What to do to oppose global challenges
The 7th Astana Economic Forum took place in the capital of Kazakhstan in late May. This international event brought together about 10,000 participants, including representatives of public agencies from 143 UN member countries, also Nobel laureates, well-known politicians and economists. The key theme of the forum was to discuss the risks to the global economy and new sources of growth.
Threat to stability
The central place in the AEF program, by tradition, was the speech of the President of Kazakhstan Nursultan Nazarbayev as the initiator of this dialogue platform. Addressing the delegates, he again drew the attention of the world community to the alarming trends in global development. Contrary to the hopes of mankind that the situation in the world will improve, the beginning of the 21st century turned out to be full of new threats, risks and challenges. With this, the ongoing financial and economic recession, the growing social tensions in the Eurozone, as well as the turmoil in the Arab world hold back progress, generating new dangers and negative scenarios.
As you know, today, many experts predict the next stage of post-recession recovery of the global economy, where developing countries are seen as the driver of this. However, Nursultan Nazarbayev warned them against these expectations, referring to the trend of constant capital movements. In his opinion, with the negative scenario, these capital movements can lead to a reduction of the investment flow to developing countries by more than a half.
Thus, we have to be prepared for the fact that the global economic growth will considerably reduce in the medium term. In contrast to the years 2000–2007, when the global economic growth was 4%, the projections for the coming years are for it to slow down to 2.5%. The President of Kazakhstan highlighted the deteriorating situation in the real sector of the European economy: in the first quarter of this year, the GDP growth in the Eurozone was twice lower than expected. Contrary to the optimistic statements that the United States are successfully overcoming the severe consequences of the recession, considerable problems are still present in the U.S. economy, where there is excess of consumption and imports over production and export. A number of other countries of the "Big Seven", as well as some developing countries, still have a negative balance of trade.
Speculative commodity "bubbles" whose signs are observed in a number of key segments of the global commodity market, in the opinion of Nursultan Nazarbayev, pose a serious threat to the global economy. The availability of a large amount of cheap liquidity contributes to the emergence of new "parboils" in the world. For example, the United States, Japan, Great Britain, and the EU alone have invested in the economy more than $5.5 trillion, which greatly affects the emerging markets.
Nursultan Nazarbayev called the incidence of "extreme poverty" as the second global challenge. He stressed that many African and Asian countries are in the so-called "poverty trap" when poverty generates even deeper poverty. "The mindset is as such: "too poor to develop", and the perception of poverty as the norm that has fastened to the minds, generate dependency and make the countries and entire regions forever be on the periphery of the world development."
According to him, today in the world almost 1.5 billion people have an income of just over $1 a day, and 2.5 billion live on less than $2 a day. It is almost 40% of the world population. More than 200 million people are unemployed, and 1.5 billion are self-employed and temporary workers. According to the International Labor Organization in the last year, the number of unemployed in the world increased by another 5 million people.
Despite this, the poorest regions of the world have high demographic indicators, and in the period of to 2030 about 90% of the world's population growth will be due to the countries of Africa and Asia, where poverty levels are about 30%, in average.
Along with that, by estimates of Credit Suisse Research Institute, today, less than 1% of the world population possesses about 40% of the world's wealth, while almost 70% of the world population has, in aggregate, only 3% of the world's wealth. Taking into account demographic trends, this situation will only get worse. According to the President of Kazakhstan, growing income inequality increases the gap in quality of life between the rich and poor strata of the population and leads to increased social tensions. "This could severely undermine global development and provoke large-scale social antagonism in the future."
The third challenge, according to Nursultan Nazarbayev, is the escalation of economic, social and political conflicts which lead to armed clashes and application of economic sanctions. Taking into account that we have entered a new phase of tension and increasing military power, the world in which the principle of "social Darwinism with its law of the fittest" prevails, can be a "too high price" for humanity and lead to destructive consequences, according to the President of Kazakhstan.
He also recalled that along with the new challenges, the old "strategically important issues" remain also unresolved. They concern the role of the countries in architecture in the world economic and financial relations, bipolarity and the Bretton Woods agreements. In a situation of growing global threats, he called to focus on the elimination of inequality and eradication of poverty. The life in the world in harmony and prosperity is impossible, until "social trouble spots, which may as a fire spread to neighboring prosperous countries", still exist.
According to Nursultan Nazarbayev, to solve these challenges, it is necessary to be moving in two directions: First, to use the development potential to the maximum and not to allow new "considerable economic turbulences" to happen; second, to develop a "Roadmap to Eradicate Poverty", which should include extensive tools for the development of human capital in the poorest countries of Asia and Africa. "It is important to depoliticize economic relations to the maximum. The world should avoid artificially opposing countries and regions and should not use the rhetoric of conflict."
In this regard, it is necessary to strengthen the role of international institutions, especially to ensure equal participation of all countries, irrespective of the size of their economies. "To minimize the political risks, it is necessary to develop an effective international set of instruments to guarantee investment and fulfill contractual obligations. In addition to the sustainable economy, the world needs broad steps to make the population of the poor countries to sharply brisk their economic activities. This should be the concept and content of the proposed "Road Map." The main instruments in solving this problem should be investment in human capital, business development and infrastructure.
In conclusion, the President of Kazakhstan recalled that mankind is "waiting and hoping for the formation of a new world order that would overcome the crisis of the old growth model and lay the foundation for the development of a new world." In this regard, he called on all politicians to learn to live in the 21st century on the basis of the G-GLOBAL principles: evolutionism, trust, openness, tolerance and dialogue.
New Sources of Growth
Taking into account the above-said challenges and threats, the forum participants focused their attention on finding new sources of growth in the condition of financial and economic instability. In particular, Senior Researcher of the Institute for Global Affairs at Yale University, former economy minister and former president of the Central Bank of Argentina Domingo Cavallo believes that the support of emerging markets through introduction of innovations will produce a huge impact on the way out of the recession. In this case, the demographic and physical capital of developing countries, coupled with the technological capabilities of developed countries, will allow to quickly lift the global economy on a new growth trajectory.
The former Prime Minister of Lebanon Fouad Siniora told about the importance of new markets for the global economic system. In his opinion, the recession in 2008 had shifted the center of economic activity to developing countries – these are exactly those who provided the global recovery in recent years. Along with that, the drivers for growth are gradually exhausting themselves, and if new mechanisms for the economic growth stimulation are not found, then in the next decade, growth is likely to remain at a low level. In his opinion, it will require too much time for the United States to reach the pre-recession level. Although China is developing rapidly, the question is topical for many people today: to what extent is China able to maintain this pace? The Middle East can be a new alternative to global economic growth. The region has huge energy reserves and the growing young generation with the high rate of consumption, but the Achilles heel of this region is its political instability.
Meanwhile,China’s Deputy Minister of Transport Feng Zhenglin drew attention to the positive trends in the developed countries. These trends give grounds to state that these countries remain the main drivers of gradual growth and recovery of the global economy. At the same time, this growth remains "below the potential, and the world economy is still at the phase of post-recession in-depth realignment."
As the Chinese official noted, the global stagnation pushed all the nations of the world into making new structural changes. Thus, in the condition of recession, China took a number of actions which due to the inflow of funds into the economy and the active use of monetary policy alleviated the effects of the recession. China expanded infrastructure construction and ensured the increase in domestic consumption and employment. The result was that China stabilized the situation not only in its own economy, but also gave a new impetus to global growth.
According to Feng Zhenglin, now the country is in the stage of formation of a new model of an economic system. It is based on the growth of domestic consumption, improvement of efficiency, and innovation. Having rebuilt its economy, China sets new records. Its GDP reached $9.3 trillion. 13.1 million jobs are created in cities and towns. Export exceeds $4 trillion. "In this regard, China, surpassing the United States, has come in first place in the world in terms of economic development."
As Feng Zhenglin explained, his country will continue to focus on attracting investment to maintain high growth rates. It is assumed that the main sectors of financial investments will be industry, infrastructure and agriculture.
The World Bank Regional Director for Central Asia Saroj Kumar Jha in his speech also emphasized the role of investment. According to him, investment in infrastructure and the development of tangible and intangible capital may be one of the pillars for recovery of the global economic. He recalled that the World Bank adopted a new strategy that aims to increase the wealth of nations.
With regard to Kazakhstan, the World Bank’s strategy provides for cooperation on issues of increasing government expenditure and poverty reduction. In circumstances, where the attraction of investments in the economy has worsened, the important focus of the World Bank’s activities was to support the development of the state and public institutions. In prospect, these institutions are seen to promote better implementation of the strategy of using natural resources to improve physical and human capital. Experts of the World Bank believe that most of the employable population of Kazakhstan has the necessary basic qualifications. However, for its further growth, it is necessary to strengthen the level of training of specialists, and this will require from the government further reforms in education.
Strategic priority for the World Bank in Central Asia is to ensure an economic corridor. The fact that countries in the region do not have access to the world's sea lanes makes it difficult to move goods and services to the West and the East. For this reason, the World Bank supports the development of public-private partnerships in construction of appropriate infrastructure.
Continuing the theme of investment, Managing Director and Member of the Board of JSC The National Managing Holding Company Baiterek, Kuanysh Tuleushin, recalled that the global recession has lowered the investment activity of the financial and corporate sectors in Kazakhstan. High credit burden on operating industrial enterprises and the lack of free liquid assets affected their ability to invest their own funds or attract external funds. The problem of high debt load on enterprises and the unresolved situation with problem loans hamper the growth in corporate lending by banks.
According to him, to date, the problem loans have reached 4.3 trillion tenge, or 32.2% of the loan portfolio of the second-tier banks. The analysis made by the holding company Baiterek showed that to ensure the annual growth of GDP at 7% in the next five years, it is needed to invest in the economy about $430 billion. With this, taking into consideration the influx of private and public investment, the total funding gap will be about $50 billion.
In this regard, the main activity of Baiterek’s subsidiaries in the coming decade will be to attract additional investment in the framework of PAIID. The main goal of the investment policy of the holding company will be to develop new industrial productions and to create new jobs.
In the opinion of Kuanysh Tuleushin, given the potential of the holding company, the latter is able to ensure the influx into the economy of to $10 billion in the next five years that is about 30% of the need in funding the second five-year plan of the PAIID. In 2014 the holding company plans to introduce 13 investment projects worth more than $3.7 billion with the creation of more than 8 thousand jobs, and in the next two years to finance 20 projects worth $8 billion.
Because infrastructure development is specified as one of the key areas, Baiterek intends to establish a fund of infrastructure projects with capitalization of $500M to $650M. It is expected that its co-sponsors will be major international investment institutions. According to the speaker, all this will ensure the continued growth of the economy and add to maintaining social stability in Kazakhstan.
There is safety in numbers
It is clear that an independent search of sources of growth will not make it possible to respond to global challenges. The forum participants noted that in the condition of high dependence of countries, it is very important to them to reach a consensus in the making of joint decisions.
Thus, the Asian Development Bank Chief Economist Felipe Jesus believes that speaking of the recovery, the coordination of actions by countries in the financial sector will play a big role. However, the "lack of confidence that the countries, which are willing to invest, will do it right in terms of efficiency for the global economy" remains a barrier.
For example, Japan has invested in a great number of road construction projects. However, these efforts have not produced a desired effect in the condition of recession of the global economy, since the monetary and fiscal policy of certain countries, as a rule, does not go beyond local political realities and interests. "Corporate investments are in a state of long-term expectations, since investors wary of the risks, and the public investments alone that could meet the demand are not enough. In this regard, the lack of trust is explained by the inactivity and lack of political will in the coordination of measures to create a unified program for recovery of global growth."
In such circumstances, the role of politicians in the global economy is expected to increase. They, according to the speaker, should assume the burden to manage the fiscal and monetary system, which is not currently taking place. The expert explains the lack of political will by risk of partial loss of sovereignty and the increasing dependence of each of the countries in the context of globalization.
In his turn, the former Federal Chancellor of Austria Alfred Gusenbauer noted that the main concern for the coming years will be the policy to reduce inequality. If the goal is achieved, it will be the basis for establishing a stable model of supply and demand. Backing his arguments, ex-Chancellor referred to the book of Thomas Piketty "Capital of the 21st Century", popular in the U.S. and Europe, in which he proved that the high level of inequality threatens the future of the world economy.
Mr. Gusenbauer drew attention to the fact that it is very important to distinguish between the "policy to eradicate poverty and the policy aimed at reducing inequality." As an example he cited Chile, where over the past 20 years they have achieved good results in reducing extreme forms of poverty. Today, when the average level of GDP per capita in that country comes to around $20 thousand, the task is set to ensure the lowest level of inequality. Success in creating a stable and developed Chilean society will depend on the success in achieving the above-said task.
However, this will require the development of a new architecture of investment in infrastructure of Chile. The matter concerns the creation of an infrastructure fund on the basis of capital of pension financial institutions. According to Alfred Gusenbauer, they are able to provide long-term low-interest investments, guaranteeing income for a term of 20-30 years.
Realities of the new world
Kazakh Prime Minister Karim Massimov noted in his speech that mankind after it entered the recession and suffered serious losses, only now start realizing that this recession is not confined to economic issues only. "Today it becomes clear that the world in which humanity continues living mentally, in reality is far behind, and the new realities and paradigms are not yet fully studied and understood."
With this, Mr. Massimov distinguished two models for further economic development: the western one, where progress is ascending and the eastern one, which is based on the idea of cycling. "If we take into account the Chinese development model, then according to it, the world is at the threshold of a new thirty-year cycle, which is totally different from what humanity has seen in the previous thirty years. Those rules that have been accepted not long ago, do not work in 2014."
According to the Kazakh Prime Minister, geopolitics continues producing a serious impact on the processes of national economies. This means that in the next 10 years, the current conditions will lead to closer economic cooperation between Russia and China. "Strengthening relations between the two countries will intensify traffic flows between these countries. In such circumstances, Kazakhstan is interested to receive dividends from its geopolitical location, through the capitalization of favorable political conditions."
In his turn, Russian economist Mikhail Khazin noted that the current economic cycle began in the mid of the eighties last century, when after the crisis of the seventies stimulation of demand in the private sector started through lending. According to his estimates, this has led to a situation that European and American households spend 20%-25% more than they earn. In this context, the question arises how to solve the problem of maintaining the demand, if the stimulation thanks to dollar loans ceases to exist?
Mr. Khazin expressed doubt that the revival of the Bretton Woods system, the activity of the IMF and other international institutions can solve the problem of global finance. "The matter is that the stimulation of demand during the said 30 years was ensured through the easing of the monetary policy, mainly carried out due to the lowering of the U.S. Federal Reserve interest rate. There is nowhere to reduce it further. The world is awaiting either for a strong decrease in welfare of nations, even possibly much worse than in the thirties of the last century during the Great Depression, or that some alternative sources of demand will be found."
Regional economic centers can become a solution of the problem, according to Mikhail Khazin. "Mechanisms of globalization built on the principle of stimulating through the dollar do not work any more. Today mechanisms of regionalization start working. Interaction between new regional centers should be built on entirely new principles, which imply the emergence of regional monetary systems. "Exactly these systems, in his opinion, will play a key role in the next 30 years.