TOKYO -- The managing director of the World Bank said the future global economy will be dominated by the rise of developing countries, if the actions of today are carried out correctly.
"Emerging economies will dominate the world economy by the middle of this century. On the other side, the relative economic importance of many of the advanced economies will decline," Sri Mulyani Indrawati said as part of her keynote address opening the second day of the 20th International Conference on The Future of Asia, in Tokyo on Friday.
For the developing world to manage the next few decades properly, "it won't be enough to mobilize resources and move people from agriculture to industry and services. Instead productivity must increase within industries," said Indrawati.
Indrawati, who was Indonesia's finance minister from 2005 to 2010, said that the prime obstacles for middle income countries are income inequality, proper urbanization and ageing populations. With the effects of the global financial crisis waning and the U.S. Federal Reserve tapering off its quantitative easing, the days of easy money and easy growth are over."
"But the current trends are not destiny," she said.
Indrawati said the key areas to work on are to secure the continued reallocation of resources for the most productive sectors; develop labor market institutions that maintain flexibility in the labor force while protecting workers; foster financial institutions that can channel money to its most productive use; and create a positive business climate that allows new companies to emerge "and unproductive ones to exit."
"This requires research and development, an area where public and private sectors can both play a role," said the managing director.
"Other options should be considered including increasing the participation rate of women in the labor force. That can help reduce the effects on aging for some countries in the region, including Japan, but also in middle income countries such as Malaysia," she said.
Answering questions after her keynote address, Indrawati commented on the three arrows of Japanese Prime Minister Shinzo Abe's economic policy.
"Both monetary and fiscal policies have done their parts," she said, referring to the first two arrows. "But as in any macroeconomic instrument, they have limitations."
These policies can provide stability, "but in order for the economy to move forward, and especially to sustain the maintaining of confidence, it definitely requires much deeper and faster structural policy," she said, adding that macroeconomic policy must be met with the speed as well as the depth of structural policy, the third arrow.
It is "a very encouraging sign," added Indrawati, "but you know any certain reform in any country is always difficult -- requires a lot of trade off. And that is exactly always the best of any country in the world."