Asia, a beacon of light in a crisis-ridden world

By Cheranka Mendis

Asia, which is estimated to contribute 52 per cent to the world’s GDP by 2050, has turned back a 260-year spell of declining contribution to the global GDP within a 80-year period and is now poised for better growth.

Central Bank Governor Ajith Nivard Cabraal addressing the Asian Bankers Association General Meeting and Conference

According to a recent study conducted by the Asian Development Bank on the global composition of GDP over the past few centuries, it has been highlighted that Asia, once a large contributor to the world GDP, went through dark times before coming up in a slow uphill climb.

World favours Asia

Speaking at the first-ever Asian Bankers Association General Meeting and Conference held in Sri Lanka yesterday, Central Bank Governor Ajith Nivard Cabraal stated that the world growth trends favoured Asia and that the region was marked as an important cog in the global economic wheel.

He said that with the West faltering in its actions over the past few years, Asia, armed with the majority of the BRIC countries, had become a foremost driver in the global economic and development landscape.

ADB research showed that in the year 1700, Asia contributed to 58 per cent of the global GDP. Thereafter, Asia declined over a period of 260 years until 1960, when Asia’s share of GDP declined to 16 per cent, Cabraal said.“From a high of 58 per cent, Asia dropped to a low of 16 per cent. But the good news is that thereafter, Asia has been on the rise and now contributes little over 30 per cent of the global GDP,” he expressed. “The estimates show that by 2050 Asia’s contribution will increase to 52 per cent.”

Pointing out that the period in which Asia rose once again was shorter in comparison to the drawn-out decline, Cabraal stated that the turn of events was “encouraging,” adding that therefore “it is important to remind ourselves that Asia having a key role is not something abstract – it is something real”.

What Asia should watch out for with the road up ahead looking brighter, he cautioned, was that challenges would also be more intense in time to come.

The balancing game

“Balancing the innovation that is needed to move forward with the regulatory framework that you need is one of the key challenges,” the Governor said. Admitting that the two avenues often conflict, especially at times when speed is essential and bodies need to act fast while also practicing cautiousness, Cabraal stressed that striking a balance between the two was vital.‘Safety first’ must be practiced at all times.

“If you take away safety measures, you may find that after some time all the hard work you have put in and the speed at which you were moving can come to zero if safety measures are not in place. A regulatory framework is important.”Banks should not be confined to the idea that regulatory frameworks are merely for central banks or regulatory authorities. “There is a need for banks to understand as well, to accept and buy into the regulatory measures – that is the bedrock on which the growth should be targeted.”

Financialisation of commodity markets

“Why should hedge funds be interested in buying orange juice?” Cabraal questioned.

There are many commodities in the world that have become financial instruments today. At the same time, the imbalance that is created in the global economy due to financialisation is immense. “We can see many countries grappling with this situation because for mere financial reasons, you find that commodities fluctuate greatly making it difficult for people to manage.” People must understand that economics must go hand-in-hand with politics as well, he said. “You cannot have economic stability without political stability. You cannot differentiate between the two; the line is so blurred now that no one knows where one ends and the other starts.”Too much of financialisation, which puts pressure on the management of politicians, is also a key challenge. “Do not rock the boat – this is the clear message.”

 Excess capacity

Sri Lanka is fortunate, he said. As a result of the internal terrorism issues, the country has experienced excess capacity in terms of many resources for a long time. This will however decrease over time. The capacity that we have to work with is diminishing.

 Hard landing

“It is difficult to predict how and when to land because the turmoil is so great,” Cabraal said. With the global issues and financial crises that happen on a regular basis, there are no proper grounds to measure and assess future performances.

“From one chaotic situation to another, previously there was time to recover, breathe and then find out what you’re going to do next; now the number of global problems you may have to face within a week could equal to the number of similar problems a governor or bank chief had to face over several years in the past,” he said. “It is difficult to predict.”

Stability and growth are often difficult to manage, the Governor added.

 Quality maintenance and unemployment

The two aspects must be kept low at all times, Cabraal said. “Today Asia is seen as a region on the rise. Naturally therefore people’s expectations are high; they want more and it’s difficult to manage unless we get our act together.”He stated that in many Western nations, unemployment and deficit was high and growth was low but in Asia, the expectations were much more diverse. The region will have to raise domestic demand and ensure that people are wealthier.

Early future for Sri Lanka

One of the challenges Sri Lanka will have to face over the next few years with the doubling of per capita income as expected is that the country will have to welcome the future earlier than expected.

“That’s a tough call to manage as expectations will be higher than what you can deliver. We need to get all banks on the same growth path.”

 Rebalancing of investment strategies

Investor perception is important and needs to be thought-out carefully. A clear understanding on how reinvesting our strategies should take place in the future must be exercised. “It’s a tough call – when the whole world is in turmoil, where do you keep your money? How do you react? What is it that you do? If you keep it in one place, is the other place safer? There are no immediate right answers and no right answers that will stand the test of time. The circumstances are very fluid.”

 Confidence all the way

“In my view the most important factor in banking is confidence,” asserted Cabraal. “That is what is forgotten in today’s context. We try to pump in all kinds of other instruments, such as liquidity, regulatory aspects and various other instruments, and forget that confidence is key.”

Banks must act decisively and in a way people will have confidence. Central banks and governments of the Asian region have worked hard and well to build confidence within the region, even though the situation in the West is far different. It is now time that those countries also got their acts together, the Governor expressed.

“We have been lectured by the West for a long time, but I think it’s time for them to listen to us now. They must get their act together otherwise we will all suffer because the rest of the world will also be affected.”

 Consistency

Bankers also need to exercise policy consistency and clarity in the economy. “We need to look at the economy on the whole. Most only talk of one or two items on the agenda; you’ve got to put all things together. It’s like family or one body with several organs, if one is spoilt, nothing will work right.”To maintain a ‘healthy whole economy,’ one must ensure that unemployment levels and inflation levels are down and that growth stays up. One must also remember that not a single economic factor is a standalone factor and that everything is interdependent. Cabraal said: “Create your own batting pattern – good batsmen will score on whatever platform.”

 Space creation

The economy should also have additional space to move and grow in. Drawing examples from Sri Lanka five years ago, he stated that inflation was at 28 per cent and the debt to GDP level was close to 100 per cent; growth was sluggish at 4-5 per cent and the country had seriously difficulties as a whole.

“What we did was we created spaces in each of those areas – we worked on the growth, the infrastructure, inflation and interest rates, which enabled us to have space in each of those areas. We are not hemmed in.”

Banks should also follow a similar pattern he said. “You’ve got to make decisions but at the same time, have the space for you to move in the event you face a shock.”

 Up ahead

The next few months and years will be critical and crucial for Asia, he acknowledged.  “The world will look to Asia for growth and stability and that is why it is essential that Asia remains robust and maintains its momentum.

It must remain strong and focused.” “It is our responsibility towards the world. In a pool of uncertainty, this beacon of certainty must prevail, otherwise there will be serious problems all over the world,” he concluded.