International Finance Forum 12th Annual Conference, Beijing
Ladies and gentlemen, President Jiang Jianqing – thank you so much for your kind invitation. I am privileged to be here and look forward to this luncheon address. This forum has been doing commendable work in bringing together thought leadership and thought leaders. This year’s conference reinforces this, with the theme “New Drivers for Global Economic Growth”, which is indeed topical and timely. Keeping with the theme, let me put few a thoughts in context:
- The rise of the South
- Absorptive capacity
- Development corridors
- Financial alternatives and
- Technological shifts
It has been 7 years since the global economic crisis, and the global recovery still looks fragile. Even with unprecedented liquidity, the developed world is still struggling to cope up with the legacy of high debt and high unemployment. There is uncertainty as to what the next steps of quantitative tightening would do: both for the developed world and the developing world. With all this around us, countries of the South continue to be the beacon of hope and drivers of this global recovery. In fact 75% of the increase in world GDP growth in PPP terms, since 2009, has been contributed by Emerging Markets. Clearly, Emerging markets have spearheaded global recovery post the financial crisis. This increased importance is symbolic of the changing times we live in, with a shift in the geo-economic power to the global south. I believe South-South Cooperation’s now poised to supplement North-South flows, not only financial flows but more importantly knowledge flows. It is a partnership among equals, and builds itself on a healthy exchange of best practices in cooperation amongst governments and the private sector.
Today, 75% of the world resources and about 86% of the world population is home to the Emerging markets. And for the last two decades, the share of Emerging Markets in the world GPD has increased from 36% to 53%. A large part of this has come from China. In absolute terms, China and India now contribute more to global growth than the Euro area and US put together: about USD 850 billion annually compared to USD 720 billion at the current rates of growth. There are recent talks about a slowdown in Emerging markets but a slowdown in Emerging markets is not the same as the developed world. For example, a slowdown in China means going from 10% growth rate to 7%, while a 2% slowdown implies a full blown recession for many developed economies. In these turbulent times, it is imperative for nations of the south to keep re-inventing themselves, continue with their development efforts, ramp up their public investments in infrastructure and continue to build absorptive capacities.
Recent reports suggest that developing countries would require additional spending of close to USD 1 trillion a year for the next two decades, to meet their infrastructure requirements. No single set of institutions can meet these requirements. There is also a concern whether the recipient countries, particularly the poorest ones, have sufficient structural and institutional capacity to absorb funding. Thus development of absorptive capacity is also critical for sustainable development and therefore capacity building should be at the forefront and should be leading and not lagging our infrastructure needs. A good example of how to do this is the Chinese development model. In the last three decades, China has grown at an average of over 10%, created more than 600 million jobs and lifted more than half a billion people out of poverty . We need to understand how China did this and look at its structured approach. Four key elements underpin this story:
- Firstly, investments in agriculture, animal husbandry, fisheries, water and flood management.
- Secondly, development of massive infrastructure.
- Thirdly, the development of manufacturing and industry.
- And fourthly, the development of the services sector, climate and environment
And while all this was done, the recognition that one needs to ensure that environmental and social issues are kept in context. These to me underpins holistic sustainable growth and provides a compendium of knowledge
Keeping an eye on capacity requirements for the future, China is initiating the One Belt One Road Development Corridor. This plan will provide impetus to growth and channel investment into China’s underdeveloped inland western provinces on the back of trans-national networks and interconnectivity with Europe and the Middle East. It will boost intra-regional commercial and financial linkages and develop infrastructure capacity along the route. This infrastructure spend will not only promote internationalisation, but also foster trade among the countries. Most importantly, this will spur economic growth, both during and after implementation
Therefore it is important that this next chapter of development sets in motion economic growth – not just for the few at the top, but inclusive and sustainable growth, growth that lifts the fortunes of many.
Current financing and investment patterns are inadequate in meeting investment needs. Private international capital flows are not only volatile, they are also insufficient in volume and maturity to fund sustainable development, which typically requires long-term investment. Multilateral Development Banks (MDBs) can play a pivotal role in meeting these requirements. While the annual resource commitment from MDBs has gone up from USD 45 billion to over USD 100 billion over a 10 year period, it is still insufficient to meet the infrastructure development investment of over USD 1 trillion a year. There is therefore a need for MDBs to reinvent themselves and introduce innovative instruments – like guarantee structures, asset securitization, derivative arrangements to hedge risk, as also promote reinsurance opportunities among financial participants. There is an additional need for MDBs to partner with Central Banks to create a platform for currency swap arrangements between developing countries’ currencies. There is a growing risk emanating from the fact that most of their external debt is denominated in hard currencies with their balance sheets vulnerable to currency volatility, in a world where the actions of a few can impact many. Thus, co-ordination and co-operation between financial participants would be critical.
I now move on to financial inclusion. In the financial market place substantial shifts have taken place in technology. From an era of branch banking to mobile banking to contact-less banking, technology shifts have changed the paradigm of the banking business. Technological advancements have been widespread and comprehensive, extending reach, while lowering cost. We should recognise these shifts, understand that the future lies with these technologies and align our processes to leverage these advancements. These shifts provide for a completely different approach to inclusive banking. Take the example of Aadhar – a unique identification card for to citizens of India, which is based on their biometric identification. Aadhar will supplement financial inclusion, subsidy reduction efforts of the government and significantly reduce leakages in subsidy transfers. With the implementation of Aadhar, 190 million bank accounts have been opened, banking the unbanked, within a short span of one year. The Government plans to offer access to funding, pension, insurance and medical benefits through Aadhar. This is a scalable, replicable example of how technology advancements can lead to widespread financial inclusion while eliminating leakages. Financial inclusion needs to be supplemented by social inclusion, health, education and skilling.
Let me lastly turn to the role of MDBs. To be successful, MDBs need to be relevant, lead the structural reform agenda and go where others do not. It is imperative that MDBs demonstrate greater risk appetite and avoid risk aversion. We are living in times with record low interest rates and ample global liquidity. MDBs should seize this opportunity and deliberate on how we could increase the funding base. For example, could MDBs think of operating at one notch lower rating which could help raise substantial resources at a very low incremental cost, without in any way impairing their financial health. MDBs can play an important role in sharing the vast pool of knowledge that they have collected over the years.
To conclude, we at the NDB, will listen, learn, collaborate and innovate. A significant aspect of this path would be to establish global, regional and local partnership with the new as well as established MDBs and with market participants, so that we can leverage knowledge, capacity and financial resources. We are conscious that we may not be able to be present in all areas of the agenda, but we will endeavor to be in those, which we believe we would be capable of adding value.
Once again thank you for inviting me.