Minister James Flaherty,
Finance Ministers of the Americas,
IMF Managing Director Dominique Strauss-Kahn,
IDB President Luis Alberto Moreno,
Ladies and Gentlemen.
Growth as a Common Agenda
It is a pleasure to address this select audience – particularly at this point in history. This is a unique time for emerging market economies, including many in the Americas. These economies, not only weathered the recent global economic crisis with great resilience, but quickly rebounded to high growth rates. They are taking the lead in the global recovery with a force beneficial to all, including industrialized nations.
It is cause for optimism that between 2002 and 2010, Latin America saw one of the strongest periods of growth in its last 100 years. This was done while keeping inflation to single digits and making strides against poverty, not just due to higher growth but also through targeted social assistance programs.
World Bank Managing Director Sri Mulyani Indrawati talks to US Treasury Secretary Timothy Geithner as IMF's Managing Director Dominique Strauss-Kahn reviews conference documents.
There is no question that Latin American recent successes have benefited in fact from their closer ties to Asia and China in particular. Exports to these countries as a percentage of the total have doubled in Brazil, Chile, and Peru, to name a few. The increasing strength of the ties binding these two regions is demonstrated by the fact that the correlation between growth in some key Latin American countries and China has been trending upward since the late-1990s.
In Indonesia we have an expression: Asam di gunung, garam di laut bertemu dalam satu belanga. "Tamarind in the mountain and salt in the sea meet in one pot." At this time more than ever, I feel that emerging market economies -- whether they be in East Asia, Latin America and the Caribbean, or Eastern Europe – are, in many ways, all in the same pot.
In my recent official visits to China, Singapore, Mexico, Colombia, Peru, Morocco, and India, I have seen that the great common aspiration of Middle Income Countries is growth with social inclusion and opportunities for all. While most of these countries struggle with the same issues, there are already key lessons from our recent shared experience worth highlighting.
A first lesson from the MIC experience in the global crisis is that macro-fiscal fundamentals are critical not only for growth, but also for resilience to crisis.
Emerging market economies in Asia and Latin America alike were much better positioned to deal with the current global economic crisis than in the past. There are several reasons for East Asia being in this position.
First, the balance sheets of the public and private sectors are relatively strong, creating room to finance growth-promoting investments.
Second, the economies of East Asia are operating well within the global technology frontier, and rapid productivity growth can continue with appropriate policies for acquiring, adopting, and adapting existing technologies.
Third, the new middle class in many East Asian countries will push up consumption and with appropriate South-South linkages, outward-oriented trade policies could continue to drive growth.
And finally, the commodity exporting countries of East Asia are likely to enjoy higher prices for a while – and provided they manage them well, revenues from commodity exports will sustain growth and not be a curse.
From this shared experience I would like to stress three specific points on fiscal policy. First, and related to fiscal space, is the importance of increasing government savings. In many MICs, weak revenue generation is a limitation to the utilization of fiscal policy in general, and to public investment and service delivery in particular.
According to the OECD, less than 4 percent of state revenue in Latin America comes from personal income taxes, as compared to 27 percent in industrialized nations. To make up for the shortfall many Latin American countries have adopted indirect taxes like the VAT which, although efficient from the point of view of production incentives, are regressive. I know that big efforts are required in the area of institution building and improved governance to be able to broaden tax bases. But it is an important cause, and one that deserves our full attention.
Second, counter-cyclical fiscal policy during crisis isn't about throwing money around. It calls for quality public spending. The recent shared experience in responding to the crisis points to the benefits of prioritizing both expenditures that safe-guard vulnerable populations on the one hand, as well as expenditures that can be implemented quickly, to put into place the critical infrastructure that will be the foundation of renewed growth.
Third, from my own experience, even when you have the fiscal space, you may not have the financing.
In the recent economic crisis, emerging market economies faced a serious credit crunch and high premia when they looked to international capital markets for financing. When liquidity is scarce due to skittish markets, there is a role for global collective action. As Minister of Finance of Indonesia at the time, I appreciated the World Bank extending us a precautionary "Deferred Draw-Down Option" credit that facilitated our access to commercial markets. In Latin America and the Caribbean too, the IFIs played a significant role in financing programs through the crisis.
IDB's Chief Economist Santiago Levy (L), WB Managing Director, Sri Mulyani Indrawati, Regional Vicepresident Pamela Cox and US Treasury Secretary Timothy Geithner during a conference break.
A second shared experience is that economic integration can lead to virtuous growth. I am encouraged to see that this is a central theme for this Conference. East Asia's growth owes much to its rapid integration into the global economy, its participation in regional and global production networks, and its commitment to free trade.
In the 1990s and the 2000s, global and regional production networks set a firm foothold in East Asia. They linked production in different countries, and cross-country assembly lines for exports, to third markets. The rapid rise of regional and global production networks allowed economies of scale, which would have been unthinkable without these linkages. What once were small cities became global production hubs of specialized goods, components, or tasks. The small city of Qiaotou, in China, for example, today produces 60 percent of the world's buttons.
Between 1980 and 2010, that is, within one generation, Developing East Asia's share in global trade grew three fold and its share in global GDP climbed four fold. Indeed, in purchasing power parity terms, Developing East Asia was a mere 6 percent of the economic size of high income countries; today it is closer to a third.
As I mentioned initially, Latin America has also recently benefitted from its deepening ties with Asia. But there is still a great untapped potential when it comes the region's own internal integration. According to a joint IDB, ECLAC and World Bank brief prepared for your discussions today, "the region is realizing only 50 percent of its intra-hemispheric trade potential."
Investment for Growth
A third shared lesson emerging from our common experience is the importance of investment for growth. With the emergence of China, and India as favored investment destinations, reliance on "high volume, low value-added" exports that pay decent wages is under threat for many middle-income countries.
In order to follow in the footsteps of the newly industrialized Asian economies, the Asian middle-income countries would need to invest more and with greater efficiency in physical and human capital, foster more innovation, and encourage entrepreneurship and risk taking. Today, however, with the exception of Vietnam and China, levels of fixed investment in East Asia and Latin America are markedly lower than the levels achieved in Japan, Korea, Taiwan, and Singapore during their takeoffs, even when adjusting for incomes per capita.
Jobs and Skills
And that brings me to the fourth observation from our recent collective experience. To move up the value chain and competitively integrate into the global economy requires a skilled and sophisticated labor-force. The challenge then is not only to create good jobs, but also to train the skilled workers to take them.
Yet for many emerging economies a binding constraint is often showing up in the form of skill mismatches. Access to primary and secondary education is no longer the problem for most middle-income countries. But these countries continue to lag behind the international average in the quality of education, particularly in basic reading and mathematics skills. Skills are needed to position our countries in the global value chain and our youth in the job market.
The final area I would like to highlight links the growth agenda with that of equity. While it is true that growth through global integration raises the long-run rate of growth, it is also true that it entails greater exposure to global shocks.
Finance Ministers of the Americas and top officials from multilateral lending institutions met in Calgary, Canada, to discuss Latin America's economic prospects.
There is no denying that Singapore's enhanced integration into the global economy, for example, made it extra susceptible to the global economic crisis. The good news is that the same openness and integration is now helping in its rebound from crisis. But with economic shocks, households do suffer. Such crises highlight the importance of social protection systems to help mitigate vulnerable groups from shock.
Latin America has made big strides against poverty, particularly through targeted social assistance programs such as its homegrown Conditional Cash Transfers, replicated throughout the world.It is commendable that between 2002 and 2008, more than 50 million Latin Americans were lifted out of moderate poverty and the region has also started to make inroads against persistent inequality. This has brought with it greater social cohesion and reduced risk of serious political instability.
To conclude, let me reiterate that this is a special moment for emerging markets in general -- and for Latin America and the Caribbean in particular. After decades of contending with crises, emerging markets are being looked upon today to solve global problems.
Whether on climate change, innovative food production, or growth with equity, you in Latin America and the Caribbean have made major strides toward our common objectives. Your continued success is a success to be shared; and so we at the World Bank remain committed to support you. After all, we are in this same pot together.