The international financial crisis is a result of three failures:
(a) A regulatory and supervisory failure in major developed countries;
(b) A failure in risk management in private financial institutions;
(c) A failure in market discipline mechanism
These are not my views but those of the distinguished managing director of the IMF, with which I agree.
We must analyse objectively how and why these failures occurred with such ferocity. This is necessary to bring in a new set of rules, which prevents such failures.
The sad truth about this this globalised age is that we have a global economy but it is not supported by a global polity to provide effective governance.
The resulting crisis of liquidity, accumulation of bad assets, shortage of capital and collapse of confidence threatens to spill over into the real economy by way of reduced demand for goods and services particularly exports, reduced access to trade and suppliers credits superimposed on other crises — food and fuel price rises that have strained budgets and balance of payments leading to rising inflation and living costs in many developing countries.
The president of the World Bank has identified at least 30 developing countries whose balance of payments will experience a severe deterioration due to this crisis.
The immediate task is to declog the credit markets world over. Coordinated global action is essential to restore a measure of confidence in the credit markets.
From the standpoint of developing countries, international financial institutions, particularly the IMF and World Bank, need to put in place exogenous shock facilities to provide assistance to the affected countries more quickly and in larger amounts with less service conditionalities and greater flexibility.
Countries with strong foreign exchange positions could make additional resources available to the international financial institutions on appropriate terms to finance their operations.
As a counter cyclical device, increased infrastructure investments in developing countries, if backed by increased resources flows from multilateral financial institutions such as the International Bank for Reconstruction and Development (IBRD) and Regional Development Banks, can act as a powerful stabiliser.
The IMF should revisit the potentially powerful instrument of creating liquidity through fresh allocation of Special Drawing Rights in favour of multilateral development finance institutions.
The reform and reconstruction of the financial system has to be a collective international effort. Given the growth in cross-border investment, trade and banking in the last three decades, the world must ponder over the need for a global monitoring authority to promote supervision and cooperation in the world.
India’s banking system is sound and well capitalised. It is not exposed to the type of assets which have given rise to this crisis. Our real economy will grow at the rate of 7 to 7.5 per cent this year despite the global slowdown of export demand and capital inflows. We have injected fresh liquidity in the system.
We realise that we cannot remain totally unaffected when the global economy and financial system are in deep trouble. Our stock markets and the exchange rate of the rupee are under pressure due to the capital outflow of foreign institutional investors. Sooner or later, the real economy is bound to experience the pain.
We are therefore sincere in our desire to cooperate and coordinate our actions with the world community to find effective and pragmatic solutions to the formidable challenges the world economy is now faced with.
Text of Prime Minister Dr Manmohan Singh’s speech at the ASEM meeting in Beijing on October 24, 2008
