Ajith Nivard Cabraal: Harnessing sustainable growth in emerging
markets
Keynote address by Mr Ajith Nivard Cabraal, Governor of the Central Bank of Sri Lanka, at
the 2nd World Management Summit 2008, Karachi, Pakistan, 11 March 2008.
* * *
As salaam Aleikum, Ayubowan, Good Morning.
Mr. Chairman, Distinguished Delegates, Ladies and Gentlemen,
At the outset, I wish to thank the organizers of this World Management Summit for inviting
me to deliver the keynote address. I am also greatly touched by the wonderful hospitality
accorded to me in this very interesting and historic city of Karachi.
Mr. Chairman, I consider it a privilege and honour to share my thoughts and views on a very
timely topic, "Harnessing Sustainable Growth in Emerging Markets" at this important
forum. I hope I would be able to plant a few seeds in your distinguished minds so that such
seeds may be nurtured by you in your deliberations to follow.
As a first step, let us examine the current global and regional trends in relation to
World Economic Growth, so that we could deal with this topic in a wider perspective.
As we know, over the past few years, the global economy has been experiencing one of its'
strongest sustained periods of growth, since the early 1970s. This expansion is projected to
be very strong even after accounting for the impact of the recent financial market turbulence.
Significantly, this growth has, as its foundation, the strong results of the emerging
markets which have been leading the way. In fact, during 2007, China's economy grew by
over 11 per cent and it made the largest contribution to global growth. India grew at more
than 9 per cent and Russia at almost 8 per cent. These three countries accounted for
onehalf of global growth over the past year, while several other developing countries also
maintained their own robust expansions. In fact, the rapid growth in these countries
counterbalanced the moderate growth in the United States and other advanced economies.
The current global expansion is remarkable in several ways. First, emerging markets
and developing countries are now accounting for a high share of growth - more than
twothirds, compared with about one-half in the 1990s; Second, the successes arising from rapid
growth are not being enjoyed by a few countries only - most countries and regions are doing
better in comparison to their own past standards; and, third, the volatility of growth has
declined substantially. For example, the Sri Lankan economy has grown at well over 6%
during each of the past 3 years and in 2008 too, a growth of 7% or close to 7% is projected.
Pakistan too has recorded an average growth rate above 7% during the last 4 years.
Mr. Chairman, until the last decade, there was a clear relationship between global economic
growth and the growth in advanced economies. As a matter of fact, when major economies,
particularly, the USA, recorded a slow down, it retarded world output significantly. So much
so, it was said that when the USA got a cold, the others got pneumonia! However, recent
trends show that the world economy is no longer overwhelmingly reliant on the
advanced economies only. In fact, the weights seems to be gradually shifting with the
emerging global economy recording strong growth performances during recent years, while
the advanced economies are basically recording moderate growth. It may therefore be useful
to "flag" this important aspect when we are discussing the issues relating to harnessing
sustainable growth in emerging markets.
Let us consider as to what extent the current expansion in emerging markets and
developing countries is due to the implementation of good policies, or as to whether it
was just good luck that made this happen. What is the secret behind this remarkable
performance of emerging economies?
A simple assessment may probably tell us that the main driver of the recent expansion has
been the fast integration of these developing nations with the global economy, and the rapid
opening out of their economic activity. All three major emerging economies, China, India and
Russia, were basically "closed" economies a couple of decades ago. Emergence of these
three giants, who collectively account for 20% of land area on the earth and serve as home
for 40% of world population, has dramatically changed the shape of world trade, direction of
capital flows and the growth sources of the global economy. In fact, during the last decade,
the share of advanced economies in global trade reduced gradually from around 75% to
around 60%, while the direction of investment also reversed, as evidenced by the fast
accumulation of foreign reserves by the emerging nations.
In the meantime, we would also observe that these and other developing countries have
benefited immensely by the prudent policies that they have implemented for the rapid
economic development of their emerging economies.
These improvements include more
disciplined monetary and fiscal policies, more focused institutions, and more
responsible financial sector developments. In essence, the recent success of emerging
economies could be explained, to a significant extent, by conventional growth theory.
Improvements in physical capital stock; improvements in human capital; and
improvements in productivity.
We all know that according to growth theory, increased GDP growth leads to an
increase in per capita incomes, which in turn leads to a significant improvement in the
quality of life of people in a country. We also know that, right now, significant growth
is taking place. But, will it continue to happen? Can we ensure sustainability of this
outcome? Upto what point is it going to be tough for the countries to keep on
achieving?
Many economic experts believe that the immediate challenge that is before the developing
nations is to reach a per capita income target of around US $ 2,500 as quickly as possible. It
is no secret that, when a country surpasses a threshold per capita income of around US$
2,500, it provides a new impetus to policymakers, key stakeholders and the people as a
whole, to launch into a new phase of development. Thereafter, the process of development
takes place more smoothly and naturally. This is due to several reasons. First, at the new
levels of income, a society naturally attains certain standards, including stronger business
ethics, better behavioral patterns and wider national integration. Second, at the new levels of
income, people are able to plan their investments better, as they can look beyond matching
their income with the cost for basics. This includes not only financial investments, but also
includes investments in skill and knowledge, upgrading and investing on physical health,
both of which boost factor accumulation with less effort. Third, as income levels increase,
even a lower growth rate means a higher increase in income in absolute terms.
But, moving towards that magical number is not going to be easy. In today's trying
conditions, it would be even more difficult than in the past when many of the old
established advanced nations crossed the magical mark.
As we know, many of today's advanced nations passed that threshold under very different
conditions than what the emerging economies are facing today. In fact, during those early
days, some of those countries were able to freely utilize the labour and resources of the
countries that were colonized by them, and benefit immensely by the fruits of the foreign
lands and natural resources. They had to adhere to very few laws and regulations relating to
education, training, health or labour practices, or standards on working conditions. There
were no environmental laws or treaties, and the environment was often the first casualty in
their quest of accumulating wealth. Capital accumulated by illegal means or criminal activity
was used freely without any restriction.
But, today the situation is completely different. Today, emerging countries are acting in a
much more responsible manner in driving their economies forward. In fact, the present day
emerging economies are achieving their attractive levels of growth, while adhering to, and
respecting international conventions on copyright, anti-money laundering and terrorist
financing, environmental, labour, human rights, safety, health, etc., etc. This situation is
sometimes forgotten by some of the economic and political analysts, particularly from
advanced nations and therefore it may not be too inappropriate to remind the world of this
state of affairs, on and off.
All in all, from the point of view of individual developing countries, the most important
economic need at present is to maintain the high economic growth momentum that
they are currently achieving, in a sustainable manner. Although it had been tough, it is
heartening to note that many developing countries have, since of late, been able to do so.
But the challenge is becoming more and more intense by the day, and policymakers have to
be constantly alert to developments on several fronts simultaneously, in order to continue
with the same momentum. Investments have to be boosted; institutions need to be
strengthened; infrastructure has to be improved; regulation has to be strengthened. In
addition, all this has to happen at the same time.
In the meantime, global challenges and risks loom large.
Some of the downside risks are
so intense and serious that those could even threaten the very foundation of the
present growth momentum, and drag the developing nations as well as the entire
world economy towards recession! There are many such dangers lurking. The current
financial market turmoil could trigger a more pronounced global slowdown. The unbelievably
high and volatile oil prices and the resulting inflationary pressures could lead to severe BOP
problems, disrupt capital inflows and cause large global imbalances. The aging population,
the intensification of resistance to globalization, the havoc that may be caused by global
warming and the danger of terrorism could all lead to serious repercussions to the
sustainable growth models that the economic planners are attempting to implement.
But the good news is that there is sufficient evidence to indicate to us, that many
developing countries are implementing a number of structural changes order to face
upto these growing threats. Improved monetary and fiscal policies, improved institutions,
and better financial systems, etc., are clearly helping to stretch the current positive business
cycle, notwithstanding the numerous threats.
However, we must not be complacent. We must not underestimate the recent increased
financial market volatility. We must not take the oil shock or the inflation pressures lightly. We
must not ignore the imbalances that are being generated by the aging population. We must
not think that the resistance to globalization will just fade away. We must not conclude that
terrorism is someone else's problem and therefore it will not affect us. We must not imagine
that global warming will impact only a few coastal nations and therefore we will be safe from
its effects. In contrast, we must anticipate the threats and prepare ourselves to face it with
confidence. Needless to say, if these challenges are not adequately addressed, or faced
directly, the fall out could result in serious repercussions that will greatly hamper the
continued success of the current expansion.
Mr. Chairman, another interesting phenomenon is that, while most countries seem to
be growing well at the aggregate level, there are also growing concerns about the
equitable distribution of these gains. It is clear that rapid technological progress and
continuing globalization of trade and finance have helped to enhance growth and reduce
poverty. But the same conditions are also contributing to increasing the concentration of
income and wealth, within certain selected groups. In general, owners of capital and scarce
skills have been well rewarded, while, less-skilled workers and those with limited access to
jobs or finance have enjoyed limited gains. While it is obvious that such an outcome poses
serious political risks, even from an economic point of view, inequality raises an economic
issue since it implies that human resources are not being productively used. Therefore it
follows that, unless this imbalance is addressed, it would probably manifest itself in
dangerous political upheavals, which could easily negate the economic gains that may have
been so painstakingly built up.
In recent years, the global expansion has been supported by the ready availability of external
financing at relatively reasonable interest rates. Credit has been readily available, particularly
as a result of innovations in financial market instruments which were supposed to have
improved liquidity and distributed risk better. But those innovative models are today facing
increasing pressure, and economic planners are in the process of re-thinking these
processes. Therefore, in the near future another serious issue that we may have to face
in our effort to achieve sustainability in our growth momentum would be that, over
time, global savings may well become more scarce, putting upward pressure on real
interest rates.
Mr. Chairman, twice during the first half of the last century, the prosperity of the world
was severely threatened by devastating world wars. Fortunately for us, the concerted
efforts of many statesman-like leaders and other far thinking persons who served in
respected international organizations, that danger was averted. Nevertheless the world paid
a huge price for that terrible experience. But, today in a different way, the world faces
another destructive force of terrorism, which is almost as debilitating as the horrible
world wars of the past century. As a result, from the world's advanced economies to the
lesser developed economies, many countries have to face some aspect of terrorism; directly
or indirectly. These evil forces, if not eliminated, will soon hamper the global economic
growth in many ways. It will destroy physical and human capital. It will weaken infrastructure
development and institution building. It will force governments to divert more and more
resources to national security and terrorism prevention. It will result in reduced resources that
can be channeled to developmental efforts. In that context when we are focusing on
sustainable growth, the ill-effects of terrorism must also be clearly identified and we must all
take, as well as support, the necessary steps to deal with this threat, both politically and
militarily; both locally and internationally; both directly and indirectly; both individually and
collectively.
The ever increasing oil and energy prices is another serious concern for all economic
planners. International prices of oil, as we all know, has increased five-fold during the last 6
years. As the world bravely adjusts daily to these unconscionable and wild increases, the oil
producers enjoy the unprecedented gains. In this background, we cannot realistically expect
oil prices to reduce in the near future and therefore we would have to consciously brace
ourselves to deal with the harmful effects of this highly destructive attack on future growth, if
we are to maintain our growth momentum.
As if the of oil shock was not enough, the international commodity prices too, have
been rising sharply during the past year or so. This outcome possibly displays how tightly
linked the prices of commodities are, to each other. As a result of these increases, which
resulted in the global food price index recording a 54% increase over the past year, many
countries are now facing their highest recorded inflation figures in the new millennium.
China's inflation in January 2008 was at its highest in 11 years. In Singapore, it was their
highest in 25 years. Australia recorded their highest figure in 16 years. We, in Sri Lanka also
recorded our highest rate in 18 years while we know Pakistan too is struggling with its
inflation, amidst high food prices.
In this volatile scenario, the challenge before the emerging countries is how to
maintain price stability, without hampering the growth momentum. Unfortunately, in the
backdrop of high international oil and commodity prices, there does not appear to be an easy
escape route or a quick fix. Worse still, many experts are now proffering the view that the
current increases in oil and commodity prices may be a "structural adjustment" rather than
just another "supply shock". If that is the case, the present sky-high prices may not return to
their previous low levels. If so, policymakers will have to factor that situation into their future
projections. Then the billion dollar question will crop up: What do we do? If we allow
domestic prices to adjust in line with the high international prices, we will immediately face
high inflation. On the other hand, if we subsidize these commodities using inflationary
financing, the result is again, even more high inflation in the future. Not very attractive
options! But, countries have to make choices now, particularly because it is highly unlikely
that this problem will go away.
Mr. Chairman, we have so far discussed at length, the current trends in economic growth,
and the challenges that we have to face in our attempts to harness sustainable growth. Now,
let us get to an even more critical part of this discussion. How do we continue to
harness sustainable growth in our own economies? How do we protect our growth
momentum?
Before we really get down to discussing the factors surrounding this issue, let us see as to
what usually happens in the world when nations are faced with serious threats to their
economic well being. In the early 1970s, when oil prices increased sharply, many countries
quickly started their own oil exploration and development. When doing so, several oil
reserves, which were, up to that time, believed to be uneconomical for development, were
suddenly qualifying as being "economical". In other words, many countries re-positioned
themselves to become "net commodity exporters" from being "net commodity importers", in
the face of rising prices. They were quick to understand that such a shift was vital for their
future economic development and well being. As in the 1970's, today too, there is a clear
trend where countries are quickly attempting to boost their capacity to produce oil and
agricultural commodities. If, as expected, this re-positioning and/or restructuring occurs, and
occurs quickly, the current imbalances will be addressed sooner than later. In fact, if we look
at the recent increases in bio-fuel production, it has clearly been a case of steady increases
in the production of all varieties of oil substitutes, all over the world. In that sense, the current
vibrant and challenging economic environment provides new and exciting opportunities to
both developing and advanced countries, and many countries seem eager to seize
opportunities and implement decisions quickly.
Mr. Chairman, at the same time, we should also probably realize that in our constant
search for sustainable growth, the more regular issues that confront emerging
economies also need to be addressed appropriately through a series of fundamental
policy actions. Let us therefore, for completeness sake, take a quick look at some of
those policy actions as well.
One, the sound management of risk. As the pace of globalization intensifies and massive
flows of capital take place, on-going reforms in regulation and supervision, the development
of domestic capital markets, improvement in corporate governance and an adequate and
credible legal framework have to take place effectively.
Two, the maintenance of sound macroeconomic policies. Sound fiscal and monetary
policies leading to low and stable inflation and an environment of exchange rate stability and
sustained private sector investment is vital for sustainable development.
Three, the implementation of policies that promote domestic savings and investment.
It is important to note that while a steady flow of foreign savings is important for emerging
markets, efforts to mobilize domestic resources are equally critical for long-term growth.
Four, the maintenance of reasonable debt levels so that the repayment capacity of the
economy is not compromised, even if some of the major risks were to materialize.
Five, the improvement of the quality of information and statistics relating to all sectors
of the economy. This policy action ensures the widespread and timely dissemination of
information, thereby encouraging robust economic activity.
Six, the continuous expansion of trade by lobbying for major changes within the
industrialized nations, while promoting greater trade among the emerging economies and
within regions.
Seven, the rapid implementation of consistent and significant poverty reduction
programmes and infrastructure development projects so that it provides opportunity and
hope to the poor and addresses regional imbalances.
Eight, the active use of technology in economic transformation, so that backward
societies or groups could "leap-frog" rather than drift along at "snail's pace".
At the same time, we also have to keep in mind that the sustainability for growth in
developing countries will be greatly enhanced by political stability. Therefore, care
must be taken to ensure that any political crisis which threatens to undermine economic
progress needs to be resolved quickly and satisfactorily, so that the growth momentum will
not be hampered in the short to medium terms.
Mr. Chairman, we should all be glad that we are today here in Karachi, deliberating on
the topic of "Harnessing Sustainable Growth", because it is a topic that will touch our
lives very closely, today as well as tomorrow. In doing so, we will naturally have to closely
study the worldwide conditions, trends, needs, challenges, future strategies and the many
issues connected to the realization of this outcome. It is certainly a complex topic, and it will
not have cut and dried answers; nor will it have an easy path, free of obstacles. At the same
time there is one fact that we must all be very clear about. i.e., harnessing growth will only be
the beginning. If so, we must all realize that while the beginning would be vital, we would
need to methodically build capacity to sustain the growth and to keep going, amidst whatever
challenges we may encounter. Implementation of policies would therefore be the key to
sustainable growth.
People could, of course, eloquently talk of sound monetary policies; effective fiscal policies;
well structured private/public partnerships; super regulatory institutions; vibrant markets;
skilled managers; technical capabilities; clean environments; safe living conditions;
developed infrastructure; speedy justice; transparent systems; stable governments;
corruption - free societies; free media; lower crime; balanced development; trickle down
effects; equal opportunities; equitable distribution of wealth; good living standards and a
whole host of similar outcomes. But, mere talk of such conditions would not lead us to
achieve those goals or achieve high sustainable growth. If we are to realize all those
outcomes, the continuous implementation and close monitoring and evaluation of all our
programmes and policy actions is essential. That then, is the key.
Let us remember that it is better to implement one action than write 100 reports that no one
takes notice of. It is better to deliver one outcome than deliver 100 speeches that no one
listens to. It is better to improve one life than organize 100 workshops that no one finds
useful. It is better to light one candle than curse the darkness! This then, my dear friends, is
the challenge that is before us.
Very often, we encounter prophets of gloom and doom who attempt to demoralize us by
showing off the magnitude of the problem or by continuously criticizing, or by telling us that
we can't. We should not fall prey to such distractions or falter in the implementation of our
policy actions. We must, with conviction and courage, move towards realizing our
growth targets, while improving our macroeconomic fundamentals. If we can achieve
8% growth on a continuous basis for 8 or 9 years, we would be in a position to double our
per capita income. For a country like Sri Lanka that would mean we would reach a per capita
income of around US$ 3,000 by the year 2015, from our current per capita of around US$
1,600. That is not an impossible dream. Sri Lanka has shown that, with determination and a
clear focus, it can be done. In fact, from 2005 to 2007, our per capita income shot up by
nearly 30%! These successes can be maintained, but that could only be done with hard work
and more hard work.
Mr. Chairman, South Asia, the huge giant, is finally waking up from its' deep slumber.
This giant had been taking a long rest, after enjoying a glorious past. A huge giant cannot
stir, without the world around noticing the rumble. All recent indications are that the world is
certainly taking note of this re-awakening. It is time for all of us in this region to capitalize on
this new visibility. All of us who are in this region know that our destinies are linked. We rise
and fall together. Today, we see a clear light at the end of the tunnel and the tunnel is
becoming wider and wider, making our journey more exciting and pleasant, but yet tough and
adventurous. It is not only in cricket that we are excelling today. We are making our mark on
many other areas as well.
Let us then, as a region, take our rightful place in the League of Nations by showing that we
can develop economically to reasonable levels quickly and in a sustainable manner. Our
people are responding. Our people are becoming more conscious that better living
standards are possible. They are increasingly showing that they are prepared to work
towards that goal. Our collective work ethic and productivity standards are improving. Let us
support and intensify these efforts and amplify the trends. Let us keep the momentum
going. Let us implement, implement, and implement!
Mr. Chairman, the Global Management Summit organized by you provides an excellent
forum for all of us to learn from each other and shape our strategies. Let us use this
opportunity to fine-tune our own knowledge and skills and move with confidence towards
delivering sustainable growth to our economies and usher better lives for our people. That is
my wish for all of us and I am certain that we would have the energy and the resilience to
succeed.
Thank you.