As we look forward to the next decade, it's the right time to assess the role of International Financial Centres (IFC) in the changing global economy, writes Elise Donovan.
When we look forward, it's all too easy to focus on a Euro-centric approach, but this belies the real value that IFCs can bring to the emerging and emergent economies. But how are IFCs making a difference in those regions today and how will those actions have an impact on the future? There are a number of key trends that make IFC's role significant in the global economy.
The emergent middle classes
The rise of the international middle class. By 2030, the global middle class is expected to reach 5.3 billion people.
IFCs are a sound platform for business establishment, growth and diversification and will be crucial to help stimulate emerging economies through the next decade"
Most of this growth will be in Asia - by 2030, China and India together will represent 66% of the global middle-class population and 59% of middle-class consumption. But, key to the rise of the new international middle class in Asia, Africa and the Middle East is the ability to allow start-up and entrepreneurial cultures to flourish. The World Bank estimates that 600 million jobs will be needed by 2030 to absorb the growing global workforce. In emerging markets, most formal jobs are generated by small business, which create 7 out of 10 jobs.
But many jurisdictions are not as business friendly as those in the West. Antiquated laws mean that ownership structures are not flexible, financing and debt management is difficult, and some jurisdictions have inordinate powers to dictate how businesses are run.
IFCs could be the answer to help stimulate those 600 million jobs in Asia, Africa and the Middle East. Through IFCs, even the smallest businesses today can set up secure and robust business structures offshore, so entrepreneurs can run their nimble businesses without fear of tripping over onerous business rules.
Setting up a business in a tried-and tested jurisdiction also gives investors more confidence to help a company grow. A good example of this is Careem, the Dubai-based ride-sharing platform. It was able to successfully secure investment via a BVI incorporated investment vehicle as opposed to setting up in the UAE. The business was recently valued at $1 billion and is widely recognised as the "Uber of the Arab world".
The rise of the African economies
Since 2000, at least half of the world's fastest-growing economies have been in Africa. And by 2030, Africa will be home to 1.7 billion people. Of the 55 countries in African, 54 have signed on to the African Continental Free Trade Agreement (AfCFTA) to make it the world's largest free trade block. AfCFTA with a collective GDP of $3.2trn is expected to catapult the economies of the continent. The United Nations Economic Commission for Africa estimates that the AfCFTA will boost intra-African trade by 52% by 2022.
For Africa to realise its potential, however, it needs to secure international development finance, particularly into its financial and infrastructure sectors. Much of that finance comes through Foreign Direct Investment (FDI) flows, which in turn is often mediated through IFCs. Flows through FDIs into Africa rose to $46bn in 2018, an increase of 11% on the previous year, according to UNCTAD's World Investment Report 2019.
A recent report by the Overseas Development Institute (ODI) found that through IFC intermediation, financial services sectors in developing nations had received an additional $600 billion and infrastructure sectors had received some $1trn worth of extra investment.
IFCs provide the security necessary for private investors to be safe in the knowledge that their investment is subject to the legal jurisdictions of established financial centres, which is often lacking in emerging African jurisdictions.
Crucially, the risks of development finance not using an IFC in Africa are well-recorded. Norway's Norfund stopped using non-OECD IFCs due to political pressure in 2009. As this prevented it from using business structures in Mauritius, the DFI made no new investments in sub-Saharan Africa in 2010 and 2011. As a result, pipeline deals in the agricultural and small business sectors - essential to job creation and poverty alleviation - ground to a halt.
China's global vision
Only 15 years ago, China's economy was one tenth the size of the US economy. But, by 2030 it will be the biggest economy in the world. But to execute on its ‘Going Global Strategy' and Belt & Road Initiative, it will need to continue to use IFCs as mediators for international joint ventures and co-funded infrastructure projects.
IFCs are already a significant conduit to fund Chinese infrastructures projects throughout Asia, Africa and Europe. Core to China's Belt & Road Initiative is the ability for Chinese enterprises to partner with international business and raise finance from around the world.
The statutory framework underpinning IFC vehicles has been well-tested in courts and is therefore trusted in allowing for several variations of a joint venture and bespoke partnership agreements that help to create transparent, mutually beneficial cross-border agreements that suit all stakeholders.
By 2030, the goal of the Belt & Road initiative will have been to expand trade, increase foreign investment, and reduce poverty - all by lowering global trade costs. Therefore, active international collaboration in investment and financing in the building of the Belt & Road investment and financing system is essential. Using IFCs as the lynchpin, we can facilitate connected financial services, interlinked capital markets and financial infrastructure, active international financial centres and collaboration between international financial regulators.
IFCs key to 2030 economic growth
IFCs are a sound platform for business establishment, growth and diversification and will be crucial to help stimulate emerging economies through the next decade. Emerging economies are lifting millions of people out of grinding poverty while also exerting more influence in the global economy.
We must continue to use our IFCs' dynamic, energised and internationally minded talent to create more innovative products and services designed to help foster better business environments across Asia, Africa, the Middle East and Latin America.
IFCs are vital investment and trade hubs today, and over the next decade we can help turn billions into trillions as emergent and emerging economies begin to shape the 21st century.
Elise Donovan is the chief executive officer at BVI Finance
Rising incomes in Asia will probably be the most important investment story of the 2020s. Asia is home to 60% of the world's population, with both China and India each accounting for about 18% of the global total.