“On some new measures, China has already surpassed the US to become the largest economy in the world. There is more to come...”
Jeffrey D. Sachs is a world-renowned professor of economics, leader in sustainable development, senior UN advisor, bestselling author, and syndicated columnist whose monthly newspaper columns appear in more than 80 countries. This interview focuses on the importance of sustainable development, what it means for emerging markets, and aims to identify the investment implications for foreign direct investment and portfolio investors.
Q. Does the term “emerging markets” mean anything in a world where China is the second largest economy in the world? Should we be classifying countries differently?
A. Over the past generation, the world economy has been dramatically reshaped. Overall, global output has roughly doubled. One key element of this has been the rapid growth of emerging economies, with developing countries now contributing more than 50% of the world’s market output.
On some new measures, China has already surpassed the US to become the largest economy in the world. There is more to come.
In principle, all developing countries are “emerging”, not just the BRICs, yet economies have escaped from poverty at different times and rates. All developing countries lag in technology and, therefore, have room for “catching up”. This gives them the possibility to grow rapidly, more rapidly than advanced countries, and thereby to “emerge” as fast-growing middle-income economies.
Catch-up growth is not inevitable, and economies can stall or reverse, if the basics are not in place: infrastructure, stability, security of investment, disease control, and literate and numerate workers.
Proper economic management, from both the public and private sectors, is required to ensure these basic needs are provided.
The recent relative slowdown in key emerging economies can be viewed through this lens. We are witnessing both long-term trends and short-term fluctuations, not a fundamental change in principles. China is richer, so there is less headroom for rapid catching up. Perhaps China will now grow at 6% to 7% per year, still very rapid, rather than 9% to 10% per year, as in the past 25 years. The other BRIC countries have their own short-term macroeconomic problems. Still, as a whole, the developing-world catch-up phenomenon continues and forecasts show this is likely to continue for the foreseeable future. According to the most recent IMF World Economic Outlook, “emerging and developing Asia” will grow at 6.7% in 2014, sub-Saharan Africa at 5.4%, and emerging and developing countries as a whole will grow at 4.9%, far above the projected growth of 2.2% in the advanced economies.
“Catch-up growth is not inevitable, and economies can stall or reverse, if the basics are not in place: infrastructure, stability, security of investment, disease control, and literate and numerate workers.”
Q. What has been the most surprising element of emerging market growth over the past 10 to 15 years for you?
A. There are two big surprises to me: China’s success at maintaining high growth, despite many difficulties (financial, social, macroeconomic, environmental, geopolitical); and sub-Saharan Africa’s rise in growth, to become the second-fastest growing area of the world. Neither of these processes is assured for the future.
China faces huge structural challenges. In the course of rapid development, it has become one of the most polluted places on the planet. Recent estimates suggest that the air pollution in heavy coal-using northern regions is reducing life expectancy by 5.5 years.
“...yet the Chinese authorities have shown great dexterity and skill in navigating such complex challenges in the past.”
Freshwater depletion, the pollution of rivers and estuaries, and the poisoning of the soils is also taking a huge toll. At the same time, unregulated shadow banking, a real-estate bubble, and the lack of transparency in local-government finances, all threaten the financial sector. And through all this, China is endeavouring to absorb 100 million people into the urban area by 2020. It may sound impossible – like a balancing act beyond control, yet the Chinese authorities have shown great dexterity and skill in navigating such complex challenges in the past. The momentum for growth in China – through improved technology, higher education, and urbanisation – remains intact. I believe that once China adopts a strategy of sustainable development, balancing growth, social inclusion and environmental sustainability, the medium-term growth prospects will be even stronger.
Incidentally, I often emphasise that China’s success depends not on converting investment spending into consumption spending, but in raising the quality of investments in both the public and private sectors.
Africa’s challenges are very different, of course, reflecting an earlier stage of development. Despite recent strong economic performance, Africa is still suffering from instability, excessively high fertility rates and high vulnerability to climate change. Yet the high growth definitely demonstrates the medium-term potential of Africa to escape from its long plight of extreme poverty. One could foresee at least 15 years of 8% per annum average Africa’s growth.
Africa’s growth today is fuelled by seven factors: the onset of catch-up growth; improved domestic economic management; a winding down of most of the regional wars; debt cancellation spurred by the Millennium Development Goals (MDGs); disease control and improved schooling and literacy also spurred by the MDGs; the mobile
revolution, leading to a leapfrogging of communications and business technologies (including online banking) and, of course, the voracious demand from China for Africa’s primary commodities.
“Still, Africa must prepare itself for the climate change ahead, and undertake large-scale investments to ‘climate proof’ the African economies as much as possible.”
All of these factors, together, are sufficient to give Africa substantial momentum in poverty reduction. Indeed it is possible to imagine the slashing of poverty rate in the coming twenty years. Yet there are two major obstacles that must still be faced. First, Africa’s fertility rates remain excessively high. Unless there is a concerted effort to reduce these high fertility rates, a population explosion (up to 3.8 billion people in sub-Saharan Africa by 2100) could overwhelm the growth dynamics. Fortunately, fertility rates can be brought down through a proven combination of policies: girls’ education at secondary school level; access to family planning and contraception; women’s empowerment; and a drastic decline in child mortality (giving confidence to households to have fewer children).
The second huge risk factor, alas, is global climate change. Africa is victim rather than cause, so the threats to Africa of global climate
change are profoundly unfair. Still, Africa must prepare itself for the climate change ahead, and undertake large-scale investments (for example, in irrigation) to “climate proof” the African economies as much as possible. Also, global mitigation of climate change will be vital for Africa’s future wellbeing.
Q. What has been the role of the public sector versus the private sector in fuelling emerging market growth? Does one matter more than the other?
A. We must move beyond the public versus private debate. Growth is always a mix of public and private actions. All successful economies are mixed economies.
Government must underpin infrastructure, public health, education, social stability, and environmental protection. Even if a considerable portion of infrastructure is privately funded, it almost always depends on a public regulatory, land use, and co-financing system. Health and education inevitably depend on effective government services.
“We must move beyond the public versus private debate. Growth is always a mix of public and private actions. All successful economies are mixed economies.”
The private sector will be vital in the years ahead in most economic sectors, even in areas such as health, education, and infrastructure, where public financing will complement private provision and innovation. We are inherently moving to a public-private economy in nearly every sector. Part of the art of financial engineering will be to combine public financing (through bonds, equity, and public pricing) with privately managed concessions on roads, ports, airports, hospitals, and other infrastructure. The key here is strong regulation that ensures that private monopolies do not abuse their market power, while encouraging private-sector innovation in quality of services.
Q. What is the role of financial market development in a country’s growth trajectory? Have certain parts of the emerging world “financialised” too quickly?
A. Finance is both the key to growth and the source of instability. Basically, long-term financing via foreign direct investment, external bond financing, and effective intermediation of long-term domestic saving for long-term housing and infrastructure investments are key. Yet finance becomes a source of instability when it veers towards short-term trading, excessive leverage, and bubbly investments in real estate. Countless developing country economies have been led to collapse by dependence on short-term financing from abroad. The key points: attract long-term capital, stay away from short-term debt (especially inter-bank credit lines), and regulate against excessive leverage of financial institutions.
“Yet finance becomes a source of instability when it veers towards short-term trading, excessive leverage, and bubbly investments in real estate. Countless developing country economies have been led to collapse by dependence on short-term financing from abroad.”
“I tell my friends and counterparts on Wall Street that such long-term financing is not only the future; it is Wall Street’s only chance to remain at the centre of the global action.”
Q. How can the financial services industry play a more constructive role in global problem solving around sustainable development?
A. Financial services are critical to financing a sustainable future. For that, we need expertise in designing and financing long-term complex sustainable projects, in infrastructure, education and, of course, business development. Finance is a great contributor to human well-being when it steps out of the market casino into long-term building of economies. That’s the real role of finance in the years ahead.
I believe that after a generation of finance that focused on trading profits, we will move back to the real role of finance: building the economy in the long term. There is a huge and growing interest in
that deeper model, in the form of public-private partnerships for infrastructure; development banking at local, state, and regional levels; sustainable infrastructure as a growing asset class; and responsible investing by pension funds and insurance funds in long-term programmes.
I tell my friends and counterparts on Wall Street that such long-term financing is not only the future; it is Wall Street’s only chance to remain at the centre of the global action.
Q. Are you optimistic about the next generation of our world's inhabitants?
A. We had better be optimistic. There is no viable alternative. And there is no moral alternative. We’ll continue to fight for what is right and what is needed. Humanity wants to survive and flourish. It’s everybody’s job to contribute.
Professor Jeffrey D Sachs serves as Director of the Earth Institute at Columbia University.Download PDF
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