Dealing Effectively with Interrelated Issues of Global Imbalances, Financial Regulations , and the International Monetary System Central to Agenda of G - 20 : FM.

Press Information Bureau

Government of India

Ministry of Finance

13-September-2011 20:10 IST

Dealing Effectively with Interrelated Issues of Global Imbalances, Financial Regulations , and the International Monetary System Central to Agenda of G - 20 : FM

Union Finance Minister Shri Pranab Mukherjee  has said that one of the central objectives of the G-20 has been to address the root causes of the global financial crisis, prevent a recurrence and, going forward, to take measures to achieve strong sustainable and balanced growth. Dealing effectively with the interrelated issues of global imbalances, financial regulation, and the international monetary system are central to this agenda,  he said. The Finance Minister was speaking at the international conference on ‘Global Cooperation on Sustainable Growth and Development, here today.  He said that the conference had been organised around 5 broad thematic areas - global imbalances, financial regulation, international monetary system, development and commodity markets. He said that in each of these areas, the world is facing several immediate challenges and these issues are therefore the subject of ongoing discussions in the G 20.  He congratulated ICRIER and its partners for organizing this timely conference and bringing together eminent academics and policymakers from across 14 countries, to deliberate on these critical issues.             

            Finance Minister said that the G 20 demonstrated its relevance to international policy making with the success of its coordinated response on the fall-out of the global financial crisis.  He said that the economic downturn was moderated and growth resumed in the second half of 2009 in most economies, although the pace of recovery remained uneven. The Finance Minister said that it appeared that policy makers had learnt theirs lessons from history by honing and harmonising the use of macro-economic policy and keeping markets open.  At the same time, countries in the developed and the developing world adopted revival strategies in keeping with the needs of their respective contexts, he said.             

            Shri Mukherjee said that developments in recent months have been less encouraging and  there is widespread apprehension that even the tepid global economic recovery that we have seen so far is stalling. Growth in most advanced economies has declined in the second quarter of 2011 and emerging markets are witnessing a combination of moderation in growth and rising inflation, he said.            

            The Finance Minister said that advanced economies, the Euro zone and the US, are seized with sovereign debt problems  which  is making financial markets nervous. He stated that elevated fiscal deficits and public debt have always followed deep recessions in the past, which could be overcome with stronger recovery in output and in the present instance,   the nominal output is yet to reach the pre-crisis levels. Shri Mukherjee said that there are structural constraints coming in the way of advanced economies returning to their trend growth path. As a result, their fiscal position looks increasingly unsustainable. He said that despite the aggressive fiscal and monetary policy, unemployment continues to be at its highest in many advanced countries. The question is what more can policy makers do to improve growth or to avoid another downturn, he said.

            The Finance Minister said that emerging markets recovered quickly from global slowdown, but are facing elevated commodity prices, inflation, moderating growth and volatile capital flows all at once. Central banks have been forced to raise policy rates repeatedly, potentially compromising growth in the short-term. While raising rates may help stabilize growth, it may also invite more capital inflows. It is true that emerging economies are relatively better placed with regard to their public debt and fiscal deficit due to their stronger growth momentum and relatively robust banking systems. Their downside risks are on account of high oil and commodity prices and volatility in capital flows, partly due to the easy money policies in advanced countries, he said.

            Shri Mukherjee said that unlike at the outset of the global financial crisis, when G 20 led policy coordination across economies could be achieved rapidly, it may be more difficult now. The advanced and developing countries are at different stages of the business cycle.  It is important, therefore, to       pause and think about what the G 20 agenda has been thus far and how it needs to evolve in future, he said.         

            Shri Mukeherjee said that most observers believe that the proximate cause of the recent crisis lay in a small, sub-prime segment of the US housing market. The ultimate reasons included the growing weaknesses in financial regulation and the build up of global imbalances. Since the international monetary system does not have an effective mechanism for preventing the build up of global imbalances, the G 20 took up the issue of its reform on a priority basis, he said. The Finance Minister stated that there is an understanding that the G 20 Framework for Strong, Sustainable and Balanced Growth may be the mechanism for adjusting these imbalances. This work-stream, in which India plays an important role as co-chair of the Framework Working Group, is vital for the success of the G 20, he said. 

            The Finance Minister said that strengthening domestic drivers of growth in developing and emerging economies is necessary for rebalancing of the global economy. As a result, the development agenda has become a central theme for the G 20 since the Seoul Summit. Moreover, as financial markets were seen to be destabilizing commodity markets, commodity price volatility and food security were also added to this agenda, he said.

            Shri Mukherjee said that while welcoming these initiatives, we need to be cautious regarding the danger of working with a one-size-fit-all approach. Basel III is a good case in point.   He said that it is quite demanding on developing country banks. Different stages of economic development require different levels and quality of support from the financial sector. If capital adequacy standards become too high, there is a danger of inefficient dis-intermediation in markets. Emerging markets should use prudential regulation and close supervision rather than merely high capital standards, he said.

            The Finance Minister Shri Mukherjee said that Global macroeconomic imbalances are at the heart of destabilizing sustainable economic growth at the international level.  He stated that    all imbalances are not bad as some of them reflect multi-paced growth, different savings-investment behaviour and productivity levels across economies and such differences may not be destabilizing per se. Shri Mukherjee said that at the same time, some imbalances reflect structural inefficiencies usually created by policy distortions relating to the external sector, trade, capital flows and exchange rate policies, financial markets, tax and subsidy regimes, which have to be addressed.

The Finance Minister said that the reform of the International monetary system is high on the agenda of the G-20 and various issues including capital flows management, financial safety nets, measuring global liquidity, composition of the SDR basket are currently under discussion, he said.

            The Finance Minister emphasised upon a few specific issues for the deliberations.  Firstly, he said that an issue of immediate concern for emerging economies is managing large capital flows. Large and volatile capital flows to  emerging markets can be destabilising as they lead to high exchange rate volatility and in some cases make it incumbent to maintain high levels of foreign exchange reserves as an insurance against sudden or large-scale flight of international capital, he added. Large and volatile inflows are also associated with asset price booms and encourage excessive risk taking by traders and investors and therefore threaten financial stability, said the Minister.

            Secondly, the Finance Minister said that recent commodity and food price rise and their volatility have induced considerable threat to economic growth and food security in energy dependent emerging, as well as, developing economies. Factors behind recent price hikes are yet to be pin pointed. Even the G-20 is undecided on the role of speculation and global excessive liquidity on the international commodity prices. He said that though it does seem odd that commodity prices should be so buoyant even as the outlook for global growth is weak. He stated that we need more research and debate on whether speculation in currency and commodity markets has been playing a role in recent price rises. 

            Thirdly, the Finance Minister said that G 20 development agenda is understandably very vast and  covers areas that are also being handled by a number of developmental agencies. While we are committed to concerns of ‘development’ and of sharing the fruits of economic growth, it is imperative to prioritize among various development needs, he said

Shri Mukherjee said that one development issue that deserves priority is the recycling of global savings for infrastructure investment. Enhancing infrastructure investment in emerging economies and developing countries would have positive spin-off for rebalancing global demand. It would result in real investments with tangible growth. The G-20 is well placed to coordinate various stakeholders including governments, especially the ones that have large surpluses, the private sector, and multilateral development banks, for investment in developing economies, he said. He hoped that the conference can suggest innovative ways to recycle global savings and identify viable strategies to overcome the presumed hurdle of ‘lack of enabling environment’ for infrastructure investment in emerging and developing countries.

            In his concluding remarks, the Finance Minister said that even though there are no simple answers or magic solutions to some of these issues,  he did not  see any reason for despair.  He hoped that the    deliberations would help in addressing global challenges at the current conjuncture and also the structural problems that confront us, in an innovative and cooperative framework.   He said that the need of the hour is global reforms with an eye on medium to long-term sustainability of economic growth.

DSM/SS/GN