Transcript of remarks by Mr Tharman Shanmugaratnam, Minister for Finance, at the World Bank-Singapore Infrastructure Finance Summit10 Nov 2010
Mr. Robert Zoellick
President, World Bank
Distinguished Guests, Ladies and Gentleman
Good morning. This is the second year in which we are having this conference. It comes at an important time. We are at a critical point in the recovery of the global economy. Globally, we have passed the phase of rebound from the depths of the crisis and are now addressing the challenge of sustaining growth.
2. The challenge is to do so in a world where economic conditions are divergent but where economies are still closely inter-connected. Economic conditions are widely divergent - growth in the advanced economies remains slow and below their potential whereas growth in the emerging economies is back up to potential, and in some emerging economies the level of output is now significantly above trend, in other words, above potential output levels.
3. So we face widely differing growth paths, and also divergent inflationary conditions. The risks are still tilted more in favour of deflation than inflation in the advanced world, whereas the risks are now distinctly tilted towards higher inflation in the emerging economies.
4. But it is still a closely inter-connected world. In Asia, more than 50 per cent of exports are still driven by final demand outside of Asia. So we all have an interest in seeing the revival and strengthening of the advanced economies; and the world at the same time depends on the growth of new sources of demand in the emerging economies to get that going.
5. It is an inter-connected world, and we have an interest in each other's economic growth. One way or another, there will be feedback from one part of the global system to another. We saw it in a brutal way during the crisis. Let's not mistake this - we are not in a decoupled world. One way or another, we are going to see feedback loops. And far better that they be positive feedback loops than negative feedback loops. Better that domestic demand in the emerging economies helps stimulate the growth of export industries in the advanced economies and helps lead their recovery, and far better that global imbalances are resolved through increased imports in surplus economies rather than through a reduction in imports in deficit economies as they slow. Far better that a return of optimism in the advanced economies reinforces the optimism that we see in the emerging economies and vice versa.
6. The key challenge therefore in Asia and a key source of potential positive feedback loops globally is in the growth of domestic demand. And there are two major components to this. The first is Chinese consumption demand. That’s well known, and is the common magazine story. Chinese consumption is already growing rapidly, but with huge potential still as the rural population moves into the cities, as tighter labour markets in the coastal provinces force up wages, and as more people cross the tipping point into the middle class and sophisticated demand grows exponentially in everything from clothing to food, to education, to gadgets and cars.
7. That's the first major component of the potential growth of domestic demand in Asia – Chinese consumption. The second major component, which doesn't receive quite the same coverage in the media, is investment in emerging Asia outside of China. Investment rates in these economies have not recovered since the Asian crisis more than a decade ago, with the exception of Vietnam. Their investment rates are also generally below the levels seen in Japan and the four Asian NIEs in their earlier years, as they moved to become middle income economies and subsequently further up in incomes. And their investment rates are well below China's investment rates currently
8. What this also means is that GDP growth and levels of income in Asia outside of China are by and large below their potential. There is significant scope to boost investment rates, and consequently scope to raise potential rates of output growth - by reasonable estimates, to raise potential output growth by one to two percentage points a year through higher and sustainable rates of investment.
9. Infrastructure investment is a key piece of that potential. There has been underinvestment in infrastructure almost across emerging Asian outside China, and there is scope to boost it greatly. And its contribution will not just be the direct contribution by way of increased construction and other economic activities, but the spillovers of dynamic effects of better infrastructure - for example as improved connectivity spurs urbanisation and higher consumption, and catalyses private investment in plant and other facilities. So infrastructure a key enabler for a much broader span of domestic demand.
10. Those are the two big sources of increased domestic demand in Asia. To put them in perspective, Chinese consumption was estimated at about US$1.7 trillion last year. Private investment in emerging Asia outside China is about US$1 trillion dollars. Two major pieces, with the scope to grow and play a major role in global rebalancing as well as in sustaining global growth going forward.
11. A further reason why we should do what we can to strengthen infrastructural investments in Asia is that it is a useful way in which we can change the composition of capital flows into Asia. The fact that we have large capital flows into Asia is not going to go away soon, with or without quantitative easing in the advanced economies. It is a region that is growing rapidly, and which is expected to see continued good growth for some years to come. It is going to attract capital. Increasing the proportion of long term investment capital within these flows is however an important priority. Getting infrastructural investments going, and using better infrastructure to bring in the broader span of private long-term investment, is going to be an important piece of the solution.
12. We know the gaps that need to be plugged and this conference will discuss these in detail. Capabilities can be improved. They can be improved through the sharing of expertise and experience, with international players like the World Bank working pro-actively with national agencies to borrow experience from wherever it is relevant. For example, legal and regulatory frameworks need strengthening. That's not just a matter of political economy. It's also a matter of building up expertise in national agencies. Many developing countries lack adequate trained manpower in their regulatory agencies - in areas such as formulating competition and regulatory policies and in contract design.
13. Capabilities in urban planning and project management can also be strengthened. Here too we have to leverage on all the resources we have in the private sector, as well as the public sector experience that is available in the region and globally.
14. Capital for infrastructural investments is a third gap. But private capital is there waiting on the sidelines and we have got to find ways to unlock it. There is reason for optimism. We are already seeing a recovery in Asian project finance. This year, in the first three quarters we have seen project loans in Asia go up to US$74 billion, which already exceeds the previous full-year peak, which was in 2008, of US$49 billion.&nb sp; We have seen some improvement in risk-reward perceptions of Asian economies.
15. So the conditions are propitious for a return of private investments - both private funding for public sector projects as well as private sector projects themselves. The World Bank has I know been very focused on this - on working with public agencies to help catalyse private investments.
16. And it is not just about substituting for public finance so that the region is able to keep to the scaled-back public deficits that have been achieved - and which are themselves a source of confidence. It is also about the fact that private investment, for example through well-designed PPP schemes, can help will help enhance the focus on efficiency, on ensuring commercial viability. It leads to better productivity of investments over time.
17. So we're focused on this and Singapore is very happy to be a partner with the World Bank in working with countries across the region and further afield to help spur infrastructural investments. We will be announcing a few initiatives later this morning, aimed at enhancing capabilities in emerging economies.
18. So this is an opportunity to grow Asian domestic demand. This is the low hanging fruit in global rebalancing. The conditions are right, and we are working very well together.