President’s Desk

Public Lecture by President KV Kamath organized by Department of International Relations and Cooperation, Pretoria, Govt of South Africa

1-Dec-2015

Good Morning. Ladies and gentlemen. Thank you for inviting me. I am privileged to be here and look forward to this address. In many ways, in the last two decades, the sub -Sahara region has been one of the drivers of global growth. To put my thoughts in context, sub-Saharan GDP, from USD 400 billion in 2000, has quadrupled to USD 1.9 trillion in the span of 14 years and this engine will significantly contribute to the next leg of global growth as well. Africa’s achievements have been remarkable and the outlook remains ever so optimistic. This region is an integral part of south-south co-operation and has grown steadily and strongly in the past decade and a half. I would like to share my thoughts in the following perspective:

  • Rise of the South
  • Absorptive Capacity
  • Financial Inclusion
  • 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 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 is 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% and the Asian and the African region have been one of the biggest contributors to this growth. The reasons of this are twin fold. Firstly, sound economic policies and strategies, bolstered by good governance and secondly, reduction in armed conflicts and improved peace and stability in this region.

These two factors have propelled growth in the last two decades and helped Africa project itself as a strong investment candidate. Africa now is a growing investment destination for both the developed and emerging world, which has led to flows of USD 54 billion in 2014. The African region presents to the world a great opportunity for consolidation and rapid progress. A fast rising African entrepreneurial middle class, coupled with a demographic dividend and rich resource endowment, will act as a catalyst for growth and technological progress.

But challenges remain. The Growth has not rippled through the lowest strata of population. Poverty still remains at elevated levels, effecting close to 45% of the households in this region. More than 350 million men, women and children are grappling with less than $ 1.90 per day. And more so, most of the economies are vulnerable to the vagaries of the commodity cycle. Booming commodity prices over the last decade and loss of export competitiveness has led to manufacturing sector declines. There is a need to address capacity constraints in infrastructure which lead to high cost and now depressed commodity prices hurt. We understand that the cost of electricity in African region is significantly higher than the cost in South Asia, and this despite the fact the continent is bestowed with natural resources endowment. As a result of the above, the share of Africa in world trade has actually declined in last 50 years. Thus, the African region faces a dual challenge of unemployment and lack of manufacturing/infrastructure capabilities. It is imperative for the region to invest in its capabilities and grow. And for this momentum to continue, it is important for countries of the region to invest significantly in infrastructure and reduce dependence on commodity exports.

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 underpin holistic sustainable growth and provide a compendium of knowledge.

In the context of development, the One Belt One Road development corridor, which China has undertaken provides an important lesson. It will boost intraregional and commercial linkages, while developing infrastructure. This in turn will lead to better trade and spur economic growth during and after implementation. I understand there is enormous scope for regional co-operation in Africa, particularly in water and energy. These would open up access and result in lower cost and facilitate higher all round growth. And if we, countries of the south share resources, we will chart a new frontier of growth. Exciting technological developments, particularly in green infrastructure, now appear to be increasingly commercially viable. For example, a revolution in the cost of renewable energy would bring about a new tomorrow. As nations of the south urbanize, there is a huge opportunity to put together a whole host of green and smart technologies which will enable harnessing development at one end and ICT at other, and bring a new dawn to our people. As this vast infrastructure development rolls out, the act of investment will bring the first burst of economic growth and fruits of this investment will sustain the process.

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 and helps achieve the ambitious Sustainable Development Goals (SDGs) and African Union’s 2063 Agenda goals.

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 recognize 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 the 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. I understand MPesa also aims at an inclusive banking model. More such initiatives are needed.

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 a 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 also play an important role in sharing the vast pool of knowledge that they have collected over the years.

I now turn to our Africa Regional Center, which in due course, will be NDB’s face for the African continent. We will initially position this as our office, which will coordinate with countries of the region and help our understanding of opportunities. We would then work on developing projects and build project pipelines so that we can take forward our shared objectives. I am confident that there are exciting opportunities where one could work in this respect.

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.

I have heard and taken to heart that development cycles are more like a marathon than a sprint and there is a famous African proverb, which sums it well : “If you want to go fast- go alone, If you want to go far, go together.” We at NDB want to be part of this great African journey and walk with you.

Once again thank you for inviting me.