Distinguished guests, ladies and gentlemen, it is a pleasure and an honor to be here today at this prestigious forum. Thank you NIKKEI for the invitation.
Three years ago, my esteemed former colleague, Sri Mulyani Indrawati, who is now the Finance Minister of Indonesia, addressed this forum on behalf of the World Bank Group. She spoke about Asia’s impressive economic growth, improved standard of living, and favorable policy outlook. She also warned about challenges that would need to be addressed to ensure that the region’s tremendous progress would continue.
I refer to her speech in 2014 because she also highlighted how a rising Asia was creating a new dynamic for the existing international economic order—an order still largely based on the outcomes of World War II and one that would need to be adapted to newcomers.
That remark was very insightful, because in addition to the greater role that developing countries, notably from Asia, are taking in the international order, many events and new actors are challenging this order today. This, of course, increases the responsibilities of Asian countries.
Today, I would like to briefly review (1) recent world growth performance and risks, and (2) to discuss important opportunities for Asian leadership – particularly in championing deeper international economic integration, leading the next industrial revolution, and dealing with potential distributive consequences of this revolution. This global leadership will include a strong focus on inclusive growth and climate, and ways to channel excessive savings to investments that could create long-term income streams.
Economies in Asia remain dynamic and resilient. Even leaving aside the two economic giants – China and India, which are now among the world’s four largest economies in PPP terms – developing countries in Asia continue to grow much faster than the rest of the developing world and are providing the largest contribution to global growth.
The recent and moderated improvement in commodity prices is helping the region’s commodity exporters, while not hurting its commodity importers, which have benefited from the decline in these prices since 2013.
Global GDP growth has also strengthened in the last few quarters, despite some surprises, such as the decision of the UK to leave the EU.
There has been an uptick in global trade, after a long period of decline that followed the global financial crisis of 2008.
Investment growth, however, remains weak, with potentially serious consequences, including for emerging markets.
On their part, financial markets have been on positive territory in 2017. Volatility in global financial markets, as indicated by the VIX and analogous volatility indices, remains low, despite high valuations of equities and growing debt in some markets and jurisdictions, as well as increased policy uncertainty and geopolitical challenges that have been building up around the world.
I hope that the favorable aspects of this scenario persist, because some fundamentals have indeed improved.
But, there are also uncomfortable signs around us, including (1) rising protectionism and (2) not enough appetite for investment; and less confidence in a shared, global approach to problems and trends that can affect world stability.
This is why in our latest Global Economic Prospects report issued yesterday we call it a fragile recovery.
One of these trends has been the decline in productivity growth in most economies, including in Asia. The past success of many Asian economies has reflected their ability to reallocate labor across sectors, from agriculture to manufacturing and then to services. The challenge today is how to increase productivity within sectors to bolster growth—not just in manufacturing but increasingly in the services sector, where demand and employment are rising. I believe there are actions that can be effective to respond to this challenge.
First, Trade remains a proven driver to stimulate productivity.
In Asia, as well as in other regions, more competition and innovation can be brought by further lowering barriers to trade, investment and labor mobility.
Asian companies remain vital for the world economy, but with the risk of protectionism rising in the West, expanding the cross-border flow of goods and services within Asia and particularly in the ASEAN area has acquired a new relevance.
Across the whole Asia, 45 intra‐regional trade agreements have been signed, which is more than the 41 agreements in Europe. But our analysis shows that, compared to Europe, regional integration in Asia remains “shallow,” mostly focused on reducing tariffs. Deepening trade agreements to address non-tariff measures, including (a) standards, (b) investment and competition policies, (c) intellectual property rights, and (d) movements of capital and people is crucial for today’s increasingly sophisticated and diversified economies and to contribute to new sources of intra-regional demand.
Second: as shown by several Asian countries, ensuring greater inclusion is another venue to boost productivity, while helping the poor and vulnerable.
The World Bank’s twin goals of eliminating extreme poverty and boosting shared prosperity are part of the global compact around the Sustainable Development Goals agreed in 2015. And the recent strong replenishment of IDA, our fund for the poorest, is a concrete demonstration of the priority to fight poverty and the power of globalism, reflected in the volume provided by traditional donors and the substantial number of NEW developing country donors.
In East Asia and the Pacific, poverty has been reduced by more than in any other region—from 80 percent in 1981 to around 2 percent in 2016. Likewise, in South Asia, there have been considerable gains, particularly, the creation of a growing middle class. But challenges remain and addressing unequal opportunity, including access to health services and education, is critical.
Particular attention to early childhood development, with a drastic reduction of the high rates of child stunting in some countries, is needed to strengthen human capital and allow the whole region to benefit from a global economy that is increasingly based on brainpower.
In this respect, the advance of the so-called 4th Industrial Revolution deserves our consideration. Three earlier revolutions brought mechanization, mass production and automation to manufacturing – whereas this fourth one presents a deepening of digitization in our economies, which will be increasingly concentrated on services. The possibilities of artificial intelligence appear boundless, and this can help increase productivity. But the potential displacement of labor can be substantial, and the impact on the welfare of billions of people will hinge on how well they can participate in these changes.
Keys to success will be workers’ skills, innovation, and especially how broadly the productivity gains will be shared among people.
I am stressing these issues because, while I am optimistic about the future, this revolution could initially bring less job growth, since the most productive services tend to require highly skilled people and are therefore not as scalable. This brings risks of greater inequality, within and across countries.
With respect to the latter, new technologies affording the on-shoring of manufacturing and services could bring changes to global trading flows and reduce development opportunities for low-income countries.
These are large and possibly rapid structural transformations and we at the World Bank are exploring these questions. One thing we are convinced, and it is that they are likely to challenge public policies and require international cooperation to minimize downside risks.
The World Bank Group also recognizes climate change as a threat to global development that increases instability and contributes to poverty, fragility, and migration. Not surprisingly, since the Paris Agreement was reached in December 2015, we have strong demand from clients – low- and middle-income countries – for rapid, concerted action on climate change. These countries recognize the threat, but also the opportunity: that the transition to a low-carbon, climate resilient economy can drive innovation, jobs, and growth. Hence we are working intensively in areas like clean energy, climate-smart agriculture, sustainable urbanization, and disaster risk management, including through preparedness and insurance mechanisms. The World Bank Group has pledged to increase climate-benefitting lending to 28% of its commitments by 2020.
Climate and natural disaster risks are a global issue especially acute in East Asia and the Pacific, a region with 13 of the 30 countries that are most vulnerable to its effects, including the Pacific islands. The region endures some 70 percent of the world’s natural disasters, which have hit more than 1.6 billion people since 2000.
The region is also the largest emitter of greenhouse gases, with one-third of the world’s carbon emissions and 60 percent of coal consumption. Likewise, South Asia struggles with increasingly challenging water shortages, floods, glacial melt and storms. Regional leadership is therefore in great demand, and the World Bank will continue to work with governments, partners and the private sector across Asia to address these issues and increase resilience.
We are glad that Cambodia, Lao PDR and Myanmar have recently agreed to discuss launching a multi-country insurance scheme with support of the Japanese Government, which builds on the success of our Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) launched back in 2007 in partnership with the Pacific Community (SPC) and ADB.
Another global concern is the persistently low returns on capital as a rental factor. They have been declining for many years, well ahead of the global financial crisis. Recent studies have suggested that, in the US for example, the share of capital in GDP has dropped substantially over the last two decades, sometimes faster than that of labor.
The causes of this decline are not fully identified. But some hypotheses suggest that they may reflect (1) demographic shifts, (2) changes in technologies that have lowered the demand for capital in the most dynamic sectors of advanced economies, as well (3) as changes in competition that may have dampened the demand for investments. In this scenario, investors in ageing societies have excess savings searching for better yields. This imbalance can create a new, important dimension for globalism, with positive consequences for people in both advanced and developing economies.
Many investors have already realized the benefits of the infrastructure sector, which is global, remains capital-intensive, and generates long-term revenues. Its potential is especially promising in the case of climate-friendly infrastructure in emerging markets and developing economics with young demographics.
The investment gap in infrastructure in the EMDEs exceeds half a trillion dollars a year. This gap will not be filled by public investment alone—even with the help of some extremely important initiatives of public financing from large countries in Asia. This is so because of the fiscal pressure facing most developing economies.
That means that private savings, especially from institutional investors around the globe, can find an important outlet that will also help decrease the environmental footprint of progress in many EMDEs.
Unlocking these flows will transform development finance. This will not happen in a void, however.
Moody’s rating agency has indicated that the risk of investments in infrastructure, including in EMDEs, can be lower than in other sectors and tends to decrease over time. Still, the risk capacity of many institutional investors may not initially match the actual risk of current projects; and the information barriers can be too big.
Fortunately, these are constraints that can be minimized with the help of multilateral development banks, and of our commitment to the principles to crowd in private resources for infrastructure that were recently endorsed by the G20 finance ministers.
Let me say that in many developing countries, consumers are ready to pay for services that are provided in efficient, reliable ways. Affordability can, of course, sometimes be an issue. But households and business typically pay much higher prices for these services when adequate infrastructure is not in place. Also, concessional financing can help in specific cases. And technological innovations are creating cheaper and cleaner ways to deliver services and ensure appropriate cost recovery. These innovations range from solar and wind-powered electricity, to pre-payment schemes using mobile phones. Such approaches are changing the traditional equation and increasing the creditworthiness of operators. The promotion of local capital markets is also helping align the incentives for domestic and global players.
Our analysis of information from commercial databases and our regional experts has identified a preliminary pipeline of about $930 billion in projected value for projects that will be soliciting private capital to reach financial closure. This represents nearly 1,700 projects around the globe, mostly in the energy/renewable and transportation sectors. Global support to realize projects such as those and similar would increase stability in many regions, boost world productivity and reduce effective costs to consumers everywhere.
I have just arrived from West Africa, a region that has attracted increasing investment interest of Asian countries, including Japan, China and India, and where the WBG brought together the private sector, government and civil society to promote this shift, in some cases with the help of IDA.
The reception to this strategy was very positive, reflecting the commitment to reforms that has motivated governments in the region to join the G20 Compact with Africa that is being discussed under the current German G20 Presidency and is pushing local philanthropies to promote young entrepreneurs across Africa.
So, let me conclude with two observations. First, the World Bank, IFC, and MIGA are ready to use their balance sheets in the most effective way to support reforms that could accelerate the investment in quality infrastructure in the EMDEs.
We are also developing and deploying financial instruments to respond to the risk capacity of new global and local investors willing to increase their exposure to infrastructure in EMDEs.
Second, globalism is facing challenges but it is clear that a set of new and evolving issues, some of which I have touched on, continue to demand a global vision and that we work together.
Asia is taking steps to respond to these needs. I believe strongly that achieving the mobilization of global savings toward a new class of investments can be a way to rethink globalism and respond to persistent problems. And we should be mindful that it is likely to require international cooperation, including of prudential regulation where systematic profiles of risk are identified. We can approach these new areas of collaboration in the same multilateral spirit that built the main pillars of international trade several decades ago.
As it is so often the case, big challenges can open the way to think about great new opportunities and to exert leadership in new directions.