"Realistic" Emerging Economies

In the aftermath of the financial crisis, emerging economies proved more resilient than the West’s and have led the global economic recovery. But questions loom about what policies and regulations are needed to sustain global growth and prevent economic shocks. Peter Sands, group chief executive of London-based banking giant Standard Chartered--which manages the bulk of its business in Asia, Africa, the Middle East, and Latin America--discusses the risks and short-term realities of broad-reaching economic reforms. He says policymakers should focus less on capital supports--such as the repayment of the the Troubled Assets Relief Program

(TARP)--and more on correctly timing central banks’ easing of monetary support. The risks of building asset bubbles are as great in Western economies as they are in Asia, says Sands. On financial regulation, he says the world still needs big, cross-border financial institutions to meet its complex financial needs. Finally, Sands says policymakers can exaggerate the impact of banker pay rules differing across countries. What’s important, he says, is "the broad sense of a level playing field" and "our renumeration policies are already very much aligned with those."

You recently expressed concern about the sustainability of the global economic recovery. What do you consider the biggest risks?

The world economy is certainly in a better position than it was several months ago. But much of the improvement has been a result of massive monetary and fiscal stimulus by governments around the world. The question we face is how much of that is truly sustainable. The stimulus packages can’t go on forever.

One of the big issues: How do governments extricate themselves from the massive fiscal and monetary interventions and when do they do it? A lot of the media coverage has focused on the capital supports to the banking system, on things like repayment of TARP or when do governments get to sell shares, but in some respects that’s the easier part of it. The more difficult question is at what point do central banks begin reducing the degree of liquidity support to the financial system. Do it too late and you risk creating asset bubbles or inflations; do it too early and you risk creating a double dip [recession]. It has to be coordinated internationally to avoid leading to a lot of distortion.

Asia and other parts of the emerging world have also picked themselves up off the floor and are looking in much better shape, but they can only do so much on their own. For the world to be growing strongly again, the United States and Europe have to be growing. So the big question is how rapidly the United States and Europe can work through the many issues that they have within their economies.

Analysts are warning of a pullback in emerging markets after their strong run up this year, especially as U.S. demand for imports slows. Do you agree?

There is a challenge for Asian economies in that much of the growth model of the last decade or so was based on exporting to the West and particularly to meet the needs of the American consumer. It’s a big generalization and is more true of some countries than others, but it’s not a bad overall characterization. To the extent that the American consumer is going to consume less--and I think we can safely conclude that the American consumer is going to consume less--then the question is, what is going to be the demand that drives growth in Asia? Ultimately, it’s got to be met by a shift towards greater domestic demand in Asia, but that will take time.

What are the most important near-term steps to increase domestic demand in Asia?

Having bigger, deeper bond markets in Asia is undoubtedly a good thing; it’s a great way of circulating savings within Asia and within the private sector, rather than having them be intermediated through the form of official reserves invested into other countries’ treasury bonds. The creation of safety nets--in terms of changing people’s attitudes towards saving requirements and having broader and more resilient health care and social welfare systems--is a very important part of the solution. But we have to be realistic about how quickly those policies can be put in place and how long it takes for people’s behavior to change. People who have been accustomed to saving a large part of their income for all their lives are not suddenly going to go out and start spending it all.

So is the burden of responsibility more on Western economies’ shoulders?

One has to pay attention to basic mathematics of the global economy. They may be fast growing, but places like China and India represent a far smaller share of the world economy than the United States and Europe, so to look to those smaller parts of the world to pull the West out of the crisis is unrealistic. China and India have enough on their plate, their own social and economic issues to deal with.

The World Bank and the International Monetary Fund are worried about asset bubbles building in Asian markets. Do you see that happening, and if so, what policies are to blame for that?

There is a risk of asset bubbles everywhere in the world at the moment, simply because money is so cheap. The bubbles in a sense may look higher in Asia relative to what we’re seeing in the West, but what really matters with a bubble is not the absolute level but the degree to which there is a disconnect between asset prices and the underlying level of economic activity supporting those asset prices. That is a danger both in the West and in Asia. The upward price on assets is driven by the massive provision of liquidity put in place to mitigate the impacts of the crisis and to support the financial system. So the dilemma facing central bankers is how to avoid asset inflation on one hand but not undermine the recovery on the other.

Standard Chartered is en route to becoming the first foreign company to list on India’s stock exchange. Why is this the right time for that move and can you speak to how India has governed its financial markets so far?

We are working with the Indian regulators on how to do that, and if all goes well we could see that happening in the first half of next year. Why would we do this? It’s primarily about enhancing our profile and position in India, which is a very important market for Standard Chartered. We’ve been there a very long time. It’s our second largest business by profit. We have more employees in India than we have in any country in the world. It’s one of our fastest growing markets. We see the listing as a symbol of our commitment to helping the development of Mumbai as a financial center. The development of an IDR [International Depository Receipt] market will provide Indian investors with more options to invest in and is simply another step in the development of India’s overall capital markets.

Britain and the United States have differed on the best ways to deal with the issue of "too big to fail." What’s your take, especially as Standard Chartered looks at expansion?

The too-big-to-fail debate is important but ought to be quite a complex and nuanced debate, because [it is] context-dependent. If the rest of the financial system is in good health, then the system can absorb the failure of a relatively large institution. If the system is under acute stress, then even a very small bank becomes too big to fail. We’ve got to be very clear about what we mean about the word "fail." I’m not sure you ever want to have a situation in which any institituion is too big to fail because that would create quite a powerful moral hazard. But the question from a policy point of view is how much do you play with the "too big" side of it and how much do you play with modes of failure? I don’t think there is a silver bullet. But we should avoid the notion that somehow or other the real economies’ financial needs can be met by having lots of very small banks. The world’s financial needs are complex and that requires quite large sophisticated cross-border institutions. Working out how you can have these large, cross-border, sophisticated financial institutions and avoid the too-big-to-fail problem is enough of a problem. I certainly can’t immediately offer a neat solution.

What effect do you expect possibly differing rules on banker pay in Britain and the United States to have on financial firms like yours?

I think we can exaggerate the impact of whatever differences might exist in that. I think what’s important is the broad sense of a level playing field in terms of the underlying architecture of rules. We certainly don’t have any problem with [Britain’s] Financial Standards Authority Code of Practice or the G-20 Principles on Compensation. Our renumeration policies are already very much aligned with those.