Emerging markets must expand their global networks | Fin24
 
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Emerging markets must expand their global networks

Jul 08 2017 06:00
Cas Coovadia

I was recently asked whether emerging markets still matter. My immediate response was: “Of course they do!” Emerging markets still matter because they play a critical role in economic growth and trade.

But then I started questioning the definition.

While the respective emerging markets are still crucial to global trade, does defining ourselves as “emerging” still serve us?

Do we want to remain a subordinate part of the global economy defined solely as “emerging”, in contrast to the established “developed markets”?

Being part of the Brics grouping (Brazil, Russia, India, China and South Africa) defines a country as a developing or emerging economy. But China is the second-biggest economy in the world by nominal GDP and still one of the fastest growing. Despite its recent downgrade, it remains firmly in investment grade. What is “emerging” about that?

India has the sixth-biggest and Brazil the eighth-largest GDP, depending whose figures you follow.

Sure, per capita GDP is lower in the Brics markets, but the fact remains that “emerging markets” control a significant portion of trade and are major global players.

Definitions no longer matter – it is about what countries are doing to grow trade, drive investment and, critically, uplift the people of their countries.

We now live in a multipolar world. We should be talking about how we identify markets that play critical roles in the global economy, finance and trade, and work out why they are succeeding.

A country like South Africa needs to build relationships with all large economies, and build alliances and trade partnerships. We need to participate in multiple global structures.

As a developing economy, we have a lot in common with India, but our banking system is more technically sophisticated.

In the banking sense, South Africa has more in common with Canada, Australia and New Zealand.

So, for example within the International Banking Federation, Brics members can look at ways to improve banking sector competitiveness. There are several international groupings, all of which provide opportunities for cooperation within and between structures.

I feel that emerging markets can benefit from still greater cooperation and less of a self-serving approach. For me, these are the real benefits to be gained from multilateral collaboration, and they find further expression as the internal and external relations around the Brics conurbation evolve.

It’s fair to say that Brics is often more of a foreign policy lever than an economic one.

Even the Brics New Development Bank is an attempt to establish a bulwark against the hegemony of the Bretton Woods institutions.

But despite this valid initiative, it would be naive to ignore the reality of capital flows in the global economy. Investment still originates largely in the West – that is where the money is. Credibility matters in this context. One cannot hope to replace the International Monetary Fund or the World Bank overnight.

Brics and other new global structures should not aim to compete with Western-led institutions, but to exist alongside them – to provide another opportunity for countries and markets to cooperate, collaborate and share expertise.

And yes, these groupings can at times be invoked when it is in a country’s national interest – as China does.

China is cautious as the country’s policy doesn’t neglect the IMF or the World Bank. There is no thought of dismissing these long-established institutions in favour of the New Development Bank.

No country banks in isolation. All markets now operate in an integrated global economy.

Within this, South Africa’s banking system has proven itself.

In the World Economic Forum’s 2016/17 Global Competitiveness Report, South Africa was rated 11th in the world in terms of financial market development and second in the world for the soundness of our banking sector.

The survey also rated South Africa first in the world in terms of auditing and reporting standards. This is attractive to investors.

As for Africa, corporates find the continent attractive because of the opportunities in food and agriculture, minerals and the youth dividend, but there are risks in areas such as infrastructure and governance, among others.

Within that African context, South Africa provides an example of an effective, reliable financial system and proven systems of governance geared to manage capital flows. This is also attractive to investors.

So, perhaps, in building the south-south cooperation we envisage, some of the more established banking systems can impart some of our banking know-how to our counterparts in other emerging markets.

If we can improve banking and raise confidence in our institutions, we will encourage investment, which follows macroeconomic growth indicators as well as reliable financial and government infrastructure.

It remains to be seen whether a more sophisticated banking sector would lead to greater capital flows in emerging countries.

African economies such as Ethiopia, Kenya and Rwanda are experiencing rapid growth off a relatively low base, but would investors have even greater confidence if these countries had a financial sector better able to absorb, manage and govern capital flows? I believe they would.

For emerging economies, the path to sustainable growth lies in multilateral cooperation, and the sharing of knowledge and resources to enhance our effectiveness as investment destinations.

Intramember trade within Brics has certainly grown since the formation of the association. This needs to continue.

Greater assertiveness by emerging countries, systematic improvements and pragmatism can benefit all as we move towards a more equitable world balance of powers and opportunities.

Coovadia is the managing director of the Banking Association SA and serves as the chair of the International Banking Federation

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