Pranav Mukherjee Pokes many Q's for G-20

ntervention of FM at the G20 Finance Ministers’ and Central Bank Governors’ Dinner Meeting

Following is the text of the intervention of union Finance Minister Shri Pranab Mukherjee  at the G20 Finance Ministers’ and Central Bank Governors’ dinner meeting                 “Thank you for the opportunity to give a brief on the progress in the Mutual Assessment Process. Since we have had a detailed presentation by my Canadian colleague, Jim Flaherty, I will limit my briefing to raise some important issues to guide our discussion today.                 First, it is worth considering whether we are giving excessive weightage to the balance and sustainable elements of the Framework, and too little to strong growth. The question of growth is particularly relevant at this juncture, when the recent developments in the global economy are cause for serious concern. The Framework exercise was initiated on the assumption that the global economy was recovering reasonably well from the economic and financial crisis, and hence the G 20 needed to turn its attention to medium to long-term issues. Rebalancing global demand would make growth more sustainable, and even stronger, going forward, especially if there has been permanent demand destruction in some parts of the global economy. However, our medium term action plan for Cannes may not seem credible unless it addresses short-term growth and stability concerns as well. For instance, how credible would commitments for medium term consolidation look if we are seen embarking on a fresh round of stimulus? Several structural reforms to boost productivity could also have an adverse impact on short-term growth. The Cannes Action Plan, therefore, may have to link the medium term to the short-term as well.                 Second, Growth also needs to be made more broad based and especially strengthened in developing countries in general. The Framework exercise therefore needs to focus more sharply on the development aspect. In this respect, I would like to underscore the suggestion made by our Prime Minister at the Seoul Summit that global imbalances should be leveraged to address developmental imbalances. If we need to add demand to the global economy to offset the moderation of demand by industrialized countries as they contract final output, perhaps a good way of doing this is to expand infrastructure investment in developing economies. Many developing countries have developed the capacity to grow rapidly but are constrained by poor infrastructure. Financing infrastructure development in these economies could contribute to sustainable global growth.                 Third, the focus of the Framework on systemically important economies derived from the fact that global crises in the past, including the recent one, emanated from large economies. However, as we work to redefine elements of the MAP process in the G 20 countries we are faced with a new crisis arising from imbalances in relatively small economies in the periphery of the Euro Zone which has spread to countries which were well outside the periphery. This is because, given the highly interconnected nature of financial markets, large imbalances even in a small economy in a large currency union can destabilize global markets.                 The issue arises whether, in trying to anticipate threats to the global economy, we should expand our agenda to consider the nature of the stresses in the Euro Zone and policy options for handling them. The need for doing so arises because of the highly interconnected nature of the world and to the potentially destabilizing role that expectations in financial markets can play. If expectations were always determined by what we call “macroeconomic fundamentals” – essentially the imbalance indicators identified in the MAP process – it would be one thing. However, expectations can change suddenly and when they do countries that are otherwise seen as solvent can suddenly appear insolvent. Given the importance of the Euro Zone for global financial markets it is necessary to consider whether the MAP should include some surveillance of the Euro Zone.                  Fourth, we need to take stock of whether we have made substantial progress since the Toronto Summit when our leaders agreed on policy options for groups of countries, i.e. for advanced surplus, advanced deficit, emerging surplus, emerging deficit and resource rich economies. While it was not spelt out which country fell in what group, each G 20 country knew to what category it belonged, and the broad direction in which it needed to move.                 Since then, what we have done is to first come out with a set of multiple indicators of measuring imbalances, on the basis of which we have identified seven countries that are seen to have “exceptionally large” imbalances and which are systemically important. The G 20 countries, including all the systemically important ones, have presented their national projections on major indicators. The IMF has compiled these projections and given us a comparison between what they imply and what the IMF thinks is feasible based on their global models. They have concluded that the improvements in imbalances projected by the individual G 20 countries are consistent with an overall view of the world economy which is over optimistic. If that optimism now seems excessive we need to know what changes would be needed in individual country projections.                 Fifth, there appear to be some difficulties involved in making forward looking commitments. The MAP national policy template submissions of G20 member countries indicate that there is a broad congruence of ideas and recommendations for directing the future course of policy coordination, including on the need to focus on seven systemically important economies. Member countries recognize the need for further cooperation to achieve the goals of strong, sustainable and balanced growth as committed by our Leaders. The Framework Working Group deliberations have also underscored the need for countries to be more ambitious in their commitments. Countries have made forward looking projections in their templates, but these are not commitments, and are subject to periodic updates like all macro-economic models. The commitments are contained in the written part of the template and are in the form of objectives and policy changes. How commitments can be measurable is an issue.                 There are three related issues here. Firstly, some commitments asked for are outcomes over which governments do not have full control, such as fiscal deficits and current account imbalances. They control only specific policies, such as tax rates and expenditure, which may influence but not fully determine final outcomes which are the result of a complex interplay of several variables. It is important to distinguish between ‘outcome’ variables and ‘control’ variables in making prescriptions.  Secondly, countries may be only willing to commit only what they have already made public so far. Are countries in a position to make measurable, forward looking commitments beyond what is approved by their national Parliaments? Thirdly, is there a danger of such measurable commitments leading to naming and shaming, that could be acrimonious and divisive, something that the G 20 has so far avoided? The Framework makes clear what each country is expected to do, and the extent to which this ultimately feeds into domestic policies is subject to periodic mutual assessment. How and in what manner, and should we, and can we, be more ambitious and move beyond the current path?                 I know I have raised more questions than provided answers. The questions are, I think, relevant and important. I now look forward to colleagues providing the answers. ” DSM/SS/GN

India initiate a drab BRIC statement

BRICS Finance Ministers’ Joint Communiqué Issued at the end of Meeting in WashingtonFollowing is the text of the BRICS Finance Ministers’ Joint Communique issued at the end of the meeting in Washington, yesterday:

“We, the BRICS Finance Ministers and Central Bank Governors, met on September 22, 2011 in Washington DC, USA, amid growing concern regarding the state of the global economy.

While BRICS countries recovered quickly from the 2008-09 global financial crisis, some of us have been subject to inflationary pressures and growth prospects of all our countries have been dampened by global market instability. In advanced countries, the build up of sovereign debt and concerns regarding medium to long-term plans of fiscal adjustment are creating an uncertain environment for global growth. Also, excessive liquidity from aggressive policy actions taken by central banks to stabilize their domestic economies has been spilling over into emerging market economies, fostering excessive volatility in capital flows and commodity prices.

The immediate problem at hand is to get growth back on track in developed countries. In this context we welcome the recent fiscal package announced by USA as well as the decisions taken by Euro area countries to address financial tensions, notably by making the EFSF flexible. It is critical for advanced economies to adopt responsible macroeconomic and financial policies, avoid creating excessive global liquidity and undertake structural reforms to lift growth create jobs and reduce imbalances.

The current situation requires decisive actions. We are taking necessary steps to secure economic growth, maintain financial stability and contain inflation. We are also determined to speed up structural reform to sustain strong growth which would advance development and poverty reduction at home and benefit global growth and rebalancing. The contribution of BRICS countries and other emerging market economies to global growth is rising and will increase further. However, global rebalancing will take time and its impact may not be felt sufficiently in the short-term. We will also work to intensify trade and investment flows among our countries to build upon our synergies.

The BRICS are open to consider making additional efforts in working with other countries and International Financial Institutions in order to address the present challenges to global financial stability, depending on individual country circumstances.

We are concerned with the slow pace of quota and governance reforms in the IMF. The implementation of the 2010 reform is lagging. We must also move ahead with the comprehensive review of the quota formula by January 2013 and the completion of the next review of quotas by January 2014. This is needed to increase the legitimacy and effectiveness of the Fund. We reiterate our support for measures to protect the voice and representation of the IMF’s poorest members. We call on the IMF to make its surveillance more integrated and evenhanded.

Multilateral Development Banks are considered by developing countries as important partners in helping them meet their long term development finance needs. In the current global economic environment, the Banks need to mobilize more resources to increase their assistance to low income and other developing countries including finding ways of expanding their lending capacity, so that development finance is not neglected.

In the face of a slowdown of global economic growth, it is necessary to maintain international policy co-operation and co-ordination. We remain committed to work with the international community, including making contributions to the G20 Cannes Action Plan consistent with national policy frameworks to ensure strong, sustainable and balanced growth. We shall work together in searching for a coordinated solution to the current challenges as we did in 2008-09.”

DSM/SS/GN
(Release ID :76189)

India to regroup BRICs, in G-20 at Washington

India Convenes meeting of BRICS Finance Ministers in Washington DC on September 22, 2011; BRICS to Coordinate in addressing the Evolving Economic And Financial Situation In The Various Countries: Says Finance Minister

The Union Finance Minister Shri Pranab Mukherjee said that India is convening a meeting of BRICS Finance Ministers in Washington DC on September 22, 2011 on the sidelines of the Fund-Bank and G-20 Meetings. The Finance Minister said that we would explore the manner in which BRICS could coordinate in addressing the evolving economic and financial situation in the various countries of the world. The Finance Minister Shri Mukherjee said that the objective of the meeting is to discuss our concerns regarding the current state of the Global Economy and our Policy Response. Shri Mukherjee said that we will discuss the progress on the report commissioned by India on the role that BRICS can play in the global economy going forward, and also our role in the international financial institutions such as IMF and the World Bank. DSM/SS (Release ID :76054)

G-20 Agenda by India. Is it tug war..?

Dealing Effectively with Interrelated Issues of Global Imbalances, Financial Regulations , and the International Monetary System Central to Agenda of G - 20 : FM

Union Finance Minister Shri Pranab Mukherjee  has said that one of the central objectives of the G-20 has been to address the root causes of the global financial crisis, prevent a recurrence and, going forward, to take measures to achieve strong sustainable and balanced growth. Dealing effectively with the interrelated issues of global imbalances, financial regulation, and the international monetary system are central to this agenda,  he said. The Finance Minister was speaking at the international conference on ‘Global Cooperation on Sustainable Growth and Development, here today. He said that the conference had been organised around 5 broad thematic areas - global imbalances, financial regulation, international monetary system, development and commodity markets. He said that in each of these areas, the world is facing several immediate challenges and these issues are therefore the subject of ongoing discussions in the G 20.  He congratulated ICRIER and its partners for organizing this timely conference and bringing together eminent academics and policymakers from across 14 countries, to deliberate on these critical issues.                             Finance Minister said that the G 20 demonstrated its relevance to international policy making with the success of its coordinated response on the fall-out of the global financial crisis.  He said that the economic downturn was moderated and growth resumed in the second half of 2009 in most economies, although the pace of recovery remained uneven. The Finance Minister said that it appeared that policy makers had learnt theirs lessons from history by honing and harmonising the use of macro-economic policy and keeping markets open.  At the same time, countries in the developed and the developing world adopted revival strategies in keeping with the needs of their respective contexts, he said.                             Shri Mukherjee said that developments in recent months have been less encouraging and  there is widespread apprehension that even the tepid global economic recovery that we have seen so far is stalling. Growth in most advanced economies has declined in the second quarter of 2011 and emerging markets are witnessing a combination of moderation in growth and rising inflation, he said.                             The Finance Minister said that advanced economies, the Euro zone and the US, are seized with sovereign debt problems  which  is making financial markets nervous. He stated that elevated fiscal deficits and public debt have always followed deep recessions in the past, which could be overcome with stronger recovery in output and in the present instance,   the nominal output is yet to reach the pre-crisis levels. Shri Mukherjee said that there are structural constraints coming in the way of advanced economies returning to their trend growth path. As a result, their fiscal position looks increasingly unsustainable. He said that despite the aggressive fiscal and monetary policy, unemployment continues to be at its highest in many advanced countries. The question is what more can policy makers do to improve growth or to avoid another downturn, he said.             The Finance Minister said that emerging markets recovered quickly from global slowdown, but are facing elevated commodity prices, inflation, moderating growth and volatile capital flows all at once. Central banks have been forced to raise policy rates repeatedly, potentially compromising growth in the short-term. While raising rates may help stabilize growth, it may also invite more capital inflows. It is true that emerging economies are relatively better placed with regard to their public debt and fiscal deficit due to their stronger growth momentum and relatively robust banking systems. Their downside risks are on account of high oil and commodity prices and volatility in capital flows, partly due to the easy money policies in advanced countries, he said.             Shri Mukherjee said that unlike at the outset of the global financial crisis, when G 20 led policy coordination across economies could be achieved rapidly, it may be more difficult now. The advanced and developing countries are at different stages of the business cycle.  It is important, therefore, to       pause and think about what the G 20 agenda has been thus far and how it needs to evolve in future, he said.                           Shri Mukeherjee said that most observers believe that the proximate cause of the recent crisis lay in a small, sub-prime segment of the UShousing market. The ultimate reasons included the growing weaknesses in financial regulation and the build up of global imbalances. Since the international monetary system does not have an effective mechanism for preventing the build up of global imbalances, the G 20 took up the issue of its reform on a priority basis, he said. The Finance Minister stated that there is an understanding that the G 20 Framework for Strong, Sustainable and Balanced Growth may be the mechanism for adjusting these imbalances. This work-stream, in which India plays an important role as co-chair of the Framework Working Group, is vital for the success of the G 20, he said.               The Finance Minister said that strengthening domestic drivers of growth in developing and emerging economies is necessary for rebalancing of the global economy. As a result, the development agenda has become a central theme for the G 20 since the Seoul Summit. Moreover, as financial markets were seen to be destabilizing commodity markets, commodity price volatility and food security were also added to this agenda, he said.             Shri Mukherjee said that while welcoming these initiatives, we need to be cautious regarding the danger of working with a one-size-fit-all approach. Basel III is a good case in point.   He said that it is quite demanding on developing country banks. Different stages of economic development require different levels and quality of support from the financial sector. If capital adequacy standards become too high, there is a danger of inefficient dis-intermediation in markets. Emerging markets should use prudential regulation and close supervision rather than merely high capital standards, he said.             The Finance Minister Shri Mukherjee said that Global macroeconomic imbalances are at the heart of destabilizing sustainable economic growth at the international level.  He stated that    all imbalances are not bad as some of them reflect multi-paced growth, different savings-investment behaviour and productivity levels across economies and such differences may not be destabilizing per se. Shri Mukherjee said that at the same time, some imbalances reflect structural inefficiencies usually created by policy distortions relating to the external sector, trade, capital flows and exchange rate policies, financial markets, tax and subsidy regimes, which have to be addressed. The Finance Minister said that the reform of the International monetary system is high on the agenda of the G-20 and various issues including capital flows management, financial safety nets, measuring global liquidity, composition of the SDR basket are currently under discussion, he said.             The Finance Minister emphasised upon a few specific issues for the deliberations.  Firstly, he said that an issue of immediate concern for emerging economies is managing large capital flows. Large and volatile capital flows to  emerging markets can be destabilising as they lead to high exchange rate volatility and in some cases make it incumbent to maintain high levels of foreign exchange reserves as an insurance against sudden or large-scale flight of international capital, he added. Large and volatile inflows are also associated with asset price booms and encourage excessive risk taking by traders and investors and therefore threaten financial stability, said the Minister.             Secondly, the Finance Minister said that recent commodity and food price rise and their volatility have induced considerable threat to economic growth and food security in energy dependent emerging, as well as, developing economies. Factors behind recent price hikes are yet to be pin pointed. Even the G-20 is undecided on the role of speculation and global excessive liquidity on the international commodity prices. He said that though it does seem odd that commodity prices should be so buoyant even as the outlook for global growth is weak. He stated that we need more research and debate on whether speculation in currency and commodity markets has been playing a role in recent price rises.               Thirdly, the Finance Minister said that G 20 development agenda is understandably very vast and  covers areas that are also being handled by a number of developmental agencies. While we are committed to concerns of ‘development’ and of sharing the fruits of economic growth, it is imperative to prioritize among various development needs, he said. Shri Mukherjee said that one development issue that deserves priority is the recycling of global savings for infrastructure investment.Enhancing infrastructure investment in emerging economies and developing countries would have positive spin-off for rebalancing global demand. It would result in real investments with tangible growth. The G-20 is well placed to coordinate various stakeholders including governments, especially the ones that have large surpluses, the private sector, and multilateral development banks, for investment in developing economies, he said. He hoped that the conference can suggest innovative ways to recycle global savings and identify viable strategies to overcome the presumed hurdle of ‘lack of enabling environment’ for infrastructure investment in emerging and developing countries.             In his concluding remarks, the Finance Minister said that even though there are no simple answers or magic solutions to some of these issues,  he did not  see any reason for despair.  He hoped that the    deliberations would help in addressing global challenges at the current conjuncture and also the structural problems that confront us, in an innovative and cooperative framework.   He said that the need of the hour is global reforms with an eye on medium to long-term sustainability of economic growth. DSM/SS/GN (Release ID :75945)