Globalization and the changing dynamics of the emerging economies have asserted the need to increase collaboration between countries to exit a crisis and to not enter another.
Against the aggregate growth of 17% of advanced economies, emerging markets and developing countries grew by 82% and BRICs (Brazil, Russia, India, China) by a whopping 127%, Reserve Bank of India Governor Dr. Duvvuri Subharao stated.
“The crisis has taught us that no country can be an island that economic and financial disruptions anywhere can cause ripples, if not waves, everywhere,” he said.
India’s former Finance Secretary and career civil servant made these observations when delivering the Special Anniversary oration on the topic of “Frontier Issues on the Global Agenda – Emerging Economy Perspective” at the Central Bank training auditorium in Rajagiriya on Tuesday.
Comparing the global GDP, Dr. Subharao said that the growing dynamism of emerging economies becomes even more persuasive.
In this respect, it was pointed out that while the share of advanced economies dropped from 80-67% from 200-2010 there was a mirror increase in the share of the emerging markets and quite expectedly, the share of BRICs increased more impressively from 8-17%.
The emerging economies have proved to become the reason for the recovery from the slump with the world overcoming a financial meltdown sooner than the depth of the crisis, he said.
International Monetary Fund (IMF) estimates projected global growth for 2010 at 5% that was a “surprising upward revision” in comparison to its earlier projection of 4.8% made in October of last year.
It was pointed out, that the main reason was the contribution by the emerging economies that added to nearly half of the global growth.
Dr. Subharao observed that the changes in perception of the emerging economies came to light in the wake of the faster recovery post-crisis. One of these was the fact that the emerging economies would not be capable of sustaining global growth at near pre-crisis levels as the account for less than half of world GDP and only about a third of the world trade in goods and services. As such emerging economies by themselves would be unable to sustain global growth.
On the other hand, the decoupling hypothesis that seemed a fashionable idea before the crisis changed as coupling is getting stronger. He noted, the fortunes of emerging economies are coupled with fortunes of advanced economies. As a result decoupling was proved wrong as emerging economies and advanced ones are interlinked through trade, finance and confidence channels, he said.
The big challenge posed on these two economies was the need to sustain growth, reduced unemployment and contain inflation.
Global Rebalancing
It was identified that the reason for the crisis was the pre-crisis situation that was related to imbalances in the global economy.“In as much as global imbalances – no matter whether they were caused by a ‘consumption binge’ in advanced economies or a ‘savings glut’ in emerging economies – were the root cause of the crisis, reducing imbalances is a necessary condition for restoring global financial stability,” the Governor observed.
In redressing the global imbalances, Dr. Subharao spoke of the role of the exchange rate, capital flows and the G20 framework.
In the global rebalancing act there would be a need for the deficit economies to concentrate on saving more and consume less while the reverse would apply to the surplus economies, he said.
The governor noted that managing currency tensions will require a shared understanding on keeping exchange rates aligned to economic fundamentals, and an agreement that currency interventions should be resorted to not as an instrument of trade policy but only to manage disruptions to macroeconomic stability.
As per capital flows, emerging economies need capital flows to augment their investible resources, he said adding that such flows should be stable and be roughly equal to the economy’s absorptive capacity.
Capital flows are triggered by both pull and push factors with the former promising growth prospects of emerging economies and the latter are the easy monetary policies of advanced economies, which create the capital that flows into the emerging economies.
In the face of the problem of capital flows is the currency appreciation where there is a need then to intervene in a bid to prevent this so that it pumps liquidity and it pushes up interest rates. The challenge here is to weigh the costs of these factors.
In the wake of excess flows, the emerging economies have dealt it with a controlling on capital at entry, taxing it on entry or intervention in the forex market. In this respect with the crisis changing the terms of the debate it is now broadly accepted that there could be circumstances in which capital controls can be a legitimate component of the policy response to surges in capital flows.
Meanwhile, according to the G20 framework a few indictors and guidelines were provided against which these indicators countries will be assessed. The G20 Assessment Process is a potentially promising mechanism to facilitate timely identification of disruptive imbalances and to ensure that preventive and corrective action is taken.
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