Jean-Claude Trichet: Charting a new global landscape - the growing impact of
emerging markets on the world economy
Speech by Mr Jean-Claude Trichet, President of the European Central Bank, at the 75th anniversary of
the Central Bank of the Republic of Turkey, Ankara, 1 June 2007.
* * *
I. Introduction
Ladies and gentlemen,
Today is an important day. We are here to celebrate the 75th anniversary of the Central Bank of the
Republic of Turkey. Let me congratulate you warmly on this occasion. But today is an important day for
me too, as my institution, the European Central Bank, is also celebrating its birthday! Well, we are a bit
younger...we are turning nine. This means that next year it will be our turn and pleasure to host events
in Frankfurt to mark our tenth anniversary! Perhaps one issue of common interest we could discuss
today is how our two institutions may, in the words of Cicero, "support the burden of advancing age"!1
But this is not the homework you had assigned me to do. I have come here today to talk about the world
economy. We are all witnessing its rapid development, the profound changes it is undergoing. And one
of the most important changes, the consequences of which still remain to be understood fully, is the
growing role of emerging countries.
This group of economies is not easy to define, I admit. The term "emerging countries" was coined by the
World Bank more than a quarter of a century ago, but it only started to become popular in the
mid1990s.2 This is hardly a coincidence. Following the debt crises of the 1980s, a number of rapidly
developing economies gained, or regained, access to international financial markets. These economies
have liberalised their financial systems, at least in part, and have become broadly accessible to foreign
investors.3 From a handful of such economies, in particular in East Asia, the circle has gradually grown
to include several countries in Latin America, central and eastern Europe, the Middle East, as well as a
few countries in Africa. Since the turn of the millennium, new acronyms have appeared, such as
"BRICs", which refers to the largest emerging markets, to the economies that are expected to become
the giants of the 21st century, such as Brazil, Russia, India and China.4
Turkey is, in turn, one of the most important emerging market countries as illustrated by its participation
in the Group of Twenty. Turkey is also one of the main players in emerging financial markets. For
instance, its international debt is among the most liquid, accounting for as much as 10% of the emerging
bond market.5 The strong capital inflows that Turkey has attracted over the past few years, some USD
100 billion since the turn of the millennium, underline the interest of foreign investors in the economy's
record.
When discussing emerging markets nowadays, it is an attempt to understand how the global economy is
changing. Therefore, it is also an attempt to understand what the world will be like tomorrow. I would like
to share some of my thoughts on these developments with you, with particular regard to three aspects:
first, the weight of the emerging markets, which is already significant and is likely to grow further;
second, the implications of the rise of the emerging markets for the world economy, some of which is
already in evidence; and third, the implications of this rise for us, in the euro area. I shall now review
these three aspects in turn, before drawing some conclusions on the governance of the global economy.
II. Current and prospective weight of the emerging markets
Consider first the economic weight of emerging market countries. As we know, it is significant,
increasingly significant. These countries constitute over half of the world's population, with China and
India alone accounting for over one third. Due to the profound economic transformations ongoing, many
of these economies are faced with rapid urbanisation. To date, seven of the ten largest metropolitan
areas in the world are located in emerging markets. The combined population of three of these
metropolitan areas, Mexico City, São Paulo and Mumbai, is as large as that of my home country,
France. And we know that Istanbul ranks among the largest cities in the world, with a population of over
11 million.
The numbers are also increasingly impressive in terms of economic size. Emerging markets account for
almost 40% of world GDP at purchasing power parity, and 20% at market value. And if these economies
are already large, they are also growing rapidly, at about 7% per annum on average over the past five
years. Turkey has been growing at a similarly rapid pace, while the most economically vigorous region
of the world, emerging Asia, has been growing even faster, at close to 8% per annum. This makes
emerging markets one of the main engines of world growth, with a contribution of over one half last year.
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.
The integration of emerging economies into global markets of goods and services has been similarly
swift. If you look at the world exports of goods and services, the combined share of emerging markets
doubled between the early 1990s and 2006, to reach roughly 30%.
But these are well-known macroeconomic facts. Perhaps even more striking is the microeconomic
evidence of the economic success of both companies and individuals in emerging markets, which is
sometimes unprecedented in terms of rapidity. Let me give you a few examples. Four companies among
the world's 20 largest in terms of market value originate from emerging markets.6 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.7 In 2005,
there were more than 300,000 millionaires (measured in US dollars or in euro) in China. This seems to
be already more than in Canada or in Australia.8 However, that is not to say that the challenges posed
by income distribution are not among the highest priorities of most emerging market countries. As we
know, eliminating poverty is on the top of the agenda for developing countries, in particular for Africa.
If the present looks promising for emerging market economies, their potential future seems even
brighter. What do the available projections for long-term growth, based on demographic trends and
models of capital accumulation and productivity, tell us? The answer is no surprise: emerging markets
are likely to become even weightier in the world economy tomorrow than they are today. Of course, any
projection, even in the short term, is surrounded by uncertainty. Projections at very distant horizons are,
therefore, somewhat speculative. Yet, they might capture possible secular developments. A number of
studies found startling results regarding the growth prospects of emerging markets. According to one
such study, Brazil, Russia, India and China could account for over half the size of today's six largest
economies by 2025 and, in less than 40 years, they could be larger.9 Other studies convey similar
messages, notwithstanding some differences.10 Therefore, the developments we observe today are
likely to be the precursor of a profound rebalancing in the distribution of world output tomorrow. Of
course, it cannot be excluded that this process might well be "non-linear", with episodes of discontinuity,
perhaps also including financial crises somewhere down the line. Therefore, the current developments
call for constant monitoring and cooperation in the international community.
But let me also look at emerging markets from a different angle, an angle which is more uncommon for a
central banker. These countries are not only growing in importance economically, but also culturally - a
dimension which is, for sure, interlinked with the economic one. Take film-making as an example. In
2005, the largest world producer of films was India, with over 900 films, ahead of the European Union,
with about 800, and the United States, with about 700.11 Other emerging markets, such as China and
Russia, ranked among the top ten film producers. Turkey was within the top 20, with 27 films. Consider
the internet as a second example. The internet plays a crucial role in making the world more global, and
here too the weight of emerging markets is already impressive. There are already around 16 million
internet users in Turkey, corresponding to about one fifth of the population. Excluding Japan, Asia has
the highest number of internet users, with over 310 million users, ahead of North America, with 230
million users.12 There are almost as many internet users in China and India (close to 180 million) as in
the United States (some 200 million). Take finally the number of Nobel prizes awarded, which reward
the highest achievements in science, literature and peace. Here again, emerging markets seem to be
growing in importance. Back in the 1980s, 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 economies and nations and the rise in their cultural
importance are very much synchronised.
III. The implications of the rise of the emerging markets for the world economy
Consider now my second point: the implications of the rise of the emerging markets for the world
economy. Of course, this impact is multifaceted. It spans two areas of immediate interest for central
bankers, namely global inflation and global capital flows.
Take inflation first. The integration into the global economy of a massive pool of low-cost, skilled workers
from emerging markets has tended to exert downward pressure on import prices of manufactured goods
and on wage demands in mature economies.13 Indeed, in a very short space of time, the available
labour force in the global economy has doubled from 1.5 to 3 billion, reflecting the opening up of China,
India and the former Soviet bloc.14 As a consequence, the price of a wide range of manufactured goods
has declined. In addition, through various channels, this process of wage moderation and reduced
inflationary pressure in the manufacturing sector has affected wage dynamics also in the services
sector, mainly as a result of outsourcing. Altogether, these effects have helped dampen inflationary
pressures. This is what the figures seem to tell us: on the basis of a simple accounting method, the
ECB's staff estimated that the larger imports from low-cost countries had a dampening effect on overall
euro area manufacturing import prices of around two percentage points per annum, on average,
between the mid-1990s and mid-2000s.15
Yet there are other, opposing forces. Certain resources have become relatively scarcer given the
increasing demand from emerging economies. In particular, the strong growth seen in some of the
largest economies, notably China and India, has likely contributed to recent increases in the prices of
energy and other commodities, as well as of food products. Accordingly, this may have been a source of
upward pressure on inflation over the past few years. Arguably, it is difficult to make an exact
assessment of this contribution, as commodity prices are also affected by supply conditions and
geopolitical factors. However, according to one study, the rapid growth in emerging countries and their
increasing share in world trade and GDP may have contributed to an increase in oil prices by as much
as 40%, and real metal prices by as much as 10% in the first five years of the new millennium.16 This
illustrates why it is important for central bankers to do what is needed to avoid what are known as
"second-round effects" and to anchor inflation expectations through forward-looking monetary policies.
All in all, it is difficult to measure accurately the total impact of emerging markets on inflation. For
instance, the IMF's staff has estimated that globalisation, through its direct effects on non-oil import
prices, has reduced inflation by a quarter of a percentage point per year, on average, in mature
economies.17 However, the overall impact is more difficult to estimate and disentangle from other factors
that reduce inflation, for instance the increases in productivity growth and the stronger credibility of
monetary policy.
Take now international capital flows, the other dimension for which the growing role of emerging markets
has a clear global effect. Certain emerging markets, notably in Asia and among oil exporters, have
become the "financiers of the world". They are indeed large net savers, with hefty current account
surpluses, in the order of USD 800 billion last year. Interestingly, the net capital outflows from these
emerging markets finance the deficits of a number of mature economies, the United States, in particular.
Of course, many emerging economies remain external borrowers, Turkey being one of them. But for the
first time in modern history, the "southern hemisphere" is overall financing the "northern hemisphere":
capital is flowing from the "poorer" economies to the "richer" economies. This looks abnormal both from
an economic standpoint and from a moral standpoint: according to standard economic theory, capital
should flow in the opposite direction, i.e. from "richer" to "poorer" economies, where the expected rate of
return of capital is higher; and it would be more appropriate for the wealthiest economies to save more
and consume less, in proportion, than the poorest. There is much debate among economists as to how
to explain this "paradox", which is sometimes referred to in connection with the 1995 Nobel prize winner
in economics, Robert Lucas.18 Of course, there are many factors to consider. One recent explanation is
that the current constellation of global financial flows is partly due to the still "incomplete" nature of
globalisation.19 Trade integration has indeed preceded financial integration, particularly in emerging
markets. A sound and deep financial system cannot be created overnight. If you look at mature
economies, even there financial technology and infrastructure have taken a very long time to develop so
as to overcome thorny problems posed by information asymmetries.
Now, one implication of the absence of a modern financial system in many emerging markets is
precisely that it helps explain the current "unorthodox'' constellation of global financial flows. Since the
locally underdeveloped financial systems are not sufficiently capable of channelling savings internally,
this gives rise to net capital flows from emerging to mature economies. According to this view, an
important factor in the adjustment of the existing global imbalances therefore resides in the deepening of
financial systems in emerging markets.
According to another interpretation of the "Lucas paradox", which would certainly complement the
previous one, the majority of emerging economies are still taking out insurance against the risk of
financial crisis of the type that they encountered over the past 25 years. During the Mexican crisis in
1982, and the global crisis of sovereign emerging borrowers in Latin America, Africa, the Middle East
and the Soviet Union in the 1980s and early 1990s, as well as the Asian crisis at the end of the 1990s,
emerging economies were exposed to sharp and abrupt financial crises calling for challenging
macroeconomic adjustments of their domestic policies. In the same period, the industrialised countries
were protected from any such domestic crises. Substantial current account deficits were very easily
financed, such that the external financial constraint did not materialise in those economies in any
significant fashion in the period under review. This may also help to explain why mature economies, as a
whole, accept, ex ante, significant current account deficits whereas emerging economies, as a whole,
envisage current account surpluses. Let me add that what holds true for the industrialised countries, as
a whole, is not the case in the euro area, which is posting, by and large, a balanced current account.
IV. Implications for the euro area
And now to my last point: what are the specific implications of the growing role of emerging markets for
the euro area? The answer is clear, this is good news. For instance, strong 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 reform our economies and
make further progress in terms of structural reforms, which are, in any case, needed.
The euro area has the potential to take advantage of the new opportunities. In trade terms, the euro
area is actually more open than other major economies. Our exports and imports of goods and services
account for around one fifth of GDP, more than in the United States or in Japan. The euro area is open
to the emerging markets. Our trade relations with emerging Asia, Russia as well as with central and
eastern European economies have strengthened noticeably over time. Taken together, the share of
emerging markets 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 Turkey have also strengthened over time, to
surpass 2% of euro area trade in 2006.
Perhaps less well known is the fact that the euro area is also very open financially. Consider the
international balance sheet of the euro area. Its assets and liabilities vis-à-vis non-residents account for
over 120% and 130% of euro area GDP, respectively. This is more than in other large, mature
economies, such as the United States, where the corresponding figures are 90% and 110% of GDP. Not
only that: we are becoming increasingly open. Since the euro was created, in 1999, the size of euro
area's external assets and liabilities has grown by around 40 percentage points. And again, if I focus on
emerging markets only, perhaps one of the most interesting developments in recent years is that the
euro area has become an attractive destination for foreign direct investment from the largest of these
economies, although starting from very low levels, of course. Indeed, between 1999 and 2005 the stock
of foreign direct investments from Brazil, Russia, India and China in the euro area tripled, to reach
around €12 billion. Again, this is good news, as these investments represent a new source of capital for
the euro area.
V. Conclusions
Ladies and gentlemen,
The bottom line of my talk today is that emerging markets have become an increasingly larger player.
This means that the rules of the game should develop accordingly. Given their growing importance in
the world economy, emerging countries also have more responsibilities. Not only is the world economy
changing, but also its governance should adapt.
The creation of the Group of Twenty in 1999 was a milestone in this respect. Its aim is to give major
emerging markets, such as Turkey, a significant role in the process of informal discussions ongoing in
the international community. I have participated in the G20 meetings from the very beginning. I regard
them as a remarkable forum for serious dialogue on a wide range of highly relevant issues such as
exchange rate regimes, prudent debt management, domestic financial deepening, and international
codes and standards to prevent and resolve financial crises. For this reason, I look forward to the
discussions at the G20 workshop on "Fiscal elements of growth and development" to be organised in
early July in Istanbul.
But I do see other examples of the growing role played by emerging markets in the governance of the
international monetary and financial system. The G7 has also reached out to a growing number of
systemically important countries. It has invited representatives from major emerging countries, including
Brazil, Russia, India, China and South Africa, to some of its meetings to exchange views on issues of
relevance to global macroeconomic and financial stability. Useful initiatives have also been launched by
the Bank for International Settlements as regards meetings at the Governors' as well as experts' level.
Most recently, the Governor of the Central Bank of the Republic of Turkey was invited to the Global
Economy Meeting, the most important forum for central bankers in the world, which I have the privilege
to chair. Last but not least, the internal governance structure of the International Monetary Fund is
currently under review. One aim of the reform efforts is to ensure a fair and adequate voice for all
members of the IMF by aligning the distribution of quotas with countries' relative positions in the world
economy.
Ladies and gentlemen,
Today we are celebrating the 75th anniversary of the Central Bank of the Republic of Turkey. I wonder
what the world economy will look like in 2073, when my institution, the European Central Bank, will
celebrate its own 75th anniversary. Of course, it is nearly impossible to tell. There is one certainty,
however: the emerging markets of today will play a key role in shaping the future.
Thank you very much. [Tesekür ederim]