A New Purpose of Finance and Policy Lessons for Emerging Markets
The title of my closing speech is A New Purpose of Finance and Policy Lessons for Emerging markets.
In this final session my aim is to draw together some of the main themes mentioned during the keynotes and panels.
I want to pick three words from the heading Finance… Purpose… and Emerging and pose a question
What should be the purpose of finance in an emerging nation?
This year Nobel prize for Economy is awarded to three distinguished economists for their contribution to transforming the development economics and their work on reducing poverty. Welfare creation is one of the most important policy problems still unresolved especially for emerging and low income economies.
Looking back the history we can see that many nations have been able to catch up the developed nations, however there are many more nations that remained trapped at lower prosperity levels. Those who escaped from lower prosperity achieved this result by sustaining high growth rates for decades. So the first question is How Nations Reach Prosperity.
Prof. Robinson with Prof. Acemoglu, in their book Why Nations Fail argue that throughout history, the institutions explain the divergence in economic development between nations. I strongly believe in this argument. But this raises a new question. What type of institutional structures carry nations forward? How did the developed markets achieve sustainable growth and higher prosperity levels. What is the real transformation roadmap?
Prof. Robinson in his “The Narrow Corridor” presentation went further into conceptualizing the framework of institutional structure. There is a delicate power balance, or if we call it this way, a right level of power allocation between societies and the state, to give birth to sustainable prosperity. Public sector and private sector have to work collectively to increase the total productivity level of the economy in a sustainable manner. And this cannot be achieved without the guiding feedback from the markets.
The success of nations depend on this collaborative capability to create efficient systems that produce new and efficient value propositions for global markets. Professor Ufuk Akçiğit discussed the role of finance and its relations with firm dynamics and systems that carry countries forward.
The structural relationship between finance industry and real economy is very fundamental for sustainable growth. Financial professionals make decisions to allocate the capital in the economy searching for the highest return. This endless quest makes the financial sector the beating heart of a free market economy. It is the lighthouse for development of enterprise. It stands at the core of the creative destruction mechanism that fosters transformation by funding the efficient and successful and shifting the resources from the old to the new. This is the way finance generates wealth and prosperity. An if it does not work properly, it plants the seeds of repeating economic crisis over and over again. Every economic crisis is a signal for us to understand that we need to change and adapt our system to the new realities.
Yes investment must generate returns but investment must also flow to areas where capital is needed and where growth will come from. Without the money flowing into the growing companies, economies will have a diminished capacity to innovate and create added value. This means society in general will not be able to generate wealth and share the prosperity in a fair manner.
The primary role and purpose of finance should be to put capital behind the best ideas and best companies that maximize the total stakeholder and shareholder value.
Enterprises need different forms of capital at each stage of their growth cycle from idea to IPO. At early stages, companies need long term seed capital with smart mentoring, in later stages growth capital with no collateral requirements and in later internationalization stages they need global capital through listings in world financial centers. So who will be providing the long term capital in the economy is another question that should be asked.
Developing LT capital pools is one of the most essential institutional reforms that should be undertaken. LT capital pools such as pension funds, insurance pools and endowments act as the most critical component in an economy to provide long term capital for growing enterprises.
Without long terms savings pools, without the proper IPO structures in place, without a well developed VC & PE industry, is it possible to allocate capital in the most efficient way and sustain the growth momentum in the economy.
All over the world the number of IPOs and the number of listed stocks are in a declining trend. Ideas are being funded less in public markets. And more in private markets. So in countries where IPO listing conditions for growing enterprises are tight and no VC industry exists, the growing firms will starve for finance and the general growth pace will naturally stall.
In more and more markets value creation is taking place in private markets. So there is less public access to growth stocks. It is a lose lose situation while the companies miss the growth opportunity the investors miss the opportunity of investing in growth. As VC funded firms are comprising a huge part of the labor creation in the developed economies the whole economy loses is employment creation capacity.
Public markets are becoming pools of liquidity and an exit door for the owners of companies that are approaching the end of their life cycles. Markets are failing to play the role of source of risk capital for the economy. The society in general is having less stake in the game and this is leading to reduced trust in the system. The value adding potential of the finance industry is being more and more questioned.
However designing the financial industry is not enough. To create a sustainable economy you need to redesign your industries and change your consumption patterns with a circular economy mindset. Through only establishing right circular economic architectures countries may start walking on sustainable development paths.
We should be very bold about articulating bold targets for sustainability.
We should have SMART goals for specific industries that are specific, measurable, achievable, relevant and timebound. Such as creating a zero carbon economy in 5 years, %100 renewable energy in 10 years, %100 electrification of transportation in 10 years.
All comes down to designing an ecosystem, where finance, academy and firms come together in the right structure in an ecosystem. Sustainable development is a system building task. It is a design problem.
As Prof. Mustafa Ergen has shown you cannot think of Silicon Valley without Stanford University without technology firms and entrepreneurs. But also you cannot think of Silicon Valley without the Sand Hill Road where the VC firms are located. You cannot think of Silicon Valley without Nasdaq which provided growth funding for fast growing technology firms for decades. There is a saying “Only fools learn from his own mistakes, the wise man learns from the mistake of others” Emerging markets need to be wiser to be able to learn from their own mistakes and the history and success stories of developed countries as well.
