October 20, 2019
日
Bank of Japan
For Sustainable Development of Emerging Economies
Speech at the 2019 Global Meeting of
the Emerging Markets Forum
Haruhiko Kuroda
Governor of the Bank of Japan
I. Introduction
It is my great pleasure to have the opportunity to give a speech at the Emerging Markets
Forum today.
The situation surrounding emerging economies has been changing rapidly. The global
economy has recently been slowing down and there are various downside risks, ranging
from trade tensions to geopolitical risks.
At this difficult point in time, it is critically important for the global economy that emerging
economies achieve sustainable growth. As you well know, after the global financial crisis,
the growth of emerging economies contributed significantly to the recovery of the world
economy. Over 70 percent of the recovery in the global economy since 2009 is due to the
contribution of emerging economies. It would not be too much to say that the performance
of emerging economies is key to the global economy.
From the to perspective, there have been constant structural changes,
medium- long-term
including further globalization, advances in digital technologies, and climate change. For
emerging economies to achieve sustainable growth, it is essential to have a vision
long-term
for the economy and society, and to navigate the transition process successfully. Making use
of the fruits of the G20 meetings under Japan's presidency this year, I would like to take up
three topics today that are particularly important to the to development
medium- long-term
of emerging economies. Namely, promoting financial inclusion, achieving sustainable
growth, and addressing the prospective aging of the population.
II. Issues for the to Development of Emerging Economies
Medium- Long-Term
A. Promoting Financial Inclusion
The first topic I would like to consider is the promotion of financial inclusion. Although the
definition of financial inclusion varies, it is commonly taken to mean that "households and
businesses have access to appropriate financial services and are able to use them
effectively." In emerging countries, a significant portion of the population does not have
enough access to financial services, especially people on low incomes and those who live in
remote islands and mountainous regions. According to a report by the World Bank, about 40
percent of the adult population in emerging countries does not have a bank account.1 For
those people to obtain access to appropriate financial services would accelerate the
reduction of poverty and inequality.
Enhancing financial inclusion would not only help alleviate poverty and inequality, it also
has huge potential in promoting economic growth. Many researchers and policy makers
argue that financial inclusion would boost economic growth.2 For example, borrowing
from financial institutions allows a firm to invest more in R&D and capacity expansion than
would be possible using only its cash reserves. Housing loans and credit cards enable
households to consume and invest more than the amount of cash at hand. Savings in a bank
account generate interest income. Access to financial services such as these leads to more
efficient business development and active consumption, thereby promoting overall
economic growth of the country.
Financial inclusion would also enhance the effectiveness of monetary and fiscal policy.
Regarding monetary policy, as most of the interest rates of borrowings and savings by firms
and individuals are based on policy rates, central banks can affect their behavior by
changing policy rates. This would improve the effectiveness of monetary policy and help
smooth the economic cycle in the long run. Enhanced access to financial services would
also increase the effectiveness of fiscal policy. For example, ensuring a means to transfer
money to every individual would allow policy makers to design subsidization programs that
are targeted at a specific segment of society. This would make possible a
finer-tuned
redistribution policy. In addition, tax collection would become more effective.
In advancing financial inclusion, it is necessary to develop both "hard" and "soft"
infrastructures. Hard infrastructures typically include telecommunications, such as the
internet and mobile phones. Soft infrastructure includes for example the active use of
Fintech, which, in addition to improving financial literacy, would be effective in broadening
the range of financial services available. In the short run, the introduction of
state-of-the-art
Fintech might lead to leapfrogging. This refers to the phenomenon where the
so-called
convenience of services is drastically enhanced by taking advantage of new technologies
even before services based on older technologies have become entrenched. For example,
mobile payments spread rapidly in China in just a few years. Providing payment services
via mobile phone does not require conventional physical infrastructure such as branch and
ATM networks that were considered indispensable in providing broad access to financial
services. China not only enjoys improved access to banking services but has also saved on
the cost of building the physical infrastructure required for traditional banking.
That said, it should be noted that these benefits come with new risks. For example,
system problems and can negatively affect corporate management
large-scale cyber-attacks
and the daily lives of individuals. Privacy protection is important, and we should be mindful
that these new technologies might be used for money laundering and tax evasion. Moreover,
policy makers should consider carefully the possible impact of the broader use of digital
technologies on financial stability and the effectiveness of monetary policy.
Authorities should endeavor to maximize the benefits of new technologies while
appropriately addressing the accompanying risks, through close cooperation, both
domestically and internationally.
B. Achieving Sustainable Growth
The second topic is the achievement of sustainable growth. Since the industrial revolution,
the global economy has undergone remarkable development. At the same time, however, a
number of issues have emerged that require international cooperation to solve, such as those
related to poverty, inequality and the environment. In 2015, the United Nations adopted the
Sustainable Development Goals (SDGs), a set of goals to be achieved by 2030 targeting
poverty, the environment, and other issues.
Here, I would like to provide two observations on social and environmental issues in
relation to achieving sustainable growth.
First, the enormous effort and cost involved in dealing with social and environmental issues
is justified by the expected returns. In other words, there is no between solving
trade-off
social and environmental issues and achieving economic growth. Rather, they are
complementary to each other.
For example, significant progress has recently been made in reducing poverty. According to
the World Bank, in 1981, more than 40 percent of the world's population was living in
extreme poverty, but the figure has fallen to around 10 percent in 2019.3 While economic
growth leads to a decline in the poverty rate, the reduction of poverty and the resulting
inclusive growth will in turn enhance economic growth, leading to a further reduction in
poverty. The relationship between economic development and poverty reduction can be
regarded as
mutually-reinforcing.
Consensus has not yet been reached on the causal relationship between income disparity
and growth rate in economies with a low poverty rate, as much theoretical and empirical
research shows differing results.4 That said, I believe an increase in the number of people
who are given the opportunity for higher education and to learn advanced skills would lead
to an accumulation of human capital, positively affecting economic growth from the supply
side. With the digitalization of the economy, human capital becomes more important as the
industrial structure changes over time, shifting from to and
labor-intensive capital-intensive,
eventually to Moreover, the promotion of financial inclusion, which I
knowledge-intensive.
mentioned earlier, and a more stable political and social situation through the reduction of
inequality would surely have a positive impact on economic growth by attracting business
investment, and through stabilizing macroeconomic conditions more generally.
Environmental problems are, needless to say, a common threat to both advanced and
emerging countries. Climate change has already affected emerging economies through the
increase in extreme weather events and natural disasters such as storms, floods, and drought.
According to an estimate by the United Nations, the world population is expected to
increase by 2 billion in 30 years, reaching 9.7 billion by 2050. Based on this estimate, poor
harvests and water shortages caused by climate change would become even more serious.5
The effects of climate change have been studied from a variety of perspectives. For example,
there is a wealth of research on the relationship between temperature and labor productivity.
One study shows that an increase in temperature of 1 degree Celsius from 25 degrees
reduces work performance by 2 percent.6 Does this tally with your own experience?
There is also a large body of research concerning the effects of climate change on energy
demand, public health, and social stability, among other things.7
My point is that there is a strong link between resolving social and environmental issues and
macroeconomic growth, and we should tackle these challenges in a proactive manner, not
only to meet the demands of society but also to enhance to economic
medium- long-term
growth.
The second observation is that we should use the markets and incentive mechanisms to
pursue sustainable growth. For example, when making investment decisions, investors have
increasingly been taking into account environmental, social, and governance (ESG) criteria,
alongside purely financial factors. This trend has been triggered in part by the Principles for
Responsible Investment initiative supported by the United Nations. This initiative calls for
investors to consider ESG factors in investment decisions while fulfilling their fiduciary
responsibilities. Although the main target of ESG investing was initially equities, it has been
expanding to include also bonds and loans. In Europe and China especially, there has been a
dramatic increase in the issuance of green bonds, to finance projects aimed at
so-called
addressing environmental problems. These moves are expected to lead to
innovation in such areas as the use of renewable energy.
environment-related
Of course, appropriate institutional arrangements and guidance by the authorities are
essential to maximize the potential of the markets and incentive mechanisms to address
these issues. For example, governments and public institutions should continue to engage
actively in and infrastructure investment, as well as in establishing the
long-term large-scale
regulatory systems necessary to deal with environmental issues. Initiatives to ensure the
smooth functioning of market mechanisms are also important, including establishing
frameworks for the standardization of ESG investments. Of course there are many issues
which cannot be dealt with solely by market mechanisms, including international assistance
for very countries and direct support for those who are left behind in
low-income
developing countries.
C. Addressing the Prospective Population Aging
The third topic is the prospective aging of the population. "Aging and its policy
implications" has been adopted as one of the G20 priorities under Japan's presidency. You
may perhaps think that aging is not an imminent policy issue in your country. In many
emerging countries, the working age population is expected to grow for a while. However,
once the birthrate declines and the size of the working age population begins to decrease,
the shape of the demographic pyramid could change drastically within a timeframe of
perhaps 20 to 30 years. Let us take Japan's case as an example. In 1970, about 10 workers
supported one elderly person. The figure had decreased to 4 workers in 2000, and 2.3
workers in 2015. The decrease in birthrate and the aging of the population occurs over a
shorter period and at a faster pace than you might expect.8
The good news about demographic change is that we can forecast prospective changes well
in advance and with a certain degree of accuracy. In addition, emerging countries can learn
from the precedents set in those advanced countries that are already experiencing problems
related to an aging population. It is not too early to start preparing for prospective aging.
Although population aging has a wide range of economic implications, I would like to focus
today on one of the main issues associated with aging, the pension system, by reviewing
Japan's experience. The pension system is at the core of the social security system. As the
pension system has a significant impact on people's lives, careful and detailed consideration
is necessary before implementing reforms. For over 20 years in Japan, we have been
discussing various issues, including how to secure the financial resources necessary to
support the pension system, and have made steady progress with reforms.
The Japanese pension system is largely based on the scheme,
so-called pay-as-you-go
where benefits for the elderly are paid out of premiums collected from the contemporary
working age population. Therefore, the aging of the population demands a regular review of
the balance between premiums, benefits and government subsidies. After long and intensive
discussion, a number of reforms have been adopted, including a raise in the pension age and
an increase in the subsidy from the government. A mechanism called the "macroeconomic
slide" has also been introduced, which automatically adjusts the amount of pension benefit
by taking into account changes in the number of people insured and average life expectancy.
At least once every five years, the government must carry out a comprehensive review of
the financial conditions of the pension system, including its prospects.
long-term
The aging of the population has huge implications not only for the pension system but also
for public finances in general. Expenditure on health and elderly care has increased
significantly in Japan. The proportion of social security expenses to total annual expenditure
has soared from around 14 percent in 1970 to around 35 percent at present. Maintaining the
credibility of public finance by ensuring to fiscal sustainability is
medium- long-term
essential. To this end, planning and reviewing the social security and tax system so that they
can adapt to demographic changes is critically important.
Maintaining economic vitality amid an aging and shrinking population is also a critical
issue. From a macroeconomic perspective, labor participation and labor productivity need to
be increased. Labor participation of the elderly and women has risen significantly in Japan
over the past several years, helping to support economic growth. Japanese society has come
to accept a greater diversity of work styles, better suited to individual circumstances,
particularly for families with small children. Faced with serious labor shortages, firms have
been making investments, using information and communication technologies
labor-saving
and artificial intelligence to offset the shortfall in labor. In terms of industrial structure, the
aging of society can induce the growth of new industries, creating jobs and spurring
innovation. Medical, health, and nursing care are prime examples. As aging is a global trend,
industries providing elderly care services and support have a good opportunity for rapid
growth. Policy makers also have an important role to play in facilitating adaptation to the
changing business environment.
Lastly, I would like to emphasize that the aging of the population itself is by no means a
negative thing. The proportion of the elderly to the total population is around 30 percent in
Japan at present.9 With improvements in living conditions and the progress of medical
technology, the number of healthy and active elderly has been steadily increasing. Let me
give you an example of an elderly person who made a significant contribution to the world.
The Italian Renaissance sculptor, Michelangelo, worked as chief architect in the
refurbishment of Saint Peter's Basilica when he was 74 years old, coincidentally, the same
age as I am at present. Aging can enrich our lives, and social systems should be designed so
that the richness of aging can be enjoyed to its fullest.
III. Concluding Remarks
I have talked today about the issues to be addressed for sustainable growth in emerging
economies. As the issues are it is no easy task to deal appropriately with all
wide-ranging,
of them. However, emerging countries do have a latecomers' advantage in being
so-called
able to benefit from the leapfrogging I mentioned earlier. By making use of advanced digital
technologies, emerging countries can skip investment in the infrastructures that have
already become obsolete in advanced economies. And when it comes to population aging,
they can learn from the experience and mistakes of advanced economies. I believe that
emerging economies will make steady progress in overcoming difficulties and will be able
to achieve sustainable and balanced development.
Thank you for your kind attention.