While India will be able to manage, many other developing countries may not be in the same position and this is where the international community can help. We must ensure that countries hurt by the massive withdrawal of private capital are able to rely upon an increased flow of resources from the international financial institutions. This will help these countries maintain a higher level of demand than would otherwise be possible, and thus help global revival.
There are several steps we can take which will demonstrate our willingness to help.
We must declare our resolve to increase the resources available with the IMF substantially, by around $500 billion over the next two years. This can be done initially through bilateral arrangements, an expansion of the NAB and other borrowing by the Fund. However, we should also signal that these are interim steps pending an increase in Fund quotas. The next quota review, normally due in 2013, should be advanced as much as possible, and we should aim at doubling of IMF quotas at the very least.
In addition to increasing resources with the IMF, we should also signal that the conditions associated with the use of Fund resources are made more appropriate and flexible. Unless this is done, countries will prefer to build foreign exchange reserves which would be counter-productive in current circumstances.
We should also agree on a fresh allocation of SDRs of around $250 billion. This would provide the developing countries with about $80 billion of usable resources at a time when liquidity is exceptionally tight.
We support the sale of a part of the Fund’s gold to support concessional lending to low-income countries.
The multilateral development banks can play an important role in maintaining the flow of resources to developing countries over the next two years. As an immediate step, we must endorse a 200 per cent increase in the capital of the Asian Development Bank, which can be approved by its Board of Governors in May.
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The World Bank should also expand its lending in the next two to three years in a manner which helps to fill the gap left by the withdrawal of private capital flows. By directing its lending to infrastructure development and recapitalisation of banks, it would help to support contra-cyclical policy in a manner which stimulates an early resumption of growth in these economies. To perform this role, the Bank’s present single borrower limits need to be urgently reviewed. Its debt to capital ratio also needs to be made more liberal.
We must also take concrete steps to revive trade finance which has been badly hit in part, I regret to say, because of financial protectionism. Export credit agencies can expand their lending. The IFC pool to support trade finance can be substantially expanded, with bilateral assistance from countries in a position to contribute.
An issue of vital concern to developing countries is the rise of protectionist sentiment in the industrialised world. This phenomenon is not surprising, given the downturn in economic activity and the rise in unemployment. However, it will be a test of leadership whether we can persuade the public that we must not repeat past mistakes. We know that the Great Depression was as deep and prolonged as it was because countries resorted to protectionism which triggered retaliatory protectionist responses, leading to a downward spiral.
Leaders of the developing countries have struggled to overcome the doubts and fears of our public to persuade them of the merits of integrating with the global economy. I believe we had substantial success in this effort, and the open economy has brought prosperity to an ever widening circle, in both developing and industrialised countries.
Excerpts from Prime Minister Manmohan Singh’s dinner speech at the G20 summit in London on April 1