Timothy Geithner, the US government’s treasury secretary, spoke on a host of issues from the global recovery to China, capital flows and the upcoming G-20 meeting at a conference organised by the Confederation of Indian Industry and the US-India Business Council. Edited excerpts:
How do you see the US recovery?
It started out quite strong but lost a little momentum in the summer, as in many parts of the world, in part because of the inventory cycle and in part because the crisis in Europe had a big impact. But things are gradually getting stronger. We have had a series of positive indications on business orders, business confidence and on jobs.
Emerging economies like India are in the early stages of a very rapid productivity/investment growth, and very strong growth, overall. In contrast, in major economies, which grow very slowly in the best of times, growth will be moderate. That basic dynamic is going to be the dominant force shaping capital flows and financial markets in a long period to come. That brings with it a large pull on capital flows to emerging economies and puts pressure. But that is fundamentally a better problem to have than the problem we faced in the crisis, when capital was running out.
We are trying to build a closer framework of cooperation in the G-20, so that we can better manage those tensions, so that they do not spill over into financial markets and put pressure on exchange rates. Excess volatility on exchange rates can result in protectionist pressures. We are going to try and build a closer framework of cooperation on exchange rate issues and on growth to make sure that as we recover, we recover in ways that provides a more balanced growth.
There was a lot of talk on double-dip recession. Is the recovery gaining momentum?
If you look at what most private forecasters are saying now, we see much less concern about the risk of double-dip or a prolonged period of very weak growth.
The Fed’s announcement on quantitative easing has been greeted with a lot of criticism and the impact it will have on capital inflows, and possible inflation. We heard IMF talk about the possibility of currency wars. We seem to be moving away from the G-20 agenda of coordinated action.
The types of concerns and tensions you see in the past few weeks are a function and reflection of strengthening of the recovery we are seeing. The dominant force is the recognition around the world that a group of emerging economies face high growth prospects, while the advanced countries will have to be more supportive of growth. It is true that you are starting to see the first signs of inflation and policies in these countries have to adjust and adapt to that. The tensions and pressures are exacerbated by the fact some countries follow a very flexible exchange rate regime, while some do not.
In the G-20 meeting recently, it’s been reported that you proposed specific caps on trade deficits and surpluses.
You can’t set quantitative targets for external imbalances and it makes no economic sense. But it’s also true that if you care about growth being strong over time and financial stability, you have to care about balance. If you allow excess imbalances to re-emerge, you are likely to have growth weakening.
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What we propose, and we have broad agreement on that, is a framework where we use indicators as an early warning sign on pressures that could result in excess imbalances and use these as ways to catalyse cooperation to reduce them. It’s also viable to do it this way, as there is too much attention to the exchange rate as a policy instrument to help facilitate this transition. It allows focus to shift to a broader mix of policies and also allows countries like China to point to a set of multilateral commitments.
A G20 communiqué had talked about reining in excessive CEO compensation.
The shareholders and boards running financial institutions in the developed world got the incentives very wrong. We don’t think, though, that it’s the role of the government to decide to set compensation levels for executives. We have tried to get the supervisors that set standards for the composition of compensation so that more is in the form of equity and less comes in the form of cash and guarantees. There has been overwhelming shift in the US towards that.
Your comments on India?
What we see on overall reforms looks very encouraging but there are incredible challenges. You are growing at 8-9 per cent and it can be sustained over a period of time. There are infrastructure challenges that you face and it will require more reforms in the financial sector and elsewhere to sustain that.