The conflict in Libya, along with the sudden crisis in Japan, is threatening to derail economic recovery anew, after the global financial crisis. Days before his appointment as chairman of the International Monetary Fund’s policy steering committee, Singapore’s finance minister, Tharman Shanmugaratnam, spoke to Devjyot Ghoshal, in the second of a three-part interview, about the road ahead for the global economy. Edited excerpts:
Oil has gone beyond $100 a barrel, fuelled by the Libyan conflict, which along with the ongoing crisis in Japan may hamper the worldwide economic recovery. What is your outlook on the global economy, given the recent events?
Overall, we are in for heightened uncertainty and with more risks on the downside than upside, because what is happening in Japan comes in the context of the supply shock in the Middle East that is more likely to lead to higher oil prices. It is also coming in the context of a still-fragile economic recovery in the US and Europe, particularly as the fiscal stimulus peters out.
Also, it is coming at a time when the Asian emerging markets at large are facing increased inflationary pressures and they have to tighten macroeconomic policies. The timing is not propitious at all, and the interaction of these risks can be quite tricky.
In the preceding months, there has been heated debate on the valuation of the Chinese yuan. Your views?
I think the Chinese understand the issue very well. The real effective exchange rate in China has, in fact, been appreciating at quite a steady clip, due as much to domestic wage and price inflation as to the nominal appreciation of its currency.
It’s a situation where one doesn’t want one extreme or another. If you rely entirely on domestic wages and prices to push up your exchange rate, there are many undesirable side-effects. Basically, you get inflationary bubbles domestically.
If, instead, you rely purely on the exchange rate, then there are other re-distributional effects. I think the export industries face too sudden a shift in their competitiveness and you don’t give them enough time to upgrade to higher value activity or for production to shift to other locations.
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So, a mix of both is necessary and I think the Chinese understand this well enough.
Black money flows have emerged as a major issue in India recently and there is a perception that Singapore, with low tax rates, may be a destination for people looking to park illegal monies. How does Singapore ensure transparency?
There are two aspects to this. One is money laundering, the other is basically tax evasion, and there are two very important fora for monitoring how companies are doing in this regard.
For money laundering, you have the Financial Action Task Force (FATF), an international one, that monitors all jurisdictions to ensure they have in place all the necessary laws as well as regulatory practices. This is to ensure that if there is any proper suspicion of money laundering, there is a way in which information can be shared. Singapore actually comes out amongst the top-ranked countries on FATF’s peer review process. We are open to scrutiny.
Likewise, on tax information sharing, we have the Global Forum, coordinated from within the OECD, although it is an independent forum now, with a whole range of countries participating. There, too, we are open to scrutiny.
So, low taxes doesn’t mean you are a haven for tax evasion. It just means you are competitive, tax-wise. But we intend fully to abide by good international standards on sharing of tax information. We are not defensive about this issue.
There has been speculation over an Asian head for the IMF, and your name has featured on the list. Have you considered this position?
I haven’t, because I am, in fact, a minister in Singapore and committed to serving Singapore in my present role.
But if the IMF does eventually get its first Asian managing director, what should be on his or her agenda?
Fundamentally, regardless of the nationality of the person or the region he or she comes from, the challenges are going to be one that requires a certain neutrality and the ability to listen to what is now a very broad constituency of equal stakeholders, not unequal stakeholders.
Asia is now a major player in the world and its voice has to be heard, listened to and engaged with. In the same vein, Asia itself has the ability to contribute with well-reasoned argument on issues such as global rebalancing and reform of the international monetary system.
These are fundamental issues facing us as we go forward and regardless of the nationality or region of the managing director, we have to address this in a neutral and constructive fashion.
