This article first appeared in Forum, The Edge Malaysia Weekly on October 9, 2017 - October 15, 2017
Open and integrated financial markets are under threat from political and economic challenges stemming in part from the growing backlash against globalisation and calls for protectionism in many countries. This backlash partly stems from increasing fragmentation with growth not evenly spread across the income spectrum, reflecting a widening inequality gap.
Today, we live in a world where the richest 1% is said to own more wealth than the rest of the population. Globalisation has also resulted in increased inequality within countries, which is particularly pronounced in some advanced economies. In contrast, one third of all food produced for human consumption is lost or wasted, with most wastage occurring in advanced markets. Further, we are also faced with challenges from climate change where the share of national GDP at risk from climate change is expected to exceed US$1.5 trillion (RM6.34 trillion) in 301 major cities (expected to account for two thirds of the world’s GDP) by 2025 .
There are also structural implications arising from technological progress and innovation on employment and job displacement which are very real. While automation has the potential to increase productivity and economic growth, it raises concerns on the implications to jobs, skills and wages.
Despite recent geopolitical outcomes, the pivot away from globalisation is very much a symptom of deeper rooted socioeconomic imbalances, rather than a root cause of its own. It has also been aggravated by the challenging external environment of heightened uncertainty, low growth and high debt.
New paradigms of globalisation
The important question for policymakers, regulators and market participants is not whether to accept or reject globalisation, but rather, how to ensure that global policymaking and regulation do not perpetuate fragmentation even further, and impose undue costs and disruption on the market. There needs to be much greater emphasis on bridging the divides and creating greater links to financial development to minimise the risk of further polarisation.
There is also a need to redefine the paradigms of globalisation towards more inclusive access to opportunities that transcend geographical and socio-economic boundaries, while ensuring optimal living standards. This includes strengthening the safety nets with effective savings and pension structures to ensure sustainability of our retirement systems against the backdrop of an ageing population.
Future economic and development goals must be premised on long-termism and sustainability, with an emphasis on environmental, social and governance factors. This is critical as we continue to cope with limited resources within a climate-impacted world, and as globalisation further impacts inclusivity and social inequalities.
Sustainable capitalism
A healthy financial system is vital for the global economy to function well. It is observed, however, that finance has, in recent years, gained a momentum of its own and has become somewhat detached from the real-world sectors, thereby outpacing growth in the real economy and often distorting the public’s trust and confidence in the financial system.
In order to make finance work for the real world, rapid financial proliferation should be balanced with a more democratised financial system to meet the needs of diversified stakeholders across different segments of society. It cannot be anchored solely on small but influential segments, be it the more advanced markets, larger companies and institutions or wealthy and elite individuals. One clear example is the disconnect between traditional financial systems and the younger generation, where structural inadequacies within the system have helped catalyse new forms of alternative financing and investments enabled by technology (crowdfunding, mobile payments and investments, and so on).
With its ability to provide long-term financing for business activity, innovation and infrastructure development, it is critical to have deep and interconnected capital markets that can safely and efficiently allocate investments to achieve these outcomes. Global challenges, such as climate change, require significant and longer-term investments, with the World Economic Forum estimating that an additional US$700 billion per annum is needed to provide for clean energy infrastructure, sustainable transport, energy efficiency and forestry. Due to the sheer scale and duration of financing required, capital markets have the appropriate mobilisation and risk diversification capacity to fulfil this demand.
Today, Malaysia is the largest sustainable and responsible investing (SRI) market in Asia with a 43% market share by virtue of its Islamic funds being recognised as SRI-compliant. In addition, Malaysia as a leading Islamic financial centre is optimally poised to drive the sustainability agenda further.
Further, Islamic finance, based on principles of equitable and participatory growth with emphasis on risk sharing, also plays an increasingly pivotal role in promoting sustainable finance. As Islamic finance transactions need to be supported by genuine economic activities, it is also therefore firmly linked to the real economy.
Globalisation in its current form is not a viable option, nor is fragmentation or permutations of it the solution to the challenges we face. What is required is a common set of minds to shift the global ecosystem to make the economy and financial system more inclusive and sustainable for all.
A world which incentivises short-term maximisation at the individual level over long-term optimisation at the aggregate level is not a world that produces sustainable outcomes for the present as well as the future generations.
Tan Sri Ranjit Ajit Singh is chairman of the Securities Commission Malaysia, vice-chairman of the board of the International Organisation of Securities Commissions (IOSCO) and chairman of IOSCO’s Growth and Emerging Markets Committee. This article contains excerpts from a speech delivered at the 2017 Salzburg Global Forum on Finance in a Changing World held in Austria.
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.