Welcome Remarks at the 2013 Global Meeting of the Emerging Markets Forum

Welcome remarks by ADB President Takehiko Nakao on 13 October 2013 at the 2013 Global Meeting of the Emerging Markets Forum, Airlie Center, Virginia, USA

(as drafted)

Introduction

Fellow co-chairs, distinguished guests, ladies and gentlemen.

It is an honor to welcome you today at the start of our 2013 Global Meeting of the Emerging Markets Forum. This is my first time here as EMF co-chair and as President of the Asian Development Bank, and I am delighted to be here. The session topics are all extremely pertinent during these challenging economic times.

I would like to address three issues this evening which I hope would be relevant for the sessions over the next one and a half days: First, the current economic outlook for emerging markets. Second, how emerging markets can continue the post-crisis trend of increasingly driving the global economy. And third, how the challenges faced by emerging markets in Asia can be addressed.

Economic outlook in emerging market economies

The world economy continues to prepare for—and adjust to—the next stage of post-crisis economic recovery. The outlook for advanced economies—Europe, Japan, and the US—is actually brighter than it was a year ago.
Assuming current political hurdles are overcome, the US economy should continue to pick up in the coming months. The eurozone appears to be turning the corner, allowing more space to tackle needed structural reforms. And Japan is beginning to show the benefits of the monetary stimulus introduced early this year. We also expect the effects of fiscal stimulus to appear soon.

Yet there are risks in each—in US fiscal policy, in the eurozone sovereign debt and banking weakness, and in Japan’s attempts to revive its economy. The question of when the US will actually begin tapering quantitative easing also creates market uncertainty.

The gradual recovery in advanced economies has not yet fully revived export orders for developing Asia. And Asia’s recent financial market turmoil has delayed new investment in the region. These factors, added to slowing domestic demand in the People’s Republic of China and India, mean growth will moderate slightly across much of the region.

Thus, ADB’s latest forecast for developing Asia shows economic growth declining marginally from 6.1% last year to 6.0% this year, and picking up slightly to 6.2% in 2014. These figures are down slightly from our April forecasts. However, we believe that with continued sound macroeconomic policies, fiscal consolidation, and prudential measures to enhance financial stability, Asia’s long-term growth potential can be secured. Continued investments in “hardware” infrastructure and “software” structural reforms—such as trade facilitation and harmonization of standards—would also be important to sustain robust growth.

Emerging markets driving the global economy

Let me turn now to my second topic—the role of emerging markets.

Emerging market economies—with their large populations—have enjoyed robust growth over the past several decades. According to IMF data, the share of emerging economies in world GDP has nearly doubled from 20% in 1990 to 38% in 2012. More importantly, the emerging market share of annual world GDP growth has grown from about one-fifth in the early 1990s to more than two-thirds today. This means that what emerging markets do matters. While undertaking adjustments, measures can have spillover effects on neighbors—and on advanced economies as well. This also means that global agreements—made to sustain global growth—require emerging market economies to actively participate, particularly in areas related to trade and investment.

I hope emerging markets will continue to assert their presence in the global economic setting. But this is not pre- ordained. In order to do so, they must continue to pursue solid macroeconomic and prudential policies, along with structural reforms—those that address middle-income country challenges of inequality and employment, and environmental degradation for example. They also need to pursue greater regional cooperation and integration.

The role of ADB in supporting emerging markets in Asia

Allow me to turn to my third topic—Asia’s changing nature as an emerging market and ADB’s ability to respond.
Rapid economic growth has reduced poverty in much of developing Asia—from a poverty incidence of 33.8% in 1999 to 18.3% in 2010. Because of this, much of the region entered middle-income country status. Only seven of ADB’s 45 developing member countries remain at low income levels. And only Nepal and Afghanistan are expected to still have low income status in 2020.

There are, of course, significant differences among Asia’s middle income countries in terms of economic circumstances, opportunities, and challenges. There are also huge differences in income distribution between lower middle income and upper middle income countries—and within countries themselves. The major hurdle now in sustaining growth in developing Asia is avoiding the middle income trap—where countries are stuck in low wage/low cost production and cannot compete against countries producing higher value-added products.

To retain our relevance, ADB must evolve to address the concerns and challenges of countries as they increasingly reach middle-income status. As middle income countries have a wider array of market-based funds to access, ADB’s value-added lies in combining cutting edge, cross-country knowledge and a history of successful operational interventions to respond. I believe, therefore, that we have to provide both knowledge and financial resources to be relevant to these countries. Just one without the other will not do.

I believe there are three simultaneously reinforcing mechanisms that can provide the means of addressing Asia’s middle income issues. I call them the “three I’s”—Innovation, Inclusion, and Integration. Let me explain a bit about each.

Studies show that innovation is essential for avoiding the so-called “middle income trap.” It raises productivity. The private sector is the cornerstone of innovation. Thus, emerging economies need to build an enabling environment for private sector investment, skills development, and research and development.

For economic growth in MICs to be socially and politically sustainable, growth must also be inclusive. Asia’s rapid growth brought with it increased inequality. Developing Asia’s aggregate Gini coefficient rose from 39 in the 1990s to 46 in the late 2000s.

New ways of promoting inclusive growth include conditional cash transfers, which originated in Latin America. South-South exchanges promoted by regional development banks have helped bring these schemes to Asian economies like the Philippines with ADB support.

Inclusive growth for Asia’s middle income countries also means addressing the jobs challenge for the young and unskilled entering the workforce. It also must deal with high levels of informal employment.

Recent ADB studies show that a manufacturing base of at least 18% of GDP is needed to avoid being caught in the middle-income trap. Conversely, moving directly from agriculture to services, as some middle income countries in Asia have tried, does not seem to improve overall per capita income or improve labor skills.
Some middle-income economies in Asia also must address the challenge of ageing populations. Fiscally responsible social protection and increased financial inclusion based on experiences in other emerging markets and OECD countries could be useful.

Finally, regional integration can help provide middle-income Asia new and diversified external market opportunities through supply chains and production networks. This must be underpinned by regional cooperation in infrastructure connectivity and trade facilitation. In this context, I wish to specifically note our collective work in CAREC—the Central Asian Regional Economic Cooperation program—which has very quickly broken down barriers and is reaping the benefits of cooperation and integration, particularly in infrastructure and trade facilitation. ADB’s country partnerships with its middle income developing member countries increasingly highlight regional integration as a central theme.

Conclusion

To conclude, we see some strengthening in advanced economies—albeit with some risks—and continued robust if moderating growth in emerging economies. Barring any new, sudden shocks, financial market volatility can be contained as macroeconomic policies begin to normalize. Emerging markets have been central to world economic growth, and—if appropriate policies and reforms are pursued—this will likely continue in our increasingly multipolar world. Asia’s emerging market economies are increasingly reaching middle-income status. This brings new issues of increasing inequality, environmental degradation and lack of adequate employment to bear in sustaining Asia’s growth momentum. These can be overcome through policies that promote the 3 I’s of innovation, inclusiveness and integration.

ADB is pleased to participate in tackling these critical issues through both our operations and our knowledge work. I look forward to our discussions during the coming Forum sessions.

Thank you.