Emerging market countries have done well on the whole, and especially so in Asia. However, high unemployment in industrialised countries threatens a revival of protectionist sentiment, especially since the use of conventional monetary and fiscal tools to revive the economy have been exhausted.
Uncertainty about the prospects of industrialised countries affects the investment climate and dampens the medium-term growth prospects of emerging market countries. All this suggests that much remains to be done to bring our economies back to the path of strong, sustainable and balanced growth.
The problem facing us in rebalancing the global economy is 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) we adopted in Pittsburgh was a unique G-20 initiative to achieve such coordination. We saw the outcome of the first stage in Toronto, at the level of country groupings. We had expected to move to the second stage of considering country-specific recommendations by the time of the Seoul Summit.
We are not there yet, and for good reasons. It is not easy to reach 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.
Despite these difficulties, we must persevere to develop a workable G-20 mechanism for international coordination. I believe there is considerable agreement on some broad principals.
First, we must at all costs avoid competitive devaluation and resist any resurgence of protectionism. Second, advanced deficit countries must follow policies of fiscal consolidation, consistent with their individual circumstances, so as to ensure debt sustainability over the medium term. This means that fiscal correction need not be front-loaded everywhere.
Third, while structural reforms are necessary everywhere, these should increase efficiency and competitiveness in deficit countries, while expanding internal demand in surplus countries. This rebalancing will take time, but it must begin.
Fourth, exchange rates flexibility is an important instrument for achieving a sustainable current account position and our policies must reflect this consideration. At the same time, reserve currency countries have a special responsibility to ensure that their monetary policies do not lead to destabilising capital flows, which can put pressure on emerging markets.
To these well known ingredients, I would add another that has not been sufficiently discussed. Even as we try to avoid a destabilising surge of volatile capital flows to developing countries, there is a strong case for supporting long-term flows to these countries to stimulus 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. Many emerging market countries are also in a position to attract private investment, including into infrastructure.
Recycling surplus savings into investment in developing countries will not only address the immediate demand imbalance, it will also help to address developmental imbalances. In other words, we should leverage imbalances of one kind to redress imbalances of the other kind.
The G-20 would convey a powerful signal to markets if we commit ourselves to a second-stage MAP process aimed at coordinating policies in these areas.
(Excerpts from the speech of Prime Minister Manmohan Singh at the Plenary Session of the G-20 Summit, in Seoul on November 12)
