An expensive lesson from financial globalisation

It has almost become politically correct to think that globalisation is here to stay. It is good for trade and investment in terms of the net results, although there are bound to be problems along the way.

But many will feel disheartened by the latest episode in the downside of financial globalisation as Wall Street faces its biggest crisis since the 1923 crash. Of course, the financial sector has become global - acting as an efficient intermediary to channel savings to fund investments, especially in emerging economies. Just look at the recent success of China, India and Singapore. The latter relied on finance to build itself into a regional hub.

Lehman Brothers and American International Group - both now caught in the financial whirlpool - had determined roles in Thailand. Lehman was a risk-taker in the aftermath of the 1997 financial crisis. It used its financial clout to buy assets at fire-sale prices and reinvigorated them.

A much more significant player in Thailand is AIG, better known here as AIA. It is Thailand's biggest private life insurance institution, with hundreds of thousands of clients and policyholders. Its human resources training here is considered among the best, and it was very much part of the growth of the Thai insurance industry.

AIA also prides itself on being Asian, as it was founded in Shanghai. Its sponsorship of Manchester United Football Club was done for the benefit of its Asian clients more than those in other parts of the world. It also has considerable property and stock investment assets throughout Asia.

But it was not always plain sailing. AIA led the lobby for the opening of the Thai insurance market - at times causing bitter disputes between Thai and US negotiating authorities.

Globalisation is certainly a two-way street, but obviously there is no free lunch.

So, what can we learn from this latest financial crisis? The root cause lies in the US, particularly the subprime mortgage market and the housing market collapse. Lehman has filed for bankruptcy and AIA is in ICU, with possible Federal help.

There is policy consistency with the Lehman collapse but not with AIG, whose downfall would have wreaked havoc on the global financial system. The US government has tried now to step in. One cannot be cynical about the US role in the 1997 Thai financial crisis when Washington's consensus ruled and national governments were pressured to let the market ride, despite the consequences. The debate will rage on. Rescuing financial institutions is very much a matter of timing as well as principle.

But it is not just finance that we have to think of. Thailand's exports are now driven by many items that are produced from investment by multinationals. What happens in Detroit could affect the Thai auto industry. What happens at the headquarters of Seagate could hurt its plant here, and so on. The list goes on, from energy to food and other commodities.

It is probably time that global companies accelerated the process of shielding local operations from the negative impacts from headquarters, as part of risk management. Shareholders' diversification of local subsidiaries, listings on local stock markets and independent funding can be ways forward for a risk management strategy at the global level.

The result will be that your American or British shareholders will not make as much money, as they have to share this out with local investors, but you will be better protected from cross-border impacts. Globalisation has come full circle in finance. But we cannot sit still on automobiles, electrical appliances, hotels, steel, garments and other main players in the economy. The global risk has to be reduced to local risk. Local businesses have to be secure as they take on risk.