Jean-Claude Trichet: The growing importance of emerging economies in
the globalised world and its implications for the international financial
architecture
Speech by Mr Jean-Claude Trichet, President of the European Central Bank, at the Tenth L
K Jha Memorial Lecture, organised by the Reserve Bank of India, Mumbai, 26 November
2007.
* * *
I. Introduction
Ladies and gentlemen,
It is a great honour for me to give this lecture to pay tribute to the memory of the late Shri
Lakshmi Kant Jha.
L.K. Jha was a man of many talents: a distinguished administrator, a diplomat and an
eminent economist. He was the first Chairman of the General Agreement on Tariffs and
Trade in the late 1950s and Governor of the Reserve Bank of India in the late 1960s. He held
several important positions in the Government of India. In the course of his career, L. K. Jha
also became a respected member of the Brandt Commission. As some of you perhaps
remember, this commission advocated a new world economic order in which the developing
countries, including India, would have a more equitable share. L. K. Jha sadly left us about
20 years ago. However, if he and other members of the Brandt Commission were to look at
the world economy today, they would be probably surprised to see how much it has
changed. And one of the most important of these changes is precisely the growing share of
the rapidly developing economies, which we now term the emerging markets, in the global
economy. India represents one striking example of this success. Together with other
emerging markets, India is playing a crucial role in the process of globalisation of the world
we live in.
Some might think that this is a new phenomenon. It is not. India has been at the core of
globalisation since its very outset. Let us just remember how it all started. Globalisation did
not start 20 years ago, when capital controls around the world began to be lifted. It did not
start 50 years ago, when multilateral discussions on trade were launched. Nor did
globalisation start 150 years ago, with the industrial revolution. Nor did it start 600 years ago,
with the voyage of Christopher Columbus to America. Of course, this voyage marked the
linking of two continents, Europe and America. But there is one thing which we tend to forget.
Christopher Columbus did not want to travel to America. He wanted to reach India! His
ambition was not to discover a new continent. It was to open an alternative route to India
using knowledge about the spherical nature of the earth to sail directly west across the
"Ocean Sea", i.e. the Atlantic. India was part of the globalisation process from its very
historical outset, as much as it is part of it today.
In this lecture, I would like to share some of my thoughts on the growing importance of India
and other emerging economies in the globalised world. This group of economies is not easy
to define, I admit. The term "emerging markets" was coined by the World Bank more than a
quarter of a century ago, but it only started to become popular in the mid-1990s.1 From a
handful of such economies, mostly in East Asia, the circle has gradually expanded to include
several countries in Latin America, central and eastern Europe, and the Middle East, as well
as a few countries in Africa.2 India, alongside Brazil, China and Russia, is among the largest
of the emerging markets, which are expected to become the giants of the twenty-first
century. But I would also like to offer some reflections on the implications of these changes.
Not only are emerging markets becoming larger players in the global economy. They will also
need to assume growing responsibilities in a global context. This means that the rules of the
game must develop accordingly. And this is notably reflected in important developments over
recent years in the international financial architecture, the network of institutions and fora
which are involved in the governance of the world economy in macroeconomic and financial
matters.
I will therefore elaborate on these two aspects: first, the importance of the emerging markets,
which is already significant and is likely to grow further; and second, on the implications of
this growing role for the governance of the world economy in macroeconomic and financial
matters.
II. The growing importance of the emerging markets in the global economy
The growing importance of the emerging markets is striking in several respects: in
demographic terms, in economic terms - both at the macroeconomic level and at the
microeconomic level - and, perhaps even more promising, in cultural and scientific terms.
Demographic importance
Consider first population. Emerging market countries are home to over half of the world's
population. India, with a population of more than 1.1 billion, is evidently one of the world's
two population giants, together with China. But it is also a young giant, which is still growing!
Indeed, expected demographic trends suggest that India could overtake China as the world's
most populous country within the next two decades, according to projections by the United
Nations.3 Moreover, due to the profound economic transformations that are ongoing, many of
the emerging markets are faced with rapid urbanisation and massive migrations from rural
areas to cities. Cities in emerging markets have therefore grown in size considerably. At
present, seven of the ten largest metropolitan areas in the world are located in emerging
markets. Mumbai - where I have the privilege of speaking today - is the world's sixth largest
city. Its population - about 18 million - compares with that of some industrial countries in
their entirety; for instance, it is close to the population of Australia.
Economic importance: macro and micro evidence
The numbers are startling in terms of population, but they are also increasingly impressive in
terms of economic size. Emerging markets account for almost 40% of world GDP at
purchasing power parity, although still only 20% at market value. While these economies are
already large, they continue to grow vigorously, at more than 7% per annum on average over
the past six years, over 2% percentage points above the world average. India has been
growing even more rapidly, at close to 8% per annum over this period. The emerging
markets have therefore become one of the main engines of world growth, with a projected
contribution of over a half this year.4 The vigour of growth in emerging markets and its
resilience are good news for all of us. It suggests that the world economy may be better able
to rely on the dynamism of these economies, in particular should growth in other regions lose
some momentum.
Emerging countries' citizens have reaped the benefits of such rapid development with higher
standards of living. Over the last decade, GDP per capita has risen by 30% on average, to
reach over USD 9,000. In India, the rise has been even faster, with a doubling of real GDP
per capita in the last ten years. The integration of emerging economies into global markets
for goods and services has been similarly swift. If you look at world exports of goods and
services, the combined share of emerging markets doubled between the early 1990s and
2006, to reach roughly 30%. Again, the integration of India into global markets has been
even faster. India's share in world exports of goods and services tripled between the early
1990s and 2006, to close to 1.5%, with a notable acceleration in the last three years, due to
dynamic exports of services, of course including IT and IT-enabled services.
Let me turn now to the microeconomic evidence for the growing importance of the emerging
markets, which is perhaps even more striking. Here are a few examples. Four companies
among the world's 20 largest in terms of market value originate from emerging markets.5
Two oil and gas firms, one Russian and one Chinese, rank in the top ten. Moreover,
according to Forbes, seven of the 20 richest individuals in the world are from the emerging
markets, with three from India alone.6 The number of millionaires (in terms of US dollars or
euro) is rapidly rising; Forbes estimates that there were some 80,000 in India in 2005.7 Of
course, that is not to say that the challenges posed by income distribution are not among the
highest priorities of most emerging market countries, including India. Eliminating poverty is at
the top of the agenda.
Long-term economic outlook
The present looks promising for emerging market economies, but the future seems even
brighter. The projections for long-term growth, based on demographic trends and models of
capital accumulation and productivity, tell us that emerging markets are likely to become
even weightier in the world economy tomorrow than they are today. Of course, projections at
very distant horizons are somewhat speculative, but they do offer an insight into possible
secular developments. In this respect, one study found startling results regarding the growth
prospects of emerging markets. India, together with Brazil, Russia and China, could be over
half the size of today's six largest industrialised economies by 2025, and in less than 40
years they could overtake them.8 Looking ahead to 2050, China would be the world's largest
economy and India would be its third largest, behind the United States. A similar picture
emerges from other studies, with some nuances.9
4
See IMF, "World Economic Outlook", September 2007.
5
See Forbes' Global 2000 list
(http://www.forbes.com/lists/2007/18/biz_07forbes2000_The-Global2000_Rank.html).
6
See Forbes' list of billionaires
(http://www.forbes.com/lists/2007/10/07billionaires_The-WorldsBillionaires_Rank.html).
7
See Merrill Lynch and Capgemini, "World Wealth Report, 10th Anniversary", 1996-2006.
8
See D. Wilson and R. Purushothaman "Dreaming with BRICs: the path to 2050", Global Economics Paper No
99, Goldman Sachs, 1 October 2003.
9
See e.g. J. Hawksworth "The world in 2005: how big will the major emerging market economies get and how
can the OECD compete?", Price Waterhouse Coopers, March 2006; S. Poncet "The long-term growth
prospects of the world economy: horizon 2050", CEPII Working Paper No 2006, 16 October 2006.
BIS Review 138/2007
If history is any guide, these developments are unsurprising. It suffices to recall how
significant India's weight in the world economy was two millennia ago, when the Middle
Kingdoms were ruling in India and the Roman empire was ruling in Europe and North Africa.
At that time, India was by far the world's largest economic power, accounting alone for about
a third of world output.10 Moreover, at par with China, it subsequently remained the largest
economy in the world for several centuries, until the eve of the industrial revolution. Seen
from this long-run perspective, the rapidly growing importance of India in today's world
economy seems to be a return to normality. The developments we observe today are
therefore likely to be the precursor of a profound rebalancing in the distribution of world
output tomorrow. These developments call for constant monitoring and cooperation in the
international community, however. It cannot be excluded that this process of rebalancing
might be "non-linear", with episodes of discontinuity, perhaps also including economic and
financial crises somewhere down the line.
Cultural and scientific importance
But allow me to also consider the emerging markets from a different angle, which you will
perhaps find surprising for a central banker. We central bankers are known to look at
countries through the unexciting lenses of numbers, facts and figures. This is entirely true.
But we are convinced that economic figures are closely associated with the scientific overall
level of one particular society and that cultural developments and influence are closely
related to economic success. It is therefore not surprising that emerging countries are rapidly
growing in influence, importance not only economically but also culturally.
Speaking of the cultural and scientific importance of a nation which has historically been at
the source of European languages, literature and mathematics is paradoxical!
Turning to the present times, there are a vast array of indicators that underscore the growing
influence of the contemporary culture and science of emerging economies in general and of
India in particular. Being here in India, I am bound to mention film-making as a first example.
As you will know, India is the largest world producer of films, with over 900 in 2005, ahead of
the European Union, with about 800, and the United States, with about 700.11 Of course, this
is due to the success of "Bollywood", a label now well-known across the world. Other
emerging markets, such as China and Russia, rank among the top ten film producers. Take
the internet as a second example. The internet plays a crucial role in making the world more
globalised, and here too the weight of emerging markets is already impressive. There are
almost as many internet users in India (close to 40 million) as the entire population of a
country such as Spain.12 Asia is the region with the highest number of internet users, even
when Japan is excluded, with over 310 million. It is ahead of North America, with 230 million
users. Last, consider my final example: the number of Nobel prizes awarded. Here again,
emerging market countries are rapidly growing in importance. In the ten years starting from
1980, 24 nationals from emerging market countries were awarded a Nobel prize. Within only
six years of the new millennium, this figure is already almost as high (22). All in all, the
growth in the economic weight of emerging market countries and the rise in their cultural
importance are very much developing in a synchronised manner.
Euro area perspective
Before I move on to the implications of the growing importance of emerging countries for the
governance of the world economy in macroeconomic and financial matters, let me briefly tell
you how we in the European Central Bank see the growing role of the emerging markets. To
us, the message is clear: the growing role of the emerging markets is good news for the euro
area, the group of 13, soon to be 15, European countries, with 320 million fellow citizens, that
share the euro as their single currency. In particular, vigorous growth in emerging markets
increases the demand for those goods and tradable services where the euro area has
comparative advantages. Emerging market competition also strengthens the incentives to
make further progress in terms of structural reforms in our economies, which are, in any
case, needed.
The euro area, in addition, has the potential to take advantage of the new opportunities that
the development of the emerging markets creates. Our exports and imports of goods and
services account for around one-fifth of GDP, more than in the United States or in Japan. In
this respect, the euro area is also increasingly open to the emerging markets. Our trade
relations with emerging Asia, Russia and with central and eastern European economies have
strengthened noticeably over time. The share of emerging markets, taken together, in euro
area trade has grown from about one-third, when the euro was introduced in 1999, to more
than 40% today. Trade relations with India have equally strengthened over time. The euro
area is also largely open financially. If I focus on emerging markets, perhaps one of the most
interesting developments in recent years is that the euro area has become an increasingly
attractive destination for foreign direct investment from the largest of these economies,
although starting from very low levels. Indeed, between 1999 and 2005 the stock of foreign
direct investment from Brazil, Russia, India and China in the euro area tripled, to reach
around €12 billion. This is good news, as these investments represent a new source of
capital, with potentially beneficial effects on euro area growth. Moreover, they might help
European firms access emerging markets more easily than on their own.
The bottom line of my brief overview is: emerging market countries are increasingly important
global players in all dimensions, be they economic, financial, cultural or scientific. This is a
welcome, systemic, development. In turn, this has important implications for the governance
of the global economic and financial system. What are indeed these implications? This is the
second issue I would like to address today.
III. Implications for the international financial architecture
It is evident that the systemic evolution we are witnessing in the global economic and
financial system calls for systematic changes in the global policy framework. There are new
players. They are gaining in importance. This means that they also have more
responsibilities in the global arena and that the rules of the game need to adapt in order to
keep pace.
But there is another reason. Globalisation has put all economies around the globe in the
same boat. Something that happens in one economy is often no longer a mere domestic
event. Its implications can sometimes extend to the entire global system. Remember how 12
years ago the Tesobonos crisis in Mexico developed from a local phenomenon into an issue
for the international financial community.13 Remember the Asian crisis.14 Remember how the
global system had to digest crises in Russia and Argentina as well as the bursting of the
technology bubble around the turn of the millennium.15 All economies which have a systemic
importance should therefore be involved in discussing and participating in the collegial
response of the international community to issues of global relevance.
This is why the governance of the world economy in macroeconomic and financial matters
has been changing rapidly in terms of both format and substance.
Implications for the format
Consider first format. The various international institutions and fora which are involved in
international policy dialogue on macroeconomic and financial affairs have strived over the
past ten years or so to better integrate emerging markets. Let me take three examples. One
of the most important of these fora is the Group of Seven or G7, where finance ministers and
central bank governors of the seven most important industrialised nations of the world meet
several times a year to discuss issues of mutual interest. The G5, soon to become the G7,
was created as an informal forum in the 1970s. It is sometimes criticised for not reflecting the
political and economic realities of the twenty-first century. I have had the privilege of
attending all its meetings over the past 18 years. My experience is that the G7 meetings
have proven an invaluable forum for cooperation on macroeconomic policies and for giving,
when appropriate, signals to market participants. The G7 is adapting to the new political and
economic realities through what is termed "outreach". The G7 countries have acknowledged
the necessity of involving other players in their discussions. In particular, it is now standard
practice for finance ministers and governors from emerging economies - and sometimes
also from developing countries - to be invited to join these discussions. This is the case for
oil-producing countries, in particular. For instance, in spring 2006 finance ministers from
certain oil-exporting countries joined the G7 in a discussion on global imbalances.
At the level of heads of state and government another important step was made a few
months ago. A new form of informal cooperation between G8 members (i.e. the Group of
Seven and Russia) and important emerging economies has been launched. Challenges have
become global. Global challenges require global solutions. And global solutions cannot be
found without the active participation of important players, from both mature and emerging
market economies. India is of course part of these important emerging economies, as are
Brazil, China, Mexico and South Africa. At their meeting in Heiligendamm last summer, the
G8 countries and these important emerging economies committed to embark on a high-level
dialogue on issues of global dimension, issues which will be at the top of the agenda in the
years ahead. They include, for instance, cross-border investment, research and innovation,
energy efficiency and development. The Heiligendamm process is a very welcome one.
The creation of the informal grouping of the G20 in 1999 is a major change in global
governance, fully taking into account the structural transformation associated with the
growing importance of the emerging economies. It was created to examine major economic
and financial global issues at the time of the Asian crisis, fully recognising that all economies
that had a systemic influence should be partners at the global level.
Since 1999 the G20 has turned out to be a very important international policy forum for
dialogue and consensus-building among systemically important economies, both
industrialised and emerging. India held its presidency in 2002. I have a very vivid memory of
this meeting in Delhi where, for the first time, the international community through the G20
endorsed the idea of the voluntary "Principles" for prevention and solution of sovereign
crises, which I had myself suggested when it appeared that the "SDRM" was not workable.
The G20 has facilitated consensus on crucial policy issues of the international reform
agenda. It has organised several workshops to deepen the understanding of issues of global
relevance and has engaged in a process of peer review to promote countries'
implementation of market-based economic systems. In the early years of its existence, the
G20 put special emphasis on financial stability and crisis prevention, including aspects such
as prudent debt management, domestic financial deepening and exchange rate regimes. Its
agenda has widened since then. It now includes also the global policy challenges ahead of
us, such as development, energy and climate change. In my view, it is the format of the G20
which makes it a success. Not too large, not too small! Its composition and size strike a
balance between giving the G20 a high degree of legitimacy while at the same time also
allowing frank dialogue between the members. In recent years, the G20 has also played an
active role in contributing to the reform of the Bretton Woods institutions, the International
Monetary Fund (IMF) and the World Bank. It has been committed to strengthening their
credibility, effectiveness and legitimacy. It has also followed closely the progress made with
policy and internal governance issues.
Alongside the G7 and the G20, significant reform efforts are indeed under way at the IMF to
adapt the institution to a new environment and a new set of players. This is my last example
of the substantial developments that the governance of the world economy is experiencing in
terms of format. The key issues here are quota and voice, two important elements defining
the representation of Fund members.16 In addition, the way the IMF carries out its policy
work is changing. For instance, last year saw the launch of the first multilateral consultations,
an innovative approach that aims to bring together countries with a shared responsibility for
global issues. These first multilateral consultations were dedicated to one of the key risks
weighing on the world economy, namely global imbalances. The consultations involved both
mature and emerging economies, including the euro area, the United States, Japan, China
and Saudi Arabia, again illustrating the fact that large current imbalances are no longer an
issue for mature economies only, but a truly global issue. We at the ECB welcomed these
discussions as a way to foster the implementation of the agreed strategy to address global
imbalances. Evidently, these discussions are also of relevance to India. Large current
account imbalances worldwide go hand-in-hand with sizeable cross-border capital flows.
India has been confronted with challenges posed by strong capital inflows. This is why
addressing imbalances is in the interest of the international community as a whole.
Implications for the substance
Not only the form but also the substance of the governance of the world economy in
macroeconomic and financial matters is changing. This will be my last point. The
macroeconomic and financial situation in emerging economies today looks strong. But we
know it was not always so. We have seen both good and bad times. This is why many
initiatives have been taken to strengthen the resilience of countries' macroeconomic and
financial performance and policies following the string of crises of the 1980s and 1990s.
Reforms can obviously take many forms. But there are three guiding principles which, in my
view, should always be kept in mind: transparency, good practices and dialogue.
Allow me to take transparency first. Investors, borrowers, lenders and economic agents in
general cannot make proper decisions without adequate information.17 Easy access to
information facilitates investment decisions, the management of risk and market discipline.
This in turn gives appropriate incentives in the conduct of macroeconomic and structural
policies. Easy access to information also allows investors to better differentiate across
economies, borrowers and companies. Ultimately, this helps to lessen herding behaviour and
contagion when market volatility increases. This is why transparency is so crucial. And in
recent years, a lot of progress has been made to enhance transparency and to facilitate
access to information as well as its dissemination to market participants. I give you one
example. Ten years ago, the nature of economic and financial data and the way they were
reported varied significantly across countries. Even simple concepts, such as debt, could be
understood very differently around the world. This severely constrained our ability to
compare financial vulnerability across countries. But thanks to work carried out at the IMF,
the special standards for dissemination of economic and financial data have become a
widely recognised benchmark to which a large and increasing number of countries adhere.
Of course, there are still areas where more work needs to be done. One of them, for
instance, is the reporting to the IMF on the currency composition of countries' foreign
exchange reserves. But overall, things are moving in the right direction.
Adopting good practices is a second principle which should continue to guide our efforts in
reforming the governance of the world economy in macroeconomic and financial matters.
Here again, there have been a number of achievements. A large array of standards and
codes for macroeconomic and data transparency, banking supervision, corporate
governance, accounting, and payment and settlement systems have been subject to
international agreements. Such standards bring together what is widely considered as good
practice or guidelines in a particular domain. They enhance domestic and international
stability. In this respect, the IMF and the Financial Stability Forum - the only forum for
cooperation among national and international entities in charge of supervision - have singled
out 12 of these standards as being of particular importance for a sound and stable economic
and financial system. But the work of the international community has gone beyond
standard-setting. It now also focuses on implementation. Progress has been made towards
publicly examining countries' compliance with standards and codes. And there is one
important lesson that we can draw from this experience. The international community does
not always need to rely on rules and unilateral enforcement to make progress on certain
fronts. Goodwill and, at times, peer pressure, can also work.
Closely related to this is the need to maintain a constant dialogue between the public and
private sectors, the last principle to bear in mind in reforming the international financial
architecture. Principles agreed by all relevant players on a voluntary basis can at times be
preferable to rules decided and enforced unilaterally by public authorities. This proved to be
particularly true for the "Principles for stable capital flows and fair debt restructuring in
emerging markets" that - as I already mentioned - were endorsed by the G20 in Delhi in
2002. Following defaults on the part of several emerging market borrowers, the international
community realised the need to resolve financial crises in a more orderly fashion and to
improve sovereign debt restructuring mechanisms. Debtor countries and private investors
agreed on best practices and guidelines for information-sharing, dialogue and close
cooperation both in normal times and in periods of financial distress. Since I suggested
myself such a voluntary code of conduct at the IMF Annual Meetings in 2001, I am glad to
see that these principles are increasingly recognised as an important framework for
cooperative action by debtors and creditors. But looking ahead, they might also serve as an
example in other domains. One such domain, for instance, could be the sector of highly
leveraged and non-regulated entities - which could develop as actively as possible voluntary
benchmarks for good practices, as also recommended by the Financial Stability Forum.
IV. Concluding remarks
Ladies and gentlemen,
New continents are not discovered every day. When Christopher Columbus died in 1506 in
Valladolid, he was still convinced that his journeys had taken him to the coasts of India, and
not to America. It is indeed always difficult to identify change, especially when such change
is systemic. What we have seen in the last 20 years since L. K. Jha left us is such systemic
change. And we have learned that we have to be ready for it.
We have learned indeed that the world economy is changing constantly. The emerging
economies, which played a relatively modest role in the global economy 20 years ago,
occupy a far more important place today, but one which will be dwarfed in importance by
their role in the future.
We have further learned that, since the world economy is evolving constantly, the rules of the
game have to be continuously adapted. International institutions and fora are changing and
adjusting. Many initiatives have been taken and implemented. Altogether this should help
make the global economic and financial system more resilient.
But we have also learned that it is never time for complacency. The next crisis is always
different from the previous one. Both industrialised and emerging countries have to continue
to work to keep up with new developments and challenges. Efforts to ensure global stability
and prevent crises have to be made constantly, by all of us, and should be guided by the
principles of transparency, good practices and dialogue between relevant players.
In this context, I am confident that mature and emerging economies, among them India, will
continue to work in close cooperation in the years ahead to ensure that these important goals
are met.
I thank you for your attention.