What’s Changing in the Global Financial Order?

I was at a very interesting session on ‘The New Global Financial Order’ at the UNESCAP Asia Pacific Business Forum last week, and something that one of the speakers said struck me. He remarked,

“This was a financial crisis more than an economic crisis. It should never have happened. Money was originally only a medium of exchange and for accounting that exchange. But…over time, money became a storer of value. Just like gold did in the past, people started keeping money, hoarding money, and money became scarce. People started making money from money. And now we have a huge degree of financialisation in the economy”

During the course of the discussion, we ended up talking about some big trends that are shaping the world of finance.

One is the rise of the Renminbi, the Chinese currency. RMB is now 4th highest traded currency in the world, and China is lobbying for it to be included in the basket of currencies in the IMF’s Special Drawing Rights (SDR). Moreover, China’s new bilateral trade agreements are being linked to RMB, bypassing the USD.

Another trend we talked about is the simultaneous disintermediation and disruption in financial markets today. For one, there is disintermediation away from the US. In some countries disintermediation away from traditional big banks towards smaller ‘local’ banks seen to have customer interests stronger at heart..

Meanwhile, the disruption comes from something that is starting to be at the heart of disruption everywhere – big data. Big data will transform how banks operate; for instance being able to take KYC checks (‘Know Your Customer’) to the next level. Targeting products would also be enhanced. We even talked about how in advanced stages of KYC, a bank could know what type of customer is more likely to have a mistress, and predictive analytics would show how spending patterns would change.

We also talked about the rise of bitcoin and other virtual currencies; the future of electronic and mobile finance, the prospects for Ali Pay (the Alibaba equivalent of PayPal), where FinTech would go next, and whether cashless and careless payments with NFC technology like Apple Pay would truly become mainstream.

One of the issue I brought up was whether regulatory and supervisory agencies, like Central Banks and Financial Services Authorities, would adequately keep up with a rapidly changing landscape. Whether they will understand these products and how they help (and indeed potentially hurt) consumers, and regulate smartly, without snuffing out innovation. There are also concerns of privacy, and indeed equity, which we didn’t get to, but would certainly be interesting to explore.

Will innovation in financial markets make finance more inclusive or more exclusive?

And on the first trend, will the disintermediation away from the US amidst the rise of the RMB simply mean a shift from/and an over-dependence on/dominance of one large country to another large country, or will it truly mean a multipolar financial world?

Cover image: the logo of AliPay.com, the third-party online payment portal by Chinese e-commerce giant Alibaba.

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Three Forces Reshaping the Global Economic Order

In the midst of tumultuous global markets, a migrant crisis in Europe on top of their economic weaknesses, and continued bloody conflicts in the Middle East, the global economic order continues to be shaped and reshaped every day. Attending the recent Global Shapers Annual Meeting of the World Economic Forum (WEF) gave a unique insight into the forces shaping the contemporary global economy, with exciting discussions with 450 young leaders from over 150 countries, complemented by the insights of the WEF’s Founder Prof. Klaus Schwab. Three forces, in particular, are likely to influence the future trajectory of the world.

  1. Era of ‘Grand Deals’ Over

There is growing recognition that the global order set up after World War 2 does not function as well as it should anymore. While some may feel it is a cynical view, its becoming increasingly clear that the era of grand global deal-making – whether it is on trade liberalization (evidenced by the stalling of the WTO Doha Round) or cutting CO2 emissions (evidenced by troubles in climate change agreements) – seems to be over. Particularly with regard to trade, we are seeing more and more bilateral, regional, and mega-regional trade deals being forged, in the absence of serious progress on multilateral ones. Mega-regional trade deals like the Trans-Pacific Partnership (TPP) between the US and Asia, the Trans-Atlantic Trade and Investment Partnership (TTIP) between USA and Europe, and the Regional Comprehensive Economic Partnership (RCEP) within Asia, have come to dominate the global trade agenda in recent years.

Simultaneously, we are seeing new global financial institutions emerging, challenging the post-WW2 order of Bretton Woods institutions. The New Development Bank forged by the BRICS economies of Brazil, Russia, India, China and South Africa (nicknamed ‘The BRICS Bank’) and the Asian Infrastructure Investment Bank (AIIB) launched by China and joined by the majority of countries in the West and East, are evidence of the rebalance of economic might and the challenge to the previous global order that governed international finance and development under the World Bank and IMF.

  1. New Industrial Revolution

Another fast-evolving force, which Prof. Schwab especially pointed to, is “the fight between brains and artificial intelligence and the fight between robots and humans”. The WEF, and Schwab in particular, has written widely on this subject. Of course, this issue may seem years away for Sri Lanka, but we cannot ignore the fact that this phenomenon will completely change the structures of global production, as we know it today. This ‘New Machine Age’ or ‘Fourth Industrial Revolution’ will have profound effects on the competitiveness of economies, on the functioning of society, and on the lives of individuals. One major way in which this will affect individuals is through education, or the lack thereof. Without a focus on education that gears people to take advantage of this new economy, we risk this new industrial age being deeply polarizing across skill and income groups, driving new wedges of inequality and injustice in society. All countries – especially developing countries – need to build education systems that foster agility, versatility, and continuous learning.

  1. Globalizing and Polarizing

Another important realization is that, as Prof. Schwab eloquently put it, “we are living in a world that is globalizing as well as polarizing at the same time”. The proliferation of global connections and information, through technology and social media, at the swipe of a screen or the click of a mouse has meant that we are now more globalized than ever before. Facebook and Google allowed friends of Nepali earthquake victims from another continent to check on whether they were safe. A young inventor from anywhere in the world can now raise money for his invention via a crowd-funded platform online. A protestor in a small town can broadcast about police brutality to an audience of millions, instantly. A consumer in a remote town can buy a product from a mall a million miles away. Yet, amidst this globalization has been an alarming polarization of people, across lines of ethnicity, religion, wealth, political ideology and other divides. And increasingly these are becoming more violent than before, and they are having a knock-on effect on the global economy. Global institutions, global agreements, and traditional power structures seem to be struggling to keep up, to mediate and mitigate these.

Future Outlook

Many of the young people participating in the WEF meeting collectively realized that the world we are now living in is completely transforming itself and we are not fully ready. Political power lines are being redrawn. Old economic structures are being deconstructed and reshaped. Technology is both empowering as well as marginalizing. The importance of young people having a seat at decision-making tables is clear, yet the extent of influence is not. The outlook sounds rather challenging, but it should be seen as a call to action, especially for young people who will inherit this new economy. It is also a warning for countries like Sri Lanka to not lose slight of the changes going on rapidly around us, reshaping the world as we know it; even as the domestic agenda often takes up most of our attention.

This is the 22nd article in the ‘Smart Future’ column that advances ideas on competitiveness, innovation, and economic reforms.

Post-Election Agenda: Setting Up a National Innovation Council to Drive an Ambitious Programme

The Sri Lankan economy is in the midst of a unique, and tricky, transition. It’s easy for Sri Lanka to get stuck in what economists call “the middle income trap”. Already the country is finding it increasingly difficult to compete against cheap labour in low-income economies (like Bangladesh, Cambodia and Laos), on the one hand, and with the technology and innovation-driven economies (like Malaysia, Indonesia, and South Korea), on the other. Essential, then, to making a successful transition to upper-middle income levels and beyond, is fostering innovation in the country.

Ambitious Programme

Sri Lanka needs an ambitious and focussed national programme to boost innovation. Fostering a forward-looking innovation system, that supports knowledge-interaction among various parties, builds linkages between domestic and foreign firms as well as between universities and R&D institutions and the private sector, and commercialization of inventions, is critical, if Sri Lanka is to achieve faster growth. Also, of course, the daunting but essential element of raising the overall level of R&D in the country – currently at an abysmal low of 0.2%. The innovation agenda needs to be driven across the economic spectrum – not just in manufacturing and exports, but also in sectors like agriculture, healthcare, urban development. This is why the innovation agenda needs to be driven at a national, strategic level, taking an economy-wide and all-of-government approach.

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Promoting Entrepreneurship in Sri Lanka: Balancing the Government’s Role and Introducing an Entrepreneurship Climate Index

This article originally appears in the Daily Mirror Business of Thursday 9th July, under the weekly ‘Smart Future’ column.

Entrepreneurship is very much about ideas and efforts of individual (or a collective) of private actors, who start a business, hire employees, make profits, invest, expand, etc. – all through private initiative and risk-taking. So, to talk about a role for government in all this might seem unnecessary. At the same time, believing that there is no room for government and policy in fostering entrepreneurship is also a fallacy. There are two aspects to the government’s role in promoting entrepreneurship – the first is knowing when and how to get out of the way, and the second is knowing when and how to help create a way.

Where to Get Out and Where to Get In

Government policies can sometimes hurt and sometimes help entrepreneurs. In shaping a conducive climate for entrepreneurship, we need to look at what are the regulations, rules, government procedures, regulatory provisions, policy bottlenecks, etc., that get in the way of entrepreneurship and innovation. For instance, are the rules around starting up and running a business conducive for young entrepreneurs?; are government institutions geared to understand the needs of a new breed of young entrepreneurs?; are the fiscal and financial frameworks in place to support them? Then we must also look at what specific initiatives that must be in place to create a helpful path for entrepreneurs. For instance, can there be government support to encourage the setting up of affordable working spaces for new start-ups?; what can be done to increase the speed and coverage of broadband internet and telecoms infrastructure to help entrepreneurs leverage digital technologies?; are rules around land use and property development – the taxes and ownership rules for example – helping or hurting investment?; is the visa regime in place to attract good talent from abroad and cross-fertilize here in Sri Lanka?; to bring in mentorship and networks among Sri Lankans and others abroad?. These are some critical areas that the government can lend active support, to shape a better climate for entrepreneurship.

Sri Lanka Needs an ‘Entrepreneurship Climate Index’

Many of these questions need to be looked at not only at a national level but also at a sub-national level. This requires a rethinking of how we measure the entrepreneurship climate at the sub-national level, as existing indicators are inadequate. The Doing Business Index, for example, measures costs and delays in government procedures and regulations in the largest commercial city of the country, i.e., Colombo. Previously, the Asia Foundation’s Local Economic Governance Index has attempted to measure sub-national business climates but there was no continuity in the assessment and therefore planning and measuring change over time was not possible. Sri Lanka needs a new comprehensive assessment of entrepreneurship for the whole country – and I suggest an ‘Entrepreneurship Climate Index’. This ‘ECI’ can not only measure elements that traditionally form the basis of an entrepreneurship climate – like start-up regulations, access to infrastructure (like electricity, roads, water, etc.), but also elements like the availability of start-up financing and the entrepreneur-friendliness of local bank branches; the attitudes towards entrepreneurship of young people in different localities (rather than job seeking); the perceptions on constraints faced by young entrepreneurs in different regions; the availability of land, workspaces, and incubation facilities for new start-ups; the spread and quality of services by government agencies that support entrepreneurship (like the National Enterprise Development Authority, the Industrial Development Board, the Industrial Technology Institute, the Inventors Commission, the Registrar of Companies, etc.); the quality of networks between young or new entrepreneurs and the leading businesses, trader associations and chambers of commerce in a locality; and other measures to capture the quality of the entrepreneurship eco-system.

A Good SME Policy Can Help Entrepreneurship

Any policy framework that focuses on the overall small and medium enterprise sector – an SME policy – can help all entrepreneurs. It’s unfortunate that 13 years since Sri Lanka developed an SME White Paper, we are yet to see it become a full-fledged policy document. The latest effort at legislating a SME Policy Framework, which was near completion, has also stalled due to the dissolution of Parliament. Such a policy framework is important because it pushes all government agencies relevant to this area to align their work towards supporting entrepreneurship; to focus their efforts and make them coherent so that businesses truly benefit. It can help streamline the numerous ad hoc, overlapping, wasteful and ineffective entrepreneur development programmes currently being implemented, and focus efforts on where government support is truly needed. It brings a clear focus on what the government should do and should not do. It also helps those outside of government – private sector, chambers of commerce, development agencies, and universities – orient their work towards supporting this agenda. Overall, it gives a national push – from the local schools to the highest government agencies.

Renewed Focus

Once the latest round of elections are done with, we need to focus on gearing regulations and administrative procedures towards fostering entrepreneurship and innovation. We need tight rules for the right reasons, not long rules for the wrong reasons. Let’s look at the policies that are holding entrepreneurship back, and improve them; and let’s look at the policies and programmes that can help entrepreneurship and fine tune them and scale them up. Everyone can and should influence that process. Our goal should be to make Sri Lanka the “best place in Asia for a young entrepreneur to start and grow a business”.

This is the 18th article in the ‘Smart Future’ series that advances ideas on competitiveness, innovation, and economic reforms.