Thai governor says the fate of emerging markets rests on institutional progress

The Bank of Thailand governor has hit out at the practice of "lumping" all emerging markets together into one group or under one acronym, no matter how catchy it may be.

Prasarn Trairatvorakul, speaking at the Harvard Kennedy School, insisted individual countries will be responsible for their own fates, and pointed to the difference in their institutional structures as a likely dividing line between them.

He observed that growth in emerging markets is "slowing sharply" and the economies in question must continue to "change and upgrade" if they are to rebound from the slump.

This, he said, requires a "number of key fundamental capabilities" – including macroeconomic stability, rule of law, good governance, and a low tolerance of corruption – that in turn require strong institutions to deliver them.

"Good institutions encourage growth, bad institutions stifle it," Trairatvorakul explained.

The destinies of emerging markets are not strictly bound to each other

He cautioned that countries would struggle to develop stronger institutions overnight, as "big band" institutional reform is "typically infeasible". Rather, countries could make good progress by tackling individual constraints as and when they can.

"A country does not need to attain Swiss level of institutional quality in order to be able to compete with Swiss producers in many products," Trairatvorakul said.

"For example, China's growth miracle has occurred through selective market-oriented reforms against a backdrop of pervasive economic and political institutional weaknesses."

Nonetheless, there will come a point in every country's development when weak institutions will begin to hamper growth. Therefore, he said, authorities must be "pragmatic and opportunistic" if they are to build stronger institutions.

"Building institutions is not like building a house – brick by brick in a linear fashion. It is more like scoring a goal in soccer," he said. "There are many moving parts at the same time, the play is unpredictable, and it involves an enormous amount of tacit unseen co-ordination among players."

Trairatvorakul said governance should be improved incrementally over time. He pointed to evidence that institutional change is "highly persistent" and can form either "virtuous" or "vicious" circles.

How rules and norms evolve is largely dependent on what they are today, he reasoned, and countries with a greater track record of embracing institutional change will reap the benefits.

He said this factor – more than any other – will determine which countries are facing a temporary check on their growth and which countries are staring down the barrel of a "structural slowdown".

"The destinies of emerging markets are not strictly bound to each other. Some will succeed and a few may not... going forward, each country needs to be analysed more as individual stories," he said.