The World Economic Forum’s fifth ‘Annual Meeting of the New Champions’ for 2011, also dubbed the “Summer Davos”, yesterday concluded its three days discussions on the subject of “Mastering Quality Growth” that gathered more than 1,500 industry, government, technology and civil society leaders in Dalian, China from September 14 to 16.
The session looked at the capacities and strategic opportunities available for governments and other relevant constituents to make use of the demographic developments and current high savings rates in many Asian countries in order to provide for a sustainable social protection system, and how public and private sectors can come together to identify best practices to implement these measures.
Former World Bank economist and now KCIC Chief Economist Alessandro Magnoli Bocchi argued that, in Asia, the upcoming demographic developments and a good fiscal situation as well as a favorable policy environment will create over the next few years clear opportunities for private provision of: 1. financial services and social protection; and 2. social services, such as health and education. A clear win-win is at hand.
Magnoli Bocchi delivered three main arguments that offer insight on these opportunities, as they are driven by demographic development. He said:
1. Starting with the question on everyone’s mind: What is going to happen over the next few years? Asian social security systems will be reformed, to include more people. This is due to the fast growth of the Asian middle class, rapid urbanization and population dynamics. Population aging – which results from declining fertility and increasing survival rates – is also an Asian phenomenon, especially in China because of its one-child-policy. These are all forces that lead – as proven by academic literature – to a rise in social security expenditures. However, to maintain fiscal sustainability, the benefits provided will be lower than the current ones. In short: ‘More people, Less benefit’. There are clear business opportunities: private life insurance and financial services can cover the same amount of people (“more people”), and make up for the difference in benefits (“less benefits”). Also, private asset managers will see rising demand for their services.
2. We also expect policy to push in the same direction. This is the key point, the enabling factor. Emerging Markets, Asia included, can afford increasing social security coverage without falling into the trap of developed markets, where pensioners are voters and have hijacked the system. In Asia policy makers firmly intend to make domestic consumption the main engine of economic growth. Increasing social expenditures can make a substantive contribution to increasing household consumption via a reduction of savings rates. This has been the case in the Organisation for Economic Co-operation and Development (OECD) over the past 20 years. In China a sustained 1% of GDP increase in public expenditures, distributed equally across education, health, and pensions, would result in a permanent increase to household consumption of 1 and 1/4% of GDP, according to the International Monetary Fund. Business opportunity: private providers of social services will face a flourishing market.
3. In the end, the introduction and continuation of reformed systems will foster domestic consumption. It is essential for investors from the Middle East and capital markets from across the world to position themselves today in order to harvest the ensuing investment opportunities. All indicators point to a continued rise in domestic demand, including real estate for middle class (in secondary and tertiary cities), energy, infrastructure (soft – i.e. education and health – and hard – i.e. highways, railways, etc.), financial services (i.e. banks, leasing, and life insurance), and consumer (across the spectrum). As for KCIC, we enjoy a head start among investors as we’ve been positioning for years in this space and will come out ahead.
Magnoli Bocchi is KCIC’s Chief Economist and also serves on the Management Team and the Investment Committee at KCIC. Prior to joining KCIC, he was a Research Associate with Harvard University and an economist with the Inter-American Development Bank.
KCIC was founded in 2005 with a capital of KD80m by an Emiree Decree with a mandate to develop investment opportunities in Asia towards building an Asia focused asset management company. The public company employs a team of specialists in markets in Asia and currently manages assets in excess of $450m. Key shareholders include the Kuwait Investment Authority, the Sovereign Wealth Fund of Kuwait, National Investment Company, one of the leading investment banks in the Middle East, and Al Ghanim Industries, one of the largest conglomerates in the Middle East.
Saturday, September 17- 2011 @ 14:39 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.