More than ever, the world has a bifurcated view on how to approach this question. In the former emerging markets, now called “growth markets”, financial development is viewed as a fundamental tool to continue internal financial market evolution and as an efficient mechanism to continue wealth distribution. In the developed economies, clearly, the answer is immediately focused on when and how state intervention will cease to become the one available tool to foster economic growth.
Growth markets can further enhance financial development around the world. Since the late 1940’s, to generate growth, the “go to” model was established on a simple knowledge transfer. Developed economies would transfer technology to emerging economies to take advantage of available commodities to manufacture products be sold around the world. This formula worked for developed markets, generating economic resources, which triggered the creation of both sound industries and financial institutions. Today, growth markets are developing a middle class with financial muscle to generate internal consumption and reduce reliance on exports.
In Latin America, the volatile economic cycles of the 1980s and 1990s prompted the creation of conservative financial policies and strict oversight of banking systems. This positive combination has created a unique situation: financial banks in growth markets are now the best capitalized in the world and can provide credit. Past experience of when and how credit cycles start and end has allowed Latin American governments and banks to anticipate stress situations and to create new financial tools. In Chile, the government used surpluses in the sales of copper to create a “rainy day fund”. In Brazil and Mexico, banks use their “hawk vision” to generate reserves and limit lending in troubled sectors months before difficulties occur. This newly minted innovation should continue to help to maintain state intervention at a minimum.
Developed markets will require a new model. The unresolved situation in Europe and the increasing deficit in the United States have left an unclear perspective on how economic growth will resume. The US financial sector has taken a progressive approach and has been focused on increasing the capital base of banks. This capitalization, in theory, should allow the banks to re-engage in providing credit and eventually get a fair share of the debt now held by the US government. The key issue is how to generate consumption, which has been through monetary easing. Two questions that remain unresolved are how to provide financial influence to the middle class in the United States and how Europe will create a new export model using its vast technology.
It is time to innovate. Developed markets need to make a deep inner analysis and likely take example from approaches in growth markets. The innovation and experience of the LATAM countries, for example, could prove useful for the rest of the world.
Author: Alfredo Capote was named a Young Global Leader by the World Economic Forum in 2010.
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