as major corporations. The reports of these agencies often form the basis for investment and business decisions by international banks and business groups.
Malaysia’s membership of international organisations.
On a formal basis, the Malaysian economy is linked to the international environment through its membership and association with a number of global economic and policy institutions. Malaysia is a member of:
– The international Monetary Fund (IMF), which was created to:
(a) promote international monetary co-operation;
(b) facilitate the expansion and balanced growth of international trade;
(c) promote exchange stability;
(d) assist in the establishment of a multilateral system of payments;
(e) make its general resources, under adequate safeguards, temporarily available to its members experiencing balance of payments difficulties; and
(f) shorten the duration and lessen the degree of disequilibrium in the international balances of payments of its 182 members.
– The World Trade Organisation (WTO), which is the only global international organisation dealing with the rules of trade between nations. At the heart of the WTO are the WTO agreements, which are negotiated and signed by the bulk of the world’s trading nations and ratified in their participants. The goal is to help producers of goods and services, exporters and importers in their businesses by opening markets through the lowering of tariffs.
– The World Bank, which is the world’s largest source of development assistance, providing nearly US$30 billion in loans annually to its member countries. The world Bank uses its financial resources, its highly trained staff and its extensive knowledge base to individually help each developing country onto a path of stable, sustainable and equitable growth.
– The Bank for International Settlements (BIS), which is an international organisation fostering the co-operation of the central banks and international financial institutions. The BIS does not accept deposits from or generally provide financial services to private individuals or corporate entities. The BIS functions as a:
(a) forum for international monetary and financial co-operation. The BIS plays the role of a facilitator and host of meetings of central bankers and provides facilities for various committees, both standing and ad hoc, hence making a significant contribution to the promotion of international financial stability.
(b) bank for central banks, providing a broad range of financial services for managing their external reserves.
(c) centre for monetary and economic research, contributing to a better understanding of international financial markets and the interaction of national monetary and financial policies; and
(d) agent or trustee, facilitating the implementation of various international financial agreements.
In summary, the globalisation of the world economy and integration of financial markets have become key forces shaping the outcome of Malaysian financial markets.
Exercise:
1. Which of the following is NOT a risk globalisation?
A. Financial instability
B. Integration of markets
C. Increase risk-taking by financial institutions
D. Pressures on international payment and settlement systems
2. Which of the following statements is FALSE?
A. Reports of credit rating agencies do not affect investment decisions
B. Malaysia’s equity market is considered to the performance of regional bourses.
C. Malaysia is highly affected by external developments
D. Cross-border capital flows have benefited resource allocation.
3. Which of the following statement is TRUE about the functions of the International Monetary Fund IMF)?
A. to promote international monetary co-operation and to facilitate the expansion and balanced growth of international trade
B. to promote exchange stability and to assist in the establishment of a multilateral system of payments
C. make its general resources, under adequate safeguards, temporarily available to its members experiencing balance of payments difficulties and shorten the duration and lessen the degree of disequilibrium in the international balances of payments of its 182 members.
D. All of the above
4. On a formal basis, the Malaysian economy is linked to the international environment through its membership and association with a number of global economic and policy institutions. Malaysia is a member of the following organisations. Which of the statements is FALSE.
A. The international Monetary Fund (IMF), which was created to (a) promote international monetary co-operation, (b) facilitate the expansion and balanced growth of international trade, (c) promote exchange stability, (d) assist in the establishment of a multilateral system of payments, (e) make its general resources, under adequate safeguards, temporarily available to its members experiencing balance of payments difficulties and (f) shorten the duration and lessen the degree of disequilibrium in the international balances of payments of its 182 members.
B. The World Trade Organisation (WTO), which is the only global international organisation dealing with the rules of trade between nations. At the heart of the WTO are the WTO agreements, which are negotiated and signed by the bulk of the world’s trading nations and ratified in their participants. The goal is to help producers of goods and services, exporters and importers in their businesses by opening markets through the lowering of tariffs.
C. The World Bank, which is the world’s largest source of development assistance, providing nearly US$30 billion in loans annually to its member countries. The world Bank uses its financial resources, its highly trained staff and its extensive knowledge base to individually help each developing country onto a path of stable, sustainable and equitable growth.
D. The Bank for International Settlements (BIS), which is an international organisation fostering the co-operation of the central banks and international financial institutions. The BIS does accept deposits from or generally provide financial services to private individuals or corporate entities.
Note: Actually, the BIS does NOT accept deposits from or generally provide financial services to private individuals or corporate entities.