Speech at the 4th International Conference on Economics (“Global Stability and Growth and the State of Economics”), hosted by the Turkish Economic Association. Oct 18-20, 2014 at the Akka Antedon Hotel, Beldibi, Antalya, Turkey

Mr. Chairman, distinguished guests, ladies and gentlemen; I am honored to be part of this panel discussing the latest approaches for long-term investment.

As we all are aware, Turkey is about to spearhead the next G20 Presidency. I believe Turkey is well situated to steer the direction of the debate in long-term investment during the G20 and move the needle on potential growth.

Last February in Sydney, the G20 Finance Ministers put an ambitious target to increase global GDP by an additional 2 percent over five years. Ladies and gentlemen, 2 percent may seem like an easy to achieve target. In reality, it means adding two trillion dollars to the global economy over and above whatever global growth targets are in place. By no means is this easy to achieve—in fact, it is very, very difficult.

Given this objective, I would like to engage with you on two critical questions and one advice I have for EMs.

The first question is simply this: Where does one of the most significant opportunities lie in unlocking new long term investment potential and what can we do about it?

Let me say upfront, the answer is “infrastructure.” We know that over the next decade, the world needs about $80 trillion dollars to build infrastructure.

Is this $80 trillion available? Today, the available money from institutional investors alone is $85 trillion. Add to that some amounts from public and other private sector sources, and you can see why we constantly hear from the experts that “money is not the problem.”

The problem is that money is still the problem! Not its availability, but in freeing it towards infrastructure spending. There are plenty that needs to happen for this to happen, but I will highlight three.

First, the institutional investors that possess the $85 trillion I mentioned—insurers, pension funds and sovereign wealth funds—are currently only 1 percent invested in infrastructure. What’s happening here? Why? The problem is that home countries impose strict controls of the investment of such funds in infrastructure and utilities, especially outside their home environments. On top of that, many countries that require infrastructure have failed miserably to create the enabling environments necessary to receive institutional funds. Regulations are weak, political interference high, goal posts shift, bidding processes inconsistent, and time to get an agreement for an infrastructure project takes years. For example, infrastructure procurement processes in Southern Africa according to a recent OECD report, routinely take five years. In the right environment, ladies and gentlemen, these should not take more than 24 months.

And to make things even worse the shortsightedness of credit rating agencies is a concern. Individual projects cannot be rated, for instance, higher than the sovereign rating of the host country. This ends any possibility for even good and viable projects in these countries.

So, you get an idea now. “Money, money everywhere, but not anywhere to put it.”

Second, we need to have a coherent set of measurements. As Australian Treasurer, Joe Hockey said recently, we don’t even have a common measurement of risks of specific types of projects—we can’t even compare a hydro project or a rail project in one country vs. another. If one expects international investors to participate, they’ve got to know what comparable risks are before they commit to make a 30 or 40-year investment.

Third, government alone cannot unlock the potential. It needs to be government plus plus. In particular, governments and multilaterals like the Development Banks plus institutional investors plus private sector players. Government is needed because many of these infrastructure projects are so-called public goods requiring their involvement; development banks because they can reduce the cost of funds with their triple A rating and lend their considerable expertise; and institutional investors and private sector because they have the capital and the know-how. Thus, the need to move quickly on PPPs—Public, Private, Participation.

How do you do all of this in tandem? Well, I was very glad to hear that the Australian G20 Presidency has proposed a Global Infrastructure Hub idea that would act as a connector between supply and demand and unlocking potentials. No existing entity is able to do this. So, governance-wise, the call for such a hub is critical and could, like what the World Bank was able to do in the post-war period, re-build the world.

The second question I want to deal with is this: Whom should we additionally target to push long-term investment toward?

The world seems to be slowing everywhere—We have problems in Europe, China, Japan and now EMs as well. The only brighter economic spot these days seem to be the US, but even here the recovery is tentative at best. And, everywhere, job creation is the critical challenge.

Therefore, the obvious solution must center on the category that has the potential to create the largest number of jobs—the Small and Medium Enterprises segment or SMEs. They are critical. They are essential. 80% of jobs are created in SMEs, especially in new ones. Long-term financing is essential for the development of SMEs, especially young, innovative, high-growth ones. Many EMs face an acute constraint especially in this area. The 2 percent additional growth that the G20 is calling for cannot be realized if we do not pay attention to SMEs trying to raise long-term capital. Oliver Wyman estimates that the credit gap today for SMEs amount to $3.5 trillion. Given their role of job creators, if we don’t tackle SMEs, we won’t tackle the growth problem. Period!

So what can we do? I raise with you a few possibilities that others have raised also.

First, it is essential that we find ways for SMEs to bypass traditional bank lending which has become difficult ever since the financial crisis. We need to open new doors and issuing equity and debt securities in the capital markets will become more critical for SMEs. The more advanced economies have done this. For EMs, we must more aggressively pursue innovative ideas like setting up pan-regional SME market places that leverage the scale of regions as opposed to countries.

Second, there could be SME Debt platforms as the Consultancy Oliver Wyman has suggested going on the basis of successes Germany has had. Over 50 SMEs have raised close to 2.7 billion Euros via the SME bond market platforms in several German cities.

Third, SMEs need even more support than just long-term financing. The heart of the matter is that they need to become better connected to global supply chains where the action is. Therefore, they require information platforms to enable just-in-time market intelligence and gain footholds to global and regional value chains.

Importantly, all of what I have suggested will still not be enough. It is about time that the World takes a serious view on SMEs and abandons 65 years of lip service about SMEs because it sounds nice politically. A more ambitious scheme must be in place. Let me explain.

We have the WB and all the regional development banks to fight poverty; we have the IMF to take care of BoP issues, we have the UN to take care of political and security agreements; you have the likes of the OECD and other regional bloc organizations to take care of the regional interests. You even have the ILO and the ICC who on different spectrums represent labor and business respectively. However, we don’t have a single entity that gives voice to the largest employer in the World—the SMEs. We need to establish such a new organization that would be led by private sector for private sector but with the moral authority given by governments. Without something as bold as this we risk seeing another generation of SMEs go down the drain. Thankfully, the Turkish Government is supportive of such thinking and my colleague Rifat Bey is actively working to make this a reality through the auspices of the Turkish B20 that he leads. We need to support him in this noble endeavor.

Third—and this is about becoming more pragmatic and practical.

I see in too many forums a litany of complaints especially by EMs about the unintended consequences of Basel 3, the various new regulations that the G20, Basel, FSB, IMF, etc have brought to bare ever since the crisis, and lately QE. EMs are right to complain about them. They did and do continue to have negative impact on EMs. But, it is no point trying to change established policy and regulation—even while we challenge them, understand that it takes a long time to change them.

Let’s be more pragmatic. We need to look at what EMs need to do, not in response to those unintended consequences but what they should have done all along anyway. A few points come to mind:

First, EMs must step on the accelerator to develop their own local capital markets. This is the only way out of short-term dependency on capital flows as a result of QE and interest rate differentials. If EMs focus on enabling their own environments they would create the conditions that protect them from the negative effects of such capital flows in the first place. This means, enhancing the development of local currency bond markets, developing long term yield curves and therefore, providing a diversified financial market that can develop and strengthen their own local institutional investors.

Second, the old mantra of ensuring savings is still relevant today as when Lord Keynes raised it as a policy tool some one hundred years ago. Government must develop savings potentials. First place to start is to develop retirement plans through pooled investment vehicles, whether private or even collectively done such as those found in several East Asian economies.

Third, and I can speak with some experience in this area. Develop your financial infrastructure and payments systems. The reason why several EMs in the last crisis were able to resist the fallout in the west was because they took pains to develop their financial infrastructure. Infrastructure and payment systems are often the unsexy part of finance. But what remains unseen turns out to be a phenomenal antibiotic against financial crises. We should learn from the countries that did this well.

This in short Ladies and Gentlemen are my short thoughts for you. I look forward to discussing them with you.