Discussion Topics

In two days of extended debate the issues explored at the Forum included:

Discussion Topic:
The Sustainability of Liberalisation

Participants noted that:

  • In the recent past, instabilities and unsustainable imbalances in global finance had led to periodic crises.
  • The Asian Crisis of 1997-98 had illustrated both the dangers of domestic mismanagement and the pitfalls of doctrinaire approaches to liberalisation.
  • While the immediate problems associated with that crisis may have receded (with decreasing reliance on bank loans among Asian EMCs) other instabilities now loom.
  • Huge and unsustainable capital flows from emerging market economies are supporting deficits in OECD economies and shocks could result from the eventual winding down of EMC capital balances.
  • Recognizing that (i) it is difficult to achieve successful self-immunisation in isolation; (ii) successful liberalisation demands a delicate balance between the management of interest rates, debt, deficits and reserves; and (iii) there are many variations between countries, EMCs should adopt strategies that combine "immunisation, prevention and isolation".
  • EMCs should "be closely open", acting positively but cautiously in pursuing reforms as integral parts of balanced programmes of domestic and external financial policy changes.
  • Difficulties arising in these transitions could be partly offset by closer regional cooperation.

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Discussion Topic:
Capital Needs

Participants noted that:

  • EMCs have enormous investment needs that must be addressed if their economic and social goals and potential contributions to the global economy are to be realised. East Asia alone will require more than a trillion dollars in the next few years to meet ICT and physical infrastructure needs - far more than governments can supply.
  • There are potential mismatches between capital flows and the need to fund infrastructure and provide risk capital for entrepreneurs, (especially in medium size EMC enterprises).
  • Capital flows to some EMCs could outstrip their "absorptive capacity" and are not necessarily associated with technology transfer and skills development.
  • There are potential negative effects of competition between EMCs - the so-called "winner"s curse" - resulting from EMCs falling over themselves to offer unsupportable incentives to foreign capital inflows.

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Discussion Topic:
Portfolio Flows

  • Some participants judged portfolio equity finance "at best irrelevant and at worst dangerous" given the volatility it fosters and the difficulty of leveraging broader benefits from it.
  • Others emphasised that "investors learn as well" and that there had been a process of maturing and diversification since the opportunist speculation of the last decade.
  • There was broad though incomplete agreement that although it was relatively small compared to other forms of financing, portfolio equity finance could make valuable - and in the case of smaller EMCs - quite significant contributions.
  • It was also broadly agreed that from the point of view of fund managers" decisions the diversity of EMCs provides them with a natural asset that offers a hedge against worries over hedging. "EMCs have a weapon here - although they may not know it" commented one fund manager.

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Discussion Topic:
The Need to Mobilise Domestic Capital

Participants noted the irony that EMCs" massive needs for infrastructure and other investment go unmet while excess EMC savings find their way to global capital markets;

  • There were contrasting views on Foreign Direct Investment (FDI). One participant argued: "EMCs do not need more FDI but must use their own domestic savings more efficiently.and that the demands of the domestic industrial lobby will generate effective and open domestic capital markets."
  • Others saw FDI as an invaluable part of the capital mix and cited cases where it had played instrumental roles in the transfer of technology and expertise.
  • It was generally accepted that, particularly in Asia, EMC savings are not being efficiently intermediated by regional financial systems and that it is difficult to find the right investment opportunities because (i) market structures are underdeveloped and (ii) investors are concerned about efficient pricing and liquidity and weaknesses in legal and regulatory frameworks.
  • Participants concluded these issues must be resolved because as one put it: "By ensuring more of Asia"s savings remain in the region, Asia can also make a significant contribution to correcting global imbalances".
  • Participants generally discounted the risk that re-channelling Asian savings could undermine the developed economies that have become reliant on them and in turn trigger an even more comprehensive global financial crisis. As one said, "There will of course be ramifications for international financial markets. However, change will be gradual because high savings in Asia will ensure the region continues to be a capital provider to international markets for the foreseeable future."

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Discussion Topic:
The Need to Develop Domestic Capital Markets

Participants were united in their support for the development of stronger domestic and regional capital markets in EMCs while recognizing that, as one participant put it "Building domestic equity markets is crucial - but very difficult". Echoing the views of others, he added: "Creating them should be a principal focus. We should not make a distinction between the supply of foreign and domestic capital. Indeed it is becoming increasingly hard to distinguish between them. They should be treated as a common rung in the ladder of financial provision."

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Discussion Topic:
The Need to Mobilise Domestic Capital

Participants noted the irony that EMCs" massive needs for infrastructure and other investment go unmet while excess EMC savings find their way to global capital markets;

  • There were contrasting views on Foreign Direct Investment (FDI). One participant argued: "EMCs do not need more FDI but must use their own domestic savings more efficiently.and that the demands of the domestic industrial lobby will generate effective and open domestic capital markets."
  • Others saw FDI as an invaluable part of the capital mix and cited cases where it had played instrumental roles in the transfer of technology and expertise.
  • It was generally accepted that, particularly in Asia, EMC savings are not being efficiently intermediated by regional financial systems and that it is difficult to find the right investment opportunities because (i) market structures are underdeveloped and (ii) investors are concerned about efficient pricing and liquidity and weaknesses in legal and regulatory frameworks.
  • Participants concluded these issues must be resolved because as one put it: "By ensuring more of Asia"s savings remain in the region, Asia can also make a significant contribution to correcting global imbalances".
  • Participants generally discounted the risk that re-channelling Asian savings could undermine the developed economies that have become reliant on them and in turn trigger an even more comprehensive global financial crisis. As one said, "There will of course be ramifications for international financial markets. However, change will be gradual because high savings in Asia will ensure the region continues to be a capital provider to international markets for the foreseeable future."

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Discussion Topic:
Improvements in Governance

Participants agreed that:

  • The availability of capital in EMCs has been strongly affected by weak governance and lack of transparency.
  • Poor governance has, in the past limited the benefits of injections of foreign equity. "How do we get local stock markets to deliver better governance and so better value to the customer?" asked one, adding that "Local players are often able to manipulate local rules and exploit local loopholes at the expense of those outside" and that "The international community has not worked well with local authorities to combat this."
  • Strong and transparent governance plays a key role in making emerging market economies more productive, efficient and attractive.
  • The attitudes of the next generation of leaders in emerging market countries will be a crucial factor.
  • Openness and good corporate governance is one reason why India for example has been a favoured destination for foreign investment among larger emerging market economies. A participant commented that "The value of governance is in extracting value. But you must also have active agents. The major institutional investors are not yet active players in EMC markets - unlike in the US.".

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Discussion Topic:
Outsourcing

Participants:

  • Pointed to the fallout from the increasingly fierce political controversy raging in developed economies over the effects of offshoring and outsourcing on jobs, noting this is a dangerous phenomenon because it opens the backdoor to discredited protectionist practices and obscures the key issue of labour flexibility.
  • Were unanimous that the benefits of offshoring and outsourcing for both developed and emerging market economies far outweigh the drawbacks, noting that job losses due to outsourcing - which marks the rise of a new dynamic in product development and innovation and a vital and irreversible phase in the evolutionary spiral of globalisation and international economic growth - have been relatively low.

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Discussion Topic:
The Value of Regional Approaches

Pointing to disparities within and between EMC regions, participants noted that:

  • While 300 million people in Asia have been lifted out of poverty since 1990 the region is still home to nearly two-thirds of the world"s poorest people.
  • Despite isolated progress, Africa is still, in the words of one participant, "bumping along the bottom" and despite debt relief provisions announced at the meeting of G8 ministers in June, is unlikely to meet the Millennium Development Goals for 2012.
  • Despite recent economic recovery, welcome victories in the fight against inflation, and individual success stories like Chile, economic performance in Latin America has been uneven.
  • In Europe, there is a "malaise" of stagnation among core EU states and there are sharp divergences in reform and increases in fragmentation and volatility in the "New Europe" of the East.
  • Throughout the Forum regional cooperation was highlighted as a way forward for EMCs, especially for smaller or more vulnerable countries as they seek to grow and to combat global issues. Perhaps the sharpest expression of this approach came in a speech "Towards a Borderless Asia: A Perspective on Asian Economic Integration" by Haruhiko Kuroda, President of the Asian Development Bank

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