Yaseen Anwar: Karamay One Belt One Road Speech August 2015

2015-08-11 IMI

Yaseen Anwar:Former Governor, Central Bank of Pakistan; Senior Advisor, ICBC Singapore In 2010 at the Eurasia Summit in Urumqi and as a guest of the Peoples Bank of China (PBOC), I gave a speech promoting the 21st Century Silk Route. Five years later, and coincidentally in the same month, that initiative is well on its way and I am delighted and honoured to be a part of this conference and initiative that I have supported since then. The genesis of modern global economic development was built on the foundations of Trade. The evolution of Trade transactions as we know it today was founded in Renaissance Italy by the Mediciswhen they set up the first Trade representative office for Acceptance Financing in Barcelona to support their Trading posts of Genoa and Venice, the then hubs of Trade. Life was much simpler then. The Western Hemisphere had not been discovered and the global economy at the time was not vulnerable to systemic shocks. Today the world’s economy is generally in a state of malaise in the aftermath of the Global Financial Crisis (GFC) that started in 2008. It has created an existential crisis in Europe with its sovereign debt crisis and painful austerity measures exposing underlying contradictions in the European Union that has become increasingly fragmented. The United States as the largest economy, is itself struggling to stimulate aggregate demand, reduce unemployment, and strengthen its Post World War II institutions in an effort to ensure retention of its fragile global economic supremacy. Notwithstanding the economic tremors in recent years, we find ourselves in the midst of a massive process of change as the global economy realizes that Asia, led by China as the second largest economy in the world, will now shape this planet’s economic future. The debt problems facing the leading members of the OECD have not only led to a deep recession, but have also manifested into a much more serious economic problem than the Great Recession witnessed in 2007-2008. Asia must adapt and assert itself for its rightful role in this changing environment. Before I delve into the future course of the One Belt, One Road initiative and its impact on the global economic landscape, I would like to highlight the following seismic shifts we have recently witnessed: 1. 25 years ago and under the current multi-currency Reserve Management System, 65% of global Reserves were held by Developed countries and 35% by Emerging Markets (EM). Now the position is reversed with 67% of the world reserves held by Emerging Market economies, reflecting the economic role of Asia in general and China in particular. 2.According to SWIFT which monitors currency flows, the RMB in 2014 overtook the EURO to become the second most actively used currency to settle Trade Finance payments after the U.S. Dollar, and the 5th largest Payment settlement currency in the world. Shortly to become the 4th. 3.More than 50 Central Banks and Sovereign Wealth Funds have signed Agency Agreements with PBOC to invest in the Chinese onshore Bond market, evidencing confidence and trust in the RMB on a global basis. The State Bank of Pakistan was the 7th Central Bank to execute such an agreement in 2012 and activated it in 2013 to ease its balance of payments pressures faced at the time.China helped Pakistan during a difficult period.The UK government initiated such an investment in October 2014. While the above are only a few of the milestones driven by China in an effort to resolve global imbalances, lower capital flows, and FX fluctuations, we still face vulnerabilities towards restoring Public Trust and confidence in the International Monetary System in the wake of the Global Financial Crisis. Notwithstanding the GFC, the recent steps taken are a clear indication that China is taking the right steps. The renewed emphasis on its Western borders indicates the intent to revive the ancient Silk Route which once passed through Urumqi that will have far reaching and positive long term implications emanating from trade in the region with an illustrious history. In the context of the current global challenges, perhaps this direction will help facilitate the needed decoupling from OECD markets so that Asia is not just a factory to the world, but also generates its own demand for the products it creates. Global imbalances need to be reduced and new markets in Asia need not only to be developed, but also to be integrated and connected. The downside of this integration is the vulnerability to external shocks by events taking place in far-away markets. We must prepare for such events. Given the seriousness of the debt problems facing some of the developed economies, many developing countries have already faced a fall in exports, experienced speculative capital flows replacing more stable FDI, and Trade Financing choking up. The faltering prospects for export-oriented countries that are dependent on the OECD, especially those with a relatively disadvantaged domestic economy, could stall Asian growth and put people out of work. The adverse spill-overs on social development and poverty, should not be taken lightly. Addressing such vulnerability can be achieved by strengthening regional trade and investment linkages with a specific focus on reforming and reshaping existing production supply chains. In other words, it is important to look at this region not just as a factory to the world, but as an integrated economic platform that creates jobs, imparts skills, creates new markets, and generates enough prosperity to make the region more self-sustaining and also the engine of global growth. It is in this context the $1.8 Trillion One Belt, One Road represents an excellent remedy to address the key weaknesses that can restore Public Trust in the global economy. The immediate decades following WW II witnessed the growth and development of the United States, Europe, and Japan with huge outlays in infrastructure to support that growth. Today these areas are still healing and trying to recover from the 2008 Global Financial Crisis. Asia on the other hand is witnessing relatively higher growth rates but still lacks in being able to harness the huge potential it is capable of generating. However I see a bright light at the end of the tunnel that can be realized by harnessing the Asian potential through regional and global integration. The following salient economic features provide an insight into that potential. 1.Approximately 65% of the world’s GDP today is comprised of OECD countries and the rest with Emerging Market economies (EMs). By 2050, the number is expected to be reversed, primarily due to China & India. 2.In Maritime South China, $5.3 Trillion total trade passes through every year. 23% of that is U.S. trade. 3.By 2035, 90% of Middle East oil is expected to go to Asia. 4.With 400 Million population, the ASEAN region’s $2.5 Trillion economy is expected be the 4th largest by 2050. 5.The ASEAN and other EMs in Asia are only 46% urbanized, well below the 55% international norm. Pakistan is approximately 40%. With over 5% forecasted growth rates, Asian urbanization is expected to reach 60% over the next 25 years. 6.To support the anticipated growth rates, an $8 Trillion gap in Infrastructure finance is needed by 2020. The World Bank president recently stated over $1 Trillion is needed yearly. 7.In April, the president of China’s visit to Pakistan resulted in MOUs totalling $46 Billion for infrastructure development i.e. Power sector, Telecommunication, Transportation, etc., in support of the southern branch of the Eurasia Silk route linking western China. 8.Today China represents the number one Export partner for 43 countries as opposed to only 2 countries 20 years back. From these few observations, it is clear the future growth potential for the global economy will be generated by Asia. We also know that the desired growth rates cannot be achieved without infrastructure development as evidenced by post World War II western economies. A 2014 McKinsey study highlighted that over $50 Trillion will be needed for infrastructure between now and 2030. While solutions to progress and capitalizing on the opportunities may be relatively easy to identify, implementation is wrought with bottlenecks and vulnerabilities. Geopolitical tensions, market volatility that creates uncertainty, private sector risk averseness for long term investment in infrastructure, Quantitative Easing (QE) that creates currency and interest rate volatility, all conflict with a need to ensure an overall enabling environment for Trade to flourish. To highlight a few historical examples that adversely affected many economies and to avoid repeating, the 2013 QE by the U.S. led to massive movements in liquidity away from Turkey, Brazil, Argentina, Indonesia, and India to name a few. As a result, these countries faced sharp depreciation of their currencies and a rapid rise of domestic interest rates in defence of their currencies. QE in the EU and the action by the Swiss National Bank created currency volatility not witnessed in recent memory. As for global Trade, protective tariffs have never been an encouragement to Trade. In the 1930’s the U.S. Smoot Hawley Act that set tariffs, led to a 64% reduction in world trade. U.N. related sanctions on various countries no doubt adversely impact Trade, but no studies that I am aware of have been conducted to measure that impact. Now how do we pull ourselves out from the complexities of the current global economic slowdown and resume growth. Given our collective responsibility to develop a more balanced global economy that can absorb shocks from other regions and manage systemic risks, the Asian growth rates that includes the second largest economy in the world, represents the obvious solution for sustained economic development. Infrastructure is the engine of growth and the One Belt, One Road Economic Train initiative creates a modern Trade route that triggers huge investments in Infrastructure. In fact CITIC has announced plans to invest in 300 projects extending from Singapore to Turkmenistan. Projects under the plan include a network of railways, highways, oil & gas pipelines, power grids, and other infrastructure links across Central, West, and South Asia to as far as Greece, Russia, and Oman. This will naturally enhance China’s connections to Europe and Africa or conversely, enhance Europe and Africa’s connections to the second largest economy. China’s president said recently that he hoped China’s trade with countries involved in the One Belt One Road initiative would exceed $2.8 Trillion in a decade. China is a large importer of natural resources which is essential for its future economy. The One Belt One Road initiative supports this security of imports and emphasizes infrastructure and connectivity with other countries who will also benefit with prosperity. The initiative has significant geopolitical implications and comprises 5 parts to China’s Vision Plan for integration: 1.Connectivity 2.Trade 3.Financial Integration 4.Policy implementation 5.People to People linkages CPEC represents the South Asian leg of the larger Northern and Central Asian arm of Economic strategy in support of China’s macroeconomic dimension. It opens Central Asia, a geographically closed region lacking in infrastructure that will provide greater access to the sea and expand the global trade network. CPEC will also enhance energy and power investments that will ease Pakistan’s power shortage that currently reduces economic growth by up to an estimated 3%. For CPEC, Pakistan must build its Resource Capacity in all infrastructure related project entities in order to achieve the associated synergistic benefits and ensure CPEC’s success. The Corridor from Gwadar should be the shortest direct route to ensure cost benefits are realized short and long term for all countries. To facilitate trade and implementation of the CPEC initiative, Pakistan should utilizeits Currency Swap Agreement signed in 2011 with PBOC for trade purposes for which it was intended and reduce its dependency for Balance of Payments support as initially used and required in 2013. A key initiative to support all countries in developing the infrastructure necessary to achieve the ambitious, yet achievable target is the Asian Infrastructure and Investment Bank (AIIB) that includes 57 countries as its members. As stated earlier, infrastructure represents the engine of growth for an economy and is critical to support the planned growth rates. Infrastructure triggers the SME sector that provides not only employment but the opportunity to the banking sector to diversify its portfolio; the roads, bridges, and railroads to improve transportation and lower delivery costs; an elevated telecommunications network in today’s technology era is a must; and investment in the Power sector is essential for manufacturing, both for domestic needs and exports to ensure a stable Current Account. But we know there is a huge shortfall in all these areas in the developing world to the tune of over $8 Trillion. The post WW II Multilateral institutions such as the World Bank and Asian Development Banks have done well in many areas. However today’s needs to ensure stable global growth go beyond their capacity to fund this gap as the world has given birth to many new countries over the past 50 years from Bangladesh, to the break up the old Soviet Union, and Africa. The AIIB represents a solution to fill those gaps. However there has been considerable contentious debate in the Press about the need for such a new institution that is difficult to understand, especially when the world is faced with an erosion of confidence in the International Monetary System. Notwithstanding contentious issues, 57 countries, including key OECD countries, have become signatories to the AIIB charter that clearly represents a collective tsunami response in support of energizing the global economy. It is consistent with the emergence of a Multi-Polar world economy that today needs to evolve into a multi-polar, multi-currency system; a more balanced world economy that cushions and reduces vulnerabilities. The One Belt One Road initiative will stimulate industrial growth, generate employment, provide inclusive growth, reduce poverty, and provide prosperity to all nations. Finally, I would underscore that we have an unprecedented opportunity to collectively regain the Trust of the Public. There is an old saying of Confucius that ‘He who wants success, must enable others to succeed’. The One Belt, One Road provides such an opportunity and ‘collectively’we need to support it fully so that prosperity can be achieved for the benefit of all.

DOWNLOAD

Yaseen Anwar: Karamay One Belt One Road Speech August 2015

related articles

tags