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'Protectionism will reduce support for globalisation'

Mar 31, 2009

India’s Planning Commission Deputy Chairman Montek Singh Ahluwalia in an exclusive interview with a prominent national daily newspaper has expressed his concern over rising financial protectionism. Prior to his departure for the G20 summit, he emphasised on the need to change the system of regulation.

Excerpts:

The Hindu: What is the backdrop of the G20 London summit?

Montek Singh Ahluwalia.jpg

Montek Singh Ahluwalia: The summit is taking place at a time when there is global crisis of extraordinary magnitude, the worst in 60 years. I think all the leaders understand that the summit’s aim is to look at the global economic situation, to review what has been achieved in the areas identified in November last year in Washington and, may be, to give some messages on what should be done in future.

TH: What is India’s expectation from the summit?

MSA: Obviously, all the different elements of the global crisis need a global response. India is one of the 20 countries which represent over 70% of the world GDP and we hope the summit comes out with a global message which meets our expectations.

We need a revival of the global economy, we need the financial system in industrialised countries to get fixed as soon as possible, without which it is difficult to envisage a revival of confidence. The global community needs to take some special measures to make sure that the developing countries are helped at a time when a crisis that was not of their making is having a very severe effect on them.

The whole shrinkage of private capital flows from emerging markets is massive, something like $700 billion. Obviously, this will have an adverse effect on growth of many developing countries and I think that this withdrawal of capital has occurred not because of anything that has gone wrong in developing countries but because the financial systems in the industrialised countries malfunctioned.

So the global community needs to take corrective steps so that some revival of capital flows takes place till the multilateral institutions step in.

TH: From the Indian perspective, what should be the ingredients of these special measures?

MSA: First of all, it is very important that a coordinated effort is made by all major economies, including India, to take steps to de-lever the crisis. Both monetary and fiscal policy should be actively used to restore growth momentum. On our own front, we would certainly tell the assembled leaders that we are doing what is necessary and we would like to see the rest of the world also take steps to stimulate their economies.

Secondly, it is very important that the global economies remain open. We are very concerned that there are protectionist noises being made and I want to emphasise that we must distinguish between a protectionist noise and the actual protectionist action.

The fact is that a protectionist noise actually gets converted into action unless there is a strong political leadership. But protectionist pressures are rising and we are very concerned, for example, over financial protectionism. In the area of multilateral institutions, we can increase the flow of resources to developing countries through the IMF and the World Bank.

TH: What about the differences in perception between the US and Europe on the corrective steps required? What is India’s stand in this regard?

MSA: India’s position on this is very clear: there is need to act on both fronts. We need to do something to take care of the global situation today, but we also need to change the system of regulation and improve it. There is a lot of agreement among different countries that the perimeter of regulation should be expanded. We should cut out regulatory arbitrage. Shadow banks, which were doing the same thing as banks, particularly in the United States and also in Europe, should be subjected to similar regulation.

TH: Everyone knows that the reckless behaviour of US financial institutions led to the current global crisis. Do you think that the summit can work out a mechanism to ensure that it does not happen again?

MSA: A lot of what you said relates to where you put the blame on the crisis but I don’t think the leaders are going into this meeting on the blame-game point of view. They are going into the meeting saying that look, whatever happened is pretty bad and how do we stop it from happening in future.

The key answer to that is a better system of financial supervision and regulation and two, the IMF as a global monitoring body interacting with the Financial Stability Forum with the responsibility of becoming an early warning system to be able to spot difficulties.

TH: During the East Asian meltdown, the IMF had no inkling of what was going on…

MSA: That’s true, but there’s nothing you can do in three days from now that will be a guarantee. One can be very cynical, but some of what they are saying is very substantive. Like for example, we will expand the perimeters of regulation, we will set up global standards. It’s true that in the past, the IMF has not done a good job.

There is a feeling that the IMF has actually not been very effective in being able to raise issues of stability when the problems rest with industrialised countries. Now, can you overcome this? We have to see.

TH: When compared to the fiscal stimulus packages announced by the U.S. and China, do you think that the packages announced by India are good enough to combat the slowdown?

MSA: That’s a very important question. There is a misunderstanding on the extent of stimulus in India. That is because if you define the fiscal stimulus to be the extent to which the fiscal deficit is allowed to worsen, India’s fiscal stimulus is very substantial. The problem is that some of that happened not because of what we call fiscal stimulus but because of other increases in expenditure that occurred during the course of the year. The bottom line is that while new expenditures took place, we did not try to cut other expenditures.

TH: China has questioned the status of the US dollar as the world reserve currency. What is India’s view on that?

MSA: It is true that potentially, the dollar is not the only reserve currency. But the way it has worked, the dollar has been seen by most people and most countries at a dominant position. As far as the SDR is concerned, India’s view is that we should have an expansion of the SDR and that it can play a useful role by being expanded, including therefore, by encouraging people to hold their reserves in the form of SDRs.

TH: Did the Washington summit play down the culpability of the US and Europe?

MSA: You know, I think international summits are not the place where you discuss culpability issues. The Washington summit did not come to an analysis of what caused the crisis, except in very general terms.

I think today there is a better understanding and a lot more recognition that there was a regulatory failure. Now there is a perception that the regulatory authorities failed and had they acted more prudentially, this crisis would not have occurred or whatever happened would have been less damaging.

TH: The current crisis is giving rise to protectionism. Do you think it is a short-term reaction?

MSA: There is no doubt that the rise of protectionism will create problems for all members of the world economy, including us. And we often make the point that at least, as developing countries, there is a lot of doubt and suspicion about the fairness of the global economic system.

We have been very successful in opening up our economy and showing people that it gives you many opportunities. Now if as a result of protectionism, those new opportunities begin to disappear or even to be reduced, it will reduce the support for globalisation.

Source : The Hindu
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