Emerging markets have spearheaded the global recovery following the financial crisis, contributing 75% of the increase in world GDP in purchasing power parity terms since 2009. This is symbolic of the changing times we live in, characterised by a shift in geo-economic power to the global ‘South'. I believe South-South cooperation is poised to supplement North-South flows of both finance and knowledge. It is a partnership among equals.
In absolute terms, China and India now contribute more to global growth than the eurozone and US put together. There is talk of a slowdown, but this does not mean the same in emerging markets as in the developed world. A slowdown in China means growth falling from 10% to 7%, but for many developed economies it implies a full-blown recession. Even with unprecedented liquidity, the developed world is still struggling to cope with the legacy of high debt and high unemployment. There is uncertainty as to what the next steps of quantitative tightening would do: both for the developed world and the developing world.
Maintain the momentum
It is imperative that the nations of the South keep reinventing themselves, continue with their development efforts and ramp up their public investments in infrastructure.
Recent reports suggest developing countries will require additional spending of close to $1 trillion a year for the next two decades, to meet their infrastructure requirements. No single set of institutions can meet these requirements. Some countries may lack the sufficient structural and institutional capacity to absorb funding. Capacity-building should be at the forefront of policy efforts – leading and not lagging our infrastructure needs. In this regard, we can learn from China's development model.
Four key elements can be identified in the model: investment in agriculture, animal husbandry, fisheries, water and flood management; development of massive infrastructure; development of manufacturing and industry; development of the services sector, climate and environment.
Keeping an eye on capacity requirements for the future, China is pursuing the One Belt, One Road initiative. This plan will channel investment into the country's underdeveloped inland western provinces on the back of trans-national networks and interconnectivity with Europe and the Middle East. It will boost intra-regional commercial and financial linkages and develop infrastructure capacity along the route. This infrastructure spend will promote internationalisation, foster trade and, most importantly, spur economic growth.
Current financing and investment patterns are inadequate in meeting investment needs. Private international capital flows are not only volatile, but insufficient in volume and maturity to fund sustainable development, which typically requires long-term investment. Multilateral development banks (MDBs) can play a pivotal role in meeting these requirements.
Reports suggest developing countries will require additional spending of close to $1 trillion a year for the next two decades, to meet their infrastructure requirements
KV Kamath, New Development Bank
While the annual resource commitment from MDBs has risen from $45 billion to more than $100 billion over a 10-year period, it is still not enough to meet the demand for infrastructure. MDBs must reinvent themselves and embrace guarantee structures, asset securitsation and derivative arrangements to hedge risk, while promoting reinsurance among financial participants. They must also partner with central banks to create a platform for currency swap arrangements between developing countries. Most of their external debt is denominated in hard currencies, with their balance sheets vulnerable to currency volatility.
To be successful, MDBs need to lead the structural reform agenda and go where others do not. It is imperative they demonstrate greater risk appetite. We are living in times with record low interest rates and ample global liquidity. MDBs should seize this opportunity and consider how to increase their funding base. For example, they could contemplate operating with one notch lower credit ratings, which could help raise substantial resources at a very low incremental cost, without in any way impairing their financial health. MDBs can play an important role in sharing the vast pool of knowledge they have collected over the years.
New Development Bank (NDB) needs to listen, learn, collaborate and innovate. A significant step would be for the NDB to establish global, regional and local partnerships with new as well as established MDBs and with market participants, so that we can leverage knowledge, capacity and financial resources.
Promoting financial inclusion
Substantial technological shifts are taking place in finance. From an era of branch banking to mobile banking to contact-less banking, technology shifts have changed the paradigm of the banking business.
Technological advancements have been widespread and comprehensive, extending reach, while lowering cost. We should recognise these shifts, understand that the future lies with these technologies and align our processes to leverage these advancements. These shifts provide for a completely different approach to inclusive banking.
Take the example of Aadhar – a unique identification card for citizens of India, which is based on their biometric identification. Aadhar will supplement financial inclusion, subsidy reduction efforts by the government and significantly reduce leakages in subsidy transfers. With the implementation of Aadhar, 190 million bank accounts have been opened, banking the unbanked, within a short span of one year. The government plans to offer access to funding, pension, insurance and medical benefits through Aadhar.
This is a scalable, replicable example of how technology advancements can lead to widespread financial inclusion while eliminating leakages. Financial inclusion needs to be supplemented by social inclusion, health, education and skilling.