G 20 and India
SUMMARY
OF
(46th A.D Shroff Memorial
Lecture delivered by Dr. Duvvuri Subbarao, Governor, Reserve Bank of India, at
Indian Merchants’ Chamber Mumbai on November 20, 2012)
This is a summary of the MAIN POINTS in the lecture
delivered by the RBI Governor on 20th, Nov,2012. For the full text,
readers may visit the RBI web site.
As always, RBI Governor’s lecture here is laced with
precision, logic, focus on problems and clarity of solutions.
Anyone who wants some clarity of the present Global
economic scenario will indeed profit from the insights that these lectures
provide. The General Investor in stocks and shares also will profit by understanding
the movement of the Indian and Global economies – and what future holds out for
India and the world – especially the G 20.
Now read on the summary :
Ø What
is the G 20?
Ø G
20 is an informal club with 19 member countries and the European Union which
together represent 90 per cent of global GDP, 80 per cent of global trade and
two-thirds of the global population.
Ø The
chair of the G 20 rotates every year from country to country. The chair country
takes the lead in formulating and driving the agenda. The G 20 leaders meet at
the summit level once a year.Besides, the Finance Ministers and central bank
governors of G 20 meet twice a year. All the meetings are typically held in,
and hosted by, the chair country. The President of the World Bank and the
Managing Director of the IMF attend the G 20 meetings, thereby ensuring that
the activities of the G 20 are integrated into the agenda of the Bretton Woods
Institutions where necessary. There are also other invitees to the G 20
meetings such as the OECD, UNDP and the regional development banks.
Ø Why
is the G 20 important?
Ø The
bigger EMEs, particularly the BRICS3, were growing at a much faster pace than
OECD countries for a long time, and were becoming increasingly systemically
important. It became clear that for any multilateral economic consultative
process managing globalization to be effective, their inclusion in the process
was imperative.
Ø The
second factor that makes the G 20 unique is its attempt to coordinate the
macroeconomic policies of systemically important economies to make them more
effective in a world where national macroeconomic policy instruments are being
blunted via rapid global integration through trade and financial markets.
Ø Main
Issues on the G 20 Agenda :
Ø Global
Rebalancing :
Ø Almost
everyone is agreed that one of the root causes of the global financial crisis
is the buildup of global imbalances. In as much as global imbalances - no
matter whether they were caused by a ‘consumption binge’ in advanced economies
or a ‘savings glut’ in EMEs - were the root cause of the crisis, reducing
imbalances is a necessary condition for restoring global financial stability.
Ø The
post-crisis debate on global imbalances has three interrelated facets. The
first is the role of exchange rates.
The second relates to capital flows into
EMEs raising the familiar challenge of managing the impossible trinity. And
the third facet is the framework for the
adjustment process.
Ø Role
of exchange rates – is a prime lever for redressal of external imbalances.
Global rebalancing will require deficit
economies to save more and consume less. They need to depend for growth more
on external demand which calls for a real depreciation of their currencies.
Ø The
surplus economies will need to
mirror these efforts - save less and
spend more, and shift from external to domestic demand. They need to let
their currencies appreciate. The problem though is that while the adjustment by
deficit and surplus economies has to be symmetric, the incentives they face are
asymmetric. Managing currency tensions will require a shared understanding on
keeping exchange rates aligned to economic fundamentals, and an agreement that
currency interventions should be resorted to not as an instrument of trade
policy but only to manage disruptions to macroeconomic stability.
Ø Global imbalances - capital flows.
The problem of capital flows came centre stage in the aftermath of the
quantitative easing by advanced economy central banks when the excess liquidity
in the global system found its way into faster growing EMEs. The most high
profile problems thrown up by capital flows, in excess of a country’s
absorptive capacity, are erosion of monetary policy effectiveness, currency
appreciation and loss of competitiveness. Speculative capital flows could also
lead to asset and commodity bubbles potentially threatening both financial and
economic stability.
Ø In
the G 20 debate on capital flows, popularly but mistakenly referred to as
‘currency wars’, EMEs agitated mainly two points. First, that in as much as
lumpy and volatile capital flows are a spillover from the quantitative easing
of advanced economies, the burden of adjustment has to be shared. Second, that
capital controls should be understood as legitimate and acceptable defence
against speculative capital flows.
Ø Global
imbalances and their correction were the main concern in the G20 Framework and
Mutual Assessment Process (MAP) exercise. The MAP exercise is aimed at making
countries commit to external sector policies that lead to strong, sustained and
balanced growth at the global level. The understanding is that global
imbalances, especially imbalances built on the strength of undervalued exchange
rates accompanied by a build-up of reserves, threaten the stability of the
global economy due to the possibility of disorderly unwinding.
Ø China’s exchange rate policies
were at the centre of the debate in the G 20. As on date, China’s current
account surplus (in relation to its GDP) has declined from the pre-crisis peak,
and China’s real effective exchange rate has also appreciated since 2005, even
though it is widely believed that it needs to appreciate further. In the
meanwhile, however, the cumulative surpluses of oil producing countries (mostly
OPEC, Russia and Norway) have increased and now account for the lion’s share of
global current account surpluses. While global imbalances have declined in the
post-crisis period, their nature and composition continue to evolve. It is
important that the MAP exercise in the G 20 keeps a watch on changes in the
composition, nature and distribution of global imbalances and their
implications, and to steer the work towards their underlying causes.
Ø India
perspective on the global imbalance problem : India did not contribute to the
generation or transmission of global imbalances. As much as we want to enhance
our export competitiveness, we believe that it should come from improved
productivity rather than an artificially calibrated exchange rate. Our exchange
rate is largely market driven, and we intervene in the forex market only to
manage volatility in the rate and to prevent macroeconomic disruptions. As a
developing economy, we run a large current account deficit (CAD) that has in
recent period expanded relative to our historical record. We need capital flows
to finance the CAD. We have an express preference for equity flows over debt
flows, for direct investment over portfolio investment and for long term over
short term flows and. We are moving gradually towards opening our capital
account along a roadmap, the roadmap itself being recalibrated to the evolving
global situation. Our policy, in short, is festina lente which is Latin for
‘make haste slowly’.
Ø India
co-chairs, along with Canada, the G 20 Framework ‘MAP’ Working Group (FWG).
This provides India an opportunity not only to get an early preview of the
macro and micro consequences of global initiatives, but also to actively
contribute to such initiatives. India’s suggestions on the role infrastructure
investment can play in the global recovery and rebalancing is a case in point.
Ø Protectionism
Ø In
the post-crisis world, there may not actually be ‘deglobalization’ but the
earlier orthodoxy that globalization is an unmixed blessing is being
increasingly challenged. The rationale behind globalization was, and hopefully
is, that even as advanced countries may see some low end jobs being outsourced,
they will still benefit from globalization because for every low end job gone,
another high end job - that is more skill intensive, more productive - will be
created. If this does not happen rapidly enough or visibly enough,
protectionist pressures will arise, and rapidly become vociferous and
politically compelling.
Ø Recent
international developments mark an ‘ironic reversal’ in the fears about
globalization. Previously, it was the EMEs which feared that integration into
the world economy would lead to welfare loss at home. Those fears have now
given way to apprehensions in advanced economies that globalization means
losing jobs to cheap labour abroad.
Ø There
is concern in some quarters that even as open protectionism has been resisted
relatively well during the current crisis, opaque protectionism has been on the
rise. Opaque protectionism takes the form of resorting to measures such as
anti-dumping actions, safeguards, preferential treatment of domestic firms in
bailout packages and discriminatory procurement practices. To strengthen
multilateral trade discipline, the need for a quick conclusion of the Doha
Round can hardly be overemphasized. In a world with growing worries about the
debt creating stimulus packages, a Doha Round agreement should be welcomed as a
non-debt creating stimulus to the global economy.
Ø India
opposes protectionism in all its forms. However, at the same time, we have to
respect the WTO-consistent policy space available to the developing countries
to pursue their legitimate objectives of growth, development and stability. We
are encouraged by the analysis of the recent trade monitoring report jointly
released by WTO, OECD and UNCTAD on G 20 economies which shows that majority of
the trade measures taken by India in the review period were either trade
facilitative or roll back measures.
Ø Financial
Sector Reforms
Ø Received
wisdom today is that financial
deregulation shares the honours with global
imbalances as being one of the twin
villains of the crisis.
Ø The
broad contours of the international initiatives spearhead by the G 20 on
financial sector reform rest on four broad pillars: regulation, supervision, resolution, especially in respect of
global systemically important financial institutions (or SIFIs), and assessment of the implementation of new
standards. So far, one pillar that has received substantial public
attention is regulatory reform,
where there have already been some notable achievements, including agreement on
the new Basel III capital and liquidity
standards.
Ø All G 20 members have committed to the
implementation of the Basel III package. However, major
jurisdictions have come out with their own regulatory standards. It is
important that there is no disharmony that could be confusing. We need to guard
against the possibility of regulatory arbitrage. If comparable standards are
not implemented in all jurisdictions simultaneously, financial activity will
likely migrate to less regulated jurisdictions as well as into shadow banking
with disruptive consequences for the entire global financial system.
Ø As
we move forward in the area of regulation, the investment needs of the emerging
market and developing economies also deserve special attention. There are two
important points in this regard. First, it is important to ensure that financial intermediaries in emerging
and developing economies are not disadvantaged in the new regulatory framework,
especially since the opportunities and challenges in their systems are quite
different.
Ø Second,
the more demanding regulatory standards should not lead to deleveraging by global financial institutions out of emerging
markets. It should be noted in this regard that the financial regulatory reform
has so far focused on reducing systemic risks, and rightly so, but not much
attention has been devoted to redirecting savings from investment in volatile
financial assets to financing investment in the real economy, where the impact
on growth and jobs is more tangible and direct. We need to recognize that it is income from the real sector that must
ultimately pay for the profits of the financial sector. Standards setting
bodies should design incentives in a manner that helps redirect global savings into investment in the real
economy, particularly in infrastructure, supports demand and enhances
long-term potential growth thereby fulfilling the original role of
intermediating for growth and development of the real economy.
Ø Collaboration between financial authorities on
these issues is an important, albeit a difficult and painstaking task. The
regulatory response in the G 20 should be well coordinated internationally to
ensure that the new regulatory framework is effective and globally implemented
and the follies of the past that led to the financial crisis are not repeated.
Ø Future
Challenges for the G 20 :
Ø (1)Drawing
a balance between short term compulsions and medium term sustainability. A case
in point is the intense debate in the advanced economies on fiscal austerity vs
growth. Everyone is agreed that long term fiscal consolidation is critical to
macroeconomic sustainability. At the same time, everyone is also aware of the
pains of fiscal adjustment in the short-term. If fiscal profligacy is seen as
consumption of future income and shifting the burden to a future generation,
fiscal austerity should be seen as the price for the necessary correction so
that burden sharing across generations is fair and optimal. If the compulsions
of short-term and long-term policies point in different directions, how can
these be harmonized, especially since the long-term is a stringing together of
the short-terms?
Ø (2)
Nudge the countries’ policies in mutually agreed directions and hold sovereigns
accountable for commitments given, especially since these are not legally binding
and there is no enforcement mechanism. This is particularly difficult in
vigorous democracies where the popular perception could be that national
interests are being compromised for the sake of global stability.
Ø Seeking
firm, forward looking commitments, or pointed criticism of policy frameworks of
other countries, on the lines of the European Union, or even the OECD, style of
functioning, may be difficult and divisive at this stage… At this stage the
issue really is monitoring and assessing whether the general direction of G 20
member country policies is heading in a mutually consistent and agreed fashion
over the medium to long-term, and how the G 20 processes can help countries
navigate their domestic legislative, regulatory and judicial processes such
that commonly agreed policies are adopted.
Ø (3)The
success of domestic policy actions in an increasingly globalizing world with
growing policy and market spillovers is linked to global outcomes. If
rebalancing is uncoordinated, the outcomes could be even worse. Policy
co-operation is therefore potentially win-win,
since economic integration has moved far ahead of political integration. While
this is most clearly manifest in the case of the euro zone, to a great extent,
the challenges ahead before the G 20 may be similar. In this sense, the G 20 can be seen as a brave new experiment
to push the boundaries of globalization to harvest this cooperation dividend.
Ø Summary
and conclusion
Ø The
G 20 is by all accounts a bold initiative. It is unique from earlier
international initiatives in the sense that it is not formed by a charter, has
no mandate for global governance and its decisions are not legally binding and
enforceable. In short it is based on the realization that in a globalizing
world, our futures are all tied together and the only way we can all prosper is
though policy cooperation and on the belief that the only way global governance
can be pursued is through an honour code.
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