26The Bahamas Investorgrowth. Indeed, the liberalization offinancial markets boosted theaccessibility to credit of all kinds ofquality and transparency, like highlycomplex products such as collateralizeddebt obligations (CDOs). Following the recent global financialcrisis, a prime example for theconsequences of adverse incentivestructures combined with complexfinancial innovations, we need toconsider the prospects for credit-basedgrowth over the next decade. In theaftermath of the financial crisis, the biasfor financial market regulation hasshifted towards tightening.Furthermore, in particular manydeveloped economies have accumulatedexcessive debt levels-both private andpublic-which suggests a high need fordeleveraging going forward.Various empirical studies show thatafter periods of large debtaccumulation-and correspondinglyhigh growth levels due to debt-basedgrowth-economies enter into cycles of"creditless (growth) recoveries." It canbe argued that following the last debt-spurred growth cycle, culminating inthe financial crisis, developed marketsare facing a prolonged period of lesscredit-driven (ie creditless) and hencesub-par economic growth, which is adirect consequence of deleveragingefforts and stricter financial regulation. Nevertheless, the importance of creditto enhance growth is undisputed and theaccessibility to capital markets is decisivein developing the capital base. Acomparison between economies showsthat emerging markets still have thepotential to enhance their accessibility tofinancial markets. Ironically, among thedeveloped markets it is the debt-troubled European economies that areincreasingly lacking access due to theirworsened credit ratings, whereas amongemerging markets, Southeast Asian andLatin American debt policies are lookingoptimistic with regard to credit access.Access to capitalFor the citizens of many developing andemerging economies, however, access tocapital is not as easy as in developedeconomies. Less developed economiesoften lack even the simple preconditionsfor a lending environment, such as basicmeans of communication ortransportation. It is therefore notsurprising that these economies haveimmense difficulty in generating afunctioning and growing localentrepreneurship. In this regard, thereare some promising approaches to startenabling access to capital for the localpopulation, such as microfinance. Microfinance aims at closingthe gap by providing financialservices to low or minimal-income clients in developingcountries. Generally these clientsare people who cannot providecollateral for a loan and/or suffer from illiteracy. Such access to financing is a huge advantagefor both the individual and theeconomies concerned. It can spur thedevelopment of small businesses andself-employment and thus boostinvestment, as well as consumption.With a larger proportion of societygaining access to financial services, youwould expect to see positive effects onoverall economic growth. Many examples for this developmentcan be found in Latin America, Africaand Asia. Furthermore, efficienttelecommunications networks, enablinglarge population groups to communicatecheaply and quickly by mobile phone,facilitate exchanges between thesuppliers and consumers of goods andfinancial services better than ever beforein the history of the emerging marketsconcerned. This is a rather new factorenhancing economic growth potential,which is important especially foremerging markets, as the construction ofmobile phone networks is cheaper thana costly fixed-wire infrastructure.New growth patternCertain excesses regarding the creditchannel of growth, such as the neglect ofproper financial market regulation, willbe a headwind for economic growth inthe developed economies concerned.This clearly strengthens the superioroutlook of several emerging marketswith powerful workforce dynamics: anumber of emerging market economieswith currently high birth rates and largeproportions of very young population,such as the Asian economies India,Indonesia, Malaysia or Vietnam andSouth American economies such asBrazil, will be able to rely on verypositive demographic trends goingforward. In contrast, western European,North American and Australasianeconomies, but also developed Asianeconomies such as Japan, are expected tosuffer from a distinct decline in theworking-age population as a share of thetotal population, while their workingpopulation is already relatively smallcompared to the global average. Demographics will thus become amajor differentiating factor for thegrowth pattern in the next decade. Onthe other hand, knowledge, respectivelyknowledge management, as well ascredible property rights will become theother key differentiating drivers.Several emerging market economies,which lack knowledge and innovativecapacities, have been gaining know-howthrough transfer from developedeconomies. As a result, many Asianeconomies, which gladly opened theproduction plants for developedmarkets, now boast companies thatproduce complex high-tech goods.Hence, for many emerging marketcountries it has become crucial toestablish conditions that attract foreigninvestment and encourage the transferof know-how to their economies. However, there are limits to this know-how transfer as the stock of borrowableideas is running lower. If emergingeconomies grow richer by relying.a number of emergingeconomies will leave thesheltered environment ofcatch-up growth and willface tougher challenges.INVESTING

The Bahamas Investor27heavily on the transfer of know-howinstead of their own development, thereis a considerable risk of a severe growthslowdown in the future. For example, thelow innovation score of China or Russiamakes these countries vulnerable. The current growth models suggestthat, on aggregate, growth opportunitiesfor emerging markets will remainexcellent in the next few years. Risks aremainly centred around the fact thatcurrent economic growth somewhatneglects profitability due to the lastingabundance of global savings. Beyond the next one or two years, anumber of emerging economies willleave the sheltered environment ofcatch-up growth and will face tougherchallenges, which will result in lowergrowth rates. A number of developedeconomies, in particular those withoutnatural resources, are already wellpositioned for growth thanks to theirstrong innovation backdrop andcredible property rights. Developing thelatter will be the major challenge facingstill a vast majority of the emergingmarkets going forward, but allow forhuge and still hidden growth potentialsto be unleashed, if combined with acredible and functioning legal system. For the time being, the credit channelin developed markets is impaired due toexcessive debt levels and sluggishimprovements in financial marketregulation. It is expected that theopportunities will finally prevail over therisks in these markets, but only in themedium term, when deleveragingbecomes more advanced and financialmarkets become better organized andregulated, creating incentives for theefficient allocation of capital. The ensuinginvestment boom thanks to demand fromemerging markets will play a key role inimproving the opportunities in developedmarkets in a few years' time.Janwillem C AcketJanwillem C Acket is chief economist at Bank Julius Baer& Co Ltd. He is a member of the Advisory Board at theKOF Swiss Economic Institute, Swiss Federal Institute ofTechnology, in Zurich, Switzerland. He was one of thekeynote speakers at the Julius Baer InvestmentConference, which took place in Nassau at the end ofNovember 2011. COURTESY JANWILLEM C ACKETINVESTING