India today warned of a revival of protectionist sentiment in industrialised countries due to high unemployment and said competitive devaluation of currency must be resisted. The threat, it said, was very real, because conventional monetary and fiscal tools to revive the global economy had been exhausted.
“Uncertainty about the prospects of industrialised countries affects the investment climate and dampens the medium-term growth prospects of emerging market countries,” Prime Minister Manmohan Singh said in his early morning speech at the Plenary Session of the fifth G20 Summit here. He suggested the Summit might end without a significant agreement on economic policy among the 20 most powerful countries, due to structural differences.
The problem in rebalancing the global economy, said Singh, was well-known. “Major industrialised countries were running unsustainable current account deficits, which have to be reduced to manageable levels. If this is not to have a contractionary impact on the world economy, it must be offset by reducing current account surpluses elsewhere. This rebalancing requires pursuit of appropriately coordinated policies in our countries.”
The Mutual Assessment Process (MAP) adopted at the first G20 summit in Pittsburgh was to achieve such coordination. It made some progress in Toronto earlier this year, at the level of country groupings. Seoul was expected to take it to the second stage of country-specific recommendations.
“We are not there yet, and for good reason,” said the Prime Minister. “It is not easy to reach an agreement on what are sustainable current account balances for individual countries, given the structural differences across countries, the many uncertainties that prevail, and the multiple goals that each country has to balance. It is even more difficult to agree on a particular combination of policies to achieve these targets.”
G20, according to him, would convey a powerful signal to markets if it committed itself to a second-stage MAP process aimed at coordinating policies in these areas. The finance ministers and central bank governors could be asked to develop these ideas further, with the assistance of the International Monetary Fund, and produce a credible approach to identifying sustainable trajectories for external balances.
Montek Singh Ahluwalia, deputy chairman of the Planning Commission and India’s chief negotiator at G20, told Indian journalists after the Prime Minister had spoken that India had been pushing for an agreement and timeline on MAP “as soon as possible”. Realistically speaking, he expects something concrete by the time the next G20 summit comes around in November next year, in France.
PM’s advice
The Prime Minister, outlining his prescription for the ailments of the global economy, said advanced deficit countries must follow policies of fiscal consolidation, consistent with their individual circumstances, to ensure debt sustainability over the medium term. This meant that fiscal correction need not be front-loaded everywhere.
Noting that structural reforms were necessary everywhere, he said these should increase efficiency and competitiveness in deficit countries, while expanding internal demand in surplus countries. This rebalancing will take time, but must begin.
Exchange rate flexibility, he said, was an important instrument for achieving a sustainable current account position and policies must reflect this consideration. At the same time, reserve currency countries had a special responsibility to ensure that their monetary policies did not destabilise capital flows, which could put pressure on emerging markets.
He also pushed for a satisfactory conclusion to the Doha Development Round of multilateral trade negotiations. “We have seen a resurgence of protectionist sentiment in the world in the wake of recessionary trends. The only way to ensure that protectionism does not gain the upper hand is to restore momentum to the trade talks.”
A way forward
To these, Singh added an ingredient entirely his own, making a case for channeling the flow of long-term capital into developing countries to stimulate investment, especially in infrastructure. “The economic performance of emerging markets, including many countries in sub-Saharan Africa, has improved greatly in recent years. These countries are now in a position to absorb capital flows aimed at an expansion in investment, which would inject much-needed demand into the global economy. Multilateral development banks have an important role to play in this process, through recycling of global savings,” Singh said.
According to Ahluwalia, this point found great support around the table and the draft of his speech was much in demand among global leaders.
Singh said recycling surplus savings into investment in developing countries will not only address the immediate demand imbalance but also help to address development imbalances. “In other words, we should leverage imbalances of one kind to redress imbalances of the other kind.”
G20, the Prime Minister noted, was set up in response to the global financial crisis, but its role must go beyond just tackling the crisis, which is already on the wane. He signed off with this exhortation to global leaders: “A few years down the line, the world will ask as to what did G20 achieve other than averting a total breakdown due to the global financial crisis.”
