Implications of the New International Finance System for the Emerging Markets

In his speech during the session on The New Look of the International Finance System, Mr. Janamitra Devan stated:

• In the long term Basel III reforms are expected to help reduce the risks of future instabilities. However, in the short term the new accord could come with some costs. He highlighted three in particular: (i) the cost that could come through a worsening of the existing squeeze on credit, possibly impacting SMEs, the segment that is responsible for job creation in most economies; (ii) the cost of the implementation when many countries have still not fully implemented Basel II. In addition, he highlighted that financial arbitrage may channel activities through the non-bank financial institutions, posing new challenges and costs for regulators; (iii) the cost of unintended consequences, that he exemplified through the countercyclical capital buffer and the adoption of the private credit-GDP gap as its key determinant. This could signal the need for additional capital even in economies where an increase in the ratio of private credit to GDP is justified because of a low initial base or policies geared to improve financial inclusion. Thus, he argued, it is critical to ensure that low and middle income countries have their voices heard in the many international discussions currently taking place.
• Putting aside the cost of regulation, Mr. Devan turned to the observation that traditional financial powerhouses, the so called International Financial Centers, have taken a considerable hit. Of course, New York, London and other leaders are not going away anytime soon, but regional financial centers have gained in importance, like Sao Paulo, Hong Kong, and Moscow that is rightly touted as an emerging regional financial center. The challenge, he pointed out, is for regional players to position themselves opportunistically, building a strong financial infrastructure – a feature shared not only by traditional centers, but also Hong Kong, Shanghai, and others.
• At the same time, the history and geography of strong financial centers show that they emerge in industrialized hotspots and dynamic real sectors. Russia is therefore absolutely right on working on both fronts, since without a competitive real sector it will prove hard to develop Moscow into a stronger financial center. In fact, he highlighted, one thing that the crisis has reminded us is that the financial sector exists in major part to serve the real economy — it is a means to an end and not an end in itself. He continued by advocating that a modern innovative economy can prompt an investment boom and become a magnet for global capital, while creating employment and new income opportunities at home. A number of countries have managed to develop new industries that succeeded to compete effectively in global markets, like Malaysia, Singapore, South Korea, South Africa or Peru. In all cases, governments played an active role in creating the enabling investment climate foundations for sustained and strong real sector job creation.

In conclusion, Mr. Janamitra Devan said, that the ongoing efforts of the Russian government to modernize and diversify the economy are key. And although experience over the last fifty years demonstrates that there is no magic recipe or shortcut to modernization, a gradual process involving recurrent assessments, government learning and policy adjustment, coupled with open markets and business-oriented policies have been common to most successful cases.