Question

What is the implication to global companies and US companies to date, and what will be the implications going foward regarding the greek economic crisis?

Answer 1

Long-term economic outlook

The present looks promising for emerging market economies, but the future seems even brighter. The projections for long-term growth, based on demographic trends and models of capital accumulation and productivity, tell us that emerging markets are likely to become even weightier in the world economy tomorrow than they are today. Of course, projections at very distant horizons are somewhat speculative, but they do offer an insight into possible secular developments. In this respect, one study found startling results regarding the growth prospects of emerging markets. India, together with Brazil, Russia and China, could be over half the size of today’s six largest industrialised economies by 2025, and in less than 40 years they could overtake them. [8] Looking ahead to 2050, China would be the world’s largest economy and India would be its third largest, behind the United States. A similar picture emerges from other studies, with some nuances. [9]

If history is any guide, these developments are unsurprising. It suffices to recall how significant India’s weight in the world economy was two millennia ago, when the Middle Kingdoms were ruling in India and the Roman empire was ruling in Europe and North Africa. At that time, India was by far the world’s largest economic power, accounting alone for about a third of world output. [10] Moreover, at par with China, it subsequently remained the largest economy in the world for several centuries, until the eve of the industrial revolution. Seen from this long-run perspective, the rapidly growing importance of India in today’s world economy seems to be a return to normality. The developments we observe today are therefore likely to be the precursor of a profound rebalancing in the distribution of world output tomorrow. These developments call for constant monitoring and cooperation in the international community, however. It cannot be excluded that this process of rebalancing might be “non-linear”, with episodes of discontinuity, perhaps also including economic and financial crises somewhere down the line.

Cultural and scientific importance

But allow me to also consider the emerging markets from a different angle, which you will perhaps find surprising for a central banker. We central bankers are known to look at countries through the unexciting lenses of numbers, facts and figures. This is entirely true. But we are convinced that economic figures are closely associated with the scientific overall level of one particular society and that cultural developments and influence are closely related to economic success. It is therefore not surprising that emerging countries are rapidly growing in influence, importance not only economically but also culturally.

Speaking of the cultural and scientific importance of a nation which has historically been at the source of European languages, literature and mathematics is paradoxical!

Turning to the present times, there are a vast array of indicators that underscore the growing influence of the contemporary culture and science of emerging economies in general and of India in particular. Being here in India, I am bound to mention film-making as a first example. As you will know, India is the largest world producer of films, with over 900 in 2005, ahead of the European Union, with about 800, and the United States, with about 700. [11] Of course, this is due to the success of “Bollywood”, a label now well-known across the world. Other emerging markets, such as China and Russia, rank among the top ten film producers. Take the internet as a second example. The internet plays a crucial role in making the world more globalised, and here too the weight of emerging markets is already impressive. There are almost as many internet users in India (close to 40 million) as the entire population of a country such as Spain. [12] Asia is the region with the highest number of internet users, even when Japan is excluded, with over 310 million. It is ahead of North America, with 230 million users. Last, consider my final example: the number of Nobel prizes awarded. Here again, emerging market countries are rapidly growing in importance. In the ten years starting from 1980, 24 nationals from emerging market countries were awarded a Nobel prize. Within only six years of the new millennium, this figure is already almost as high (22). All in all, the growth in the economic weight of emerging market countries and the rise in their cultural importance are very much developing in a synchronised manner.

Euro area perspective

Before I move on to the implications of the growing importance of emerging countries for the governance of the world economy in macroeconomic and financial matters, let me briefly tell you how we in the European Central Bank see the growing role of the emerging markets. To us, the message is clear: the growing role of the emerging markets is good news for the euro area, the group of 13, soon to be 15, European countries, with 320 million fellow citizens, that share the euro as their single currency. In particular, vigorous growth in emerging markets increases the demand for those goods and tradable services where the euro area has comparative advantages. Emerging market competition also strengthens the incentives to make further progress in terms of structural reforms in our economies, which are, in any case, needed.

The euro area, in addition, has the potential to take advantage of the new opportunities that the development of the emerging markets creates. Our exports and imports of goods and services account for around one-fifth of GDP, more than in the United States or in Japan. In this respect, the euro area is also increasingly open to the emerging markets. Our trade relations with emerging Asia, Russia and with central and eastern European economies have strengthened noticeably over time. The share of emerging markets, taken together, in euro area trade has grown from about one-third, when the euro was introduced in 1999, to more than 40% today. Trade relations with India have equally strengthened over time. The euro area is also largely open financially. If I focus on emerging markets, perhaps one of the most interesting developments in recent years is that the euro area has become an increasingly attractive destination for foreign direct investment from the largest of these economies, although starting from very low levels. Indeed, between 1999 and 2005 the stock of foreign direct investment from Brazil, Russia, India and China in the euro area tripled, to reach around €12 billion. This is good news, as these investments represent a new source of capital, with potentially beneficial effects on euro area growth. Moreover, they might help European firms access emerging markets more easily than on their own.

The bottom line of my brief overview is: emerging market countries are increasingly important global players in all dimensions, be they economic, financial, cultural or scientific. This is a welcome, systemic, development. In turn, this has important implications for the governance of the global economic and financial system. What are indeed these implications? This is the second issue I would like to address today.

III. Implications for the international financial architecture

It is evident that the systemic evolution we are witnessing in the global economic and financial system calls for systematic changes in the global policy framework. There are new players. They are gaining in importance. This means that they also have more responsibilities in the global arena and that the rules of the game need to adapt in order to keep pace.

But there is another reason. Globalisation has put all economies around the globe in the same boat. Something that happens in one economy is often no longer a mere domestic event. Its implications can sometimes extend to the entire global system. Remember how 12 years ago the Tesobonos crisis in Mexico developed from a local phenomenon into an issue for the international financial community. Remember the Asian crisis.Remember how the global system had to digest crises in Russia and Argentina as well as the bursting of the technology bubble around the turn of the millennium.All economies which have a systemic importance should therefore be involved in discussing and participating in the collegial response of the international community to issues of global relevance.

This is why the governance of the world economy in macroeconomic and financial matters has been changing rapidly in terms of both format and substance.

Implications for the format

Consider first format. The various international institutions and fora which are involved in international policy dialogue on macroeconomic and financial affairs have strived over the past ten years or so to better integrate emerging markets. Let me take three examples. One of the most important of these fora is the Group of Seven or G7, where finance ministers and central bank governors of the seven most important industrialised nations of the world meet several times a year to discuss issues of mutual interest. The G5, soon to become the G7, was created as an informal forum in the 1970s. It is sometimes criticised for not reflecting the political and economic realities of the twenty-first century. I have had the privilege of attending all its meetings over the past 18 years. My experience is that the G7 meetings have proven an invaluable forum for cooperation on macroeconomic policies and for giving, when appropriate, signals to market participants. The G7 is adapting to the new political and economic realities through what is termed “outreach”. The G7 countries have acknowledged the necessity of involving other players in their discussions. In particular, it is now standard practice for finance ministers and governors from emerging economies – and sometimes also from developing countries – to be invited to join these discussions. This is the case for oil-producing countries, in particular. For instance, in spring 2006 finance ministers from certain oil-exporting countries joined the G7 in a discussion on global imbalances.

At the level of heads of state and government another important step was made a few months ago. A new form of informal cooperation between G8 members (i.e. the Group of Seven and Russia) and important emerging economies has been launched. Challenges have become global. Global challenges require global solutions. And global solutions cannot be found without the active participation of important players, from both mature and emerging market economies. India is of course part of these important emerging economies, as are Brazil, China, Mexico and South Africa. At their meeting in Heiligendamm last summer, the G8 countries and these important emerging economies committed to embark on a high-level dialogue on issues of global dimension, issues which will be at the top of the agenda in the years ahead. They include, for instance, cross-border investment, research and innovation, energy efficiency and development. The Heiligendamm process is a very welcome one.

The creation of the informal grouping of the G20 in 1999 is a major change in global governance, fully taking into account the structural transformation associated with the growing importance of the emerging economies. It was created to examine major economic and financial global issues at the time of the Asian crisis, fully recognising that all economies that had a systemic influence should be partners at the global level.

Since 1999 the G20 has turned out to be a very important international policy forum for dialogue and consensus-building among systemically important economies, both industrialised and emerging. India held its presidency in 2002. I have a very vivid memory of this meeting in Delhi where, for the first time, the international community through the G20 endorsed the idea of the voluntary “Principles” for prevention and solution of sovereign crises, which I had myself suggested when it appeared that the “SDRM” was not workable. The G20 has facilitated consensus on crucial policy issues of the international reform agenda. It has organised several workshops to deepen the understanding of issues of global relevance and has engaged in a process of peer review to promote countries’ implementation of market-based economic systems. In the early years of its existence, the G20 put special emphasis on financial stability and crisis prevention, including aspects such as prudent debt management, domestic financial deepening and exchange rate regimes. Its agenda has widened since then. It now includes also the global policy challenges ahead of us, such as development, energy and climate change. In my view, it is the format of the G20 which makes it a success. Not too large, not too small! Its composition and size strike a balance between giving the G20 a high degree of legitimacy while at the same time also allowing frank dialogue between the members. In recent years, the G20 has also played an active role in contributing to the reform of the Bretton Woods institutions, the International Monetary Fund (IMF) and the World Bank. It has been committed to strengthening their credibility, effectiveness and legitimacy. It has also followed closely the progress made with policy and internal governance issues.

Alongside the G7 and the G20, significant reform efforts are indeed under way at the IMF to adapt the institution to a new environment and a new set of players. This is my last example of the substantial developments that the governance of the world economy is experiencing in terms of format. The key issues here are quota and voice, two important elements defining the representation of Fund members. In addition, the way the IMF carries out its policy work is changing. For instance, last year saw the launch of the first multilateral consultations, an innovative approach that aims to bring together countries with a shared responsibility for global issues. These first multilateral consultations were dedicated to one of the key risks weighing on the world economy, namely global imbalances. The consultations involved both mature and emerging economies, including the euro area, the United States, Japan, China and Saudi Arabia, again illustrating the fact that large current imbalances are no longer an issue for mature economies only, but a truly global issue. We at the ECB welcomed these discussions as a way to foster the implementation of the agreed strategy to address global imbalances. Evidently, these discussions are also of relevance to India. Large current account imbalances worldwide go hand-in-hand with sizeable cross-border capital flows. India has been confronted with challenges posed by strong capital inflows. This is why addressing imbalances is in the interest of the international community as a whole.

Implications for the substance

Not only the form but also the substance of the governance of the world economy in macroeconomic and financial matters is changing. This will be my last point. The macroeconomic and financial situation in emerging economies today looks strong. But we know it was not always so. We have seen both good and bad times. This is why many initiatives have been taken to strengthen the resilience of countries’ macroeconomic and financial performance and policies following the string of crises of the 1980s and 1990s. Reforms can obviously take many forms. But there are three guiding principles which, in my view, should always be kept in mind: transparency, good practices and dialogue.

Allow me to take transparency first. Investors, borrowers, lenders and economic agents in general cannot make proper decisions without adequate information. Easy access to information facilitates investment decisions, the management of risk and market discipline. This in turn gives appropriate incentives in the conduct of macroeconomic and structural policies. Easy access to information also allows investors to better differentiate across economies, borrowers and companies. Ultimately, this helps to lessen herding behaviour and contagion when market volatility increases. This is why transparency is so crucial. And in recent years, a lot of progress has been made to enhance transparency and to facilitate access to information as well as its dissemination to market participants. I give you one example. Ten years ago, the nature of economic and financial data and the way they were reported varied significantly across countries. Even simple concepts, such as debt, could be understood very differently around the world. This severely constrained our ability to compare financial vulnerability across countries. But thanks to work carried out at the IMF, the special standards for dissemination of economic and financial data have become a widely recognised benchmark to which a large and increasing number of countries adhere. Of course, there are still areas where more work needs to be done. One of them, for instance, is the reporting to the IMF on the currency composition of countries’ foreign exchange reserves. But overall, things are moving in the right direction.

Adopting good practices is a second principle which should continue to guide our efforts in reforming the governance of the world economy in macroeconomic and financial matters. Here again, there have been a number of achievements. A large array of standards and codes for macroeconomic and data transparency, banking supervision, corporate governance, accounting, and payment and settlement systems have been subject to international agreements. Such standards bring together what is widely considered as good practice or guidelines in a particular domain. They enhance domestic and international stability. In this respect, the IMF and the Financial Stability Forum – the only forum for cooperation among national and international entities in charge of supervision – have singled out 12 of these standards as being of particular importance for a sound and stable economic and financial system. But the work of the international community has gone beyond standard-setting. It now also focuses on implementation. Progress has been made towards publicly examining countries’ compliance with standards and codes. And there is one important lesson that we can draw from this experience. The international community does not always need to rely on rules and unilateral enforcement to make progress on certain fronts. Goodwill and, at times, peer pressure, can also work.

Closely related to this is the need to maintain a constant dialogue between the public and private sectors, the last principle to bear in mind in reforming the international financial architecture. Principles agreed by all relevant players on a voluntary basis can at times be preferable to rules decided and enforced unilaterally by public authorities. This proved to be particularly true for the “Principles for stable capital flows and fair debt restructuring in emerging markets” that – as I already mentioned – were endorsed by the G20 in Delhi in 2002. Following defaults on the part of several emerging market borrowers, the international community realised the need to resolve financial crises in a more orderly fashion and to improve sovereign debt restructuring mechanisms. Debtor countries and private investors agreed on best practices and guidelines for information-sharing, dialogue and close cooperation both in normal times and in periods of financial distress. Since I suggested myself such a voluntary code of conduct at the IMF Annual Meetings in 2001, I am glad to see that these principles are increasingly recognised as an important framework for cooperative action by debtors and creditors. But looking ahead, they might also serve as an example in other domains. One such domain, for instance, could be the sector of highly leveraged and non-regulated entities – which could develop as actively as possible voluntary benchmarks for good practices, as also recommended by the Financial Stability Forum.