core sector communique

Emerging Global Economic Architecture
Speech of Hon’ble Minister of Finance of India
Shri Pranab Mukherjee
at Woodrow Wilson Center for Scholars, Washington D.C. 7 OCTOBER, 2010 

Ladies and Gentlemen,

It is an honour for me to be here today in Washington at the famous Woodrow Wilson International Centre for Scholars. I would like to thank Mr. Hamilton, President and Director of the Centre, for inviting me to speak before this distinguished audience.

2. I understand that this Institute has a long and illustrious tradition of promoting informed dialogue for a better appreciation of international issues and developments and to anticipate emerging trends and contribute to formulation of new policies. I would like to take this opportunity to share with you some of my own thoughts on the emerging global economic architecture and about the relationship between our two countries - India and the United States.

3. Once in a few decades, it appears as if the world is at a cross-road, when the path that it chooses to tread becomes critical for progress in the well-being of its people and fundamental changes in international rules and institutions to guide the process become imperative. Neither the process of change nor its outcomes are linear. There are always concerns, uncertainties and choices to be exercised from competing alternatives and objectives. The process is indeed challenging. Today, we are at one such juncture in our lives.

4. Following the global financial crisis since late 2007 and one of the deepest downturns that the world has witnessed in recent times, we are compelled to rethink some of our traditional principles of economic and financial policy making. For the first time after the second World War, nations have been forced to come together to explore and discuss the need for collective action, the need to regulate finance in a globalized world and the need to reform the international economic architecture. When that happens there is hope!

5. As we meet here today, the world economy is showing visible signs of emerging from the global slowdown. The pace and shape of the recovery across countries, both in the developed and the emerging world, is however varied and perhaps uncertain in some instances. At home, we have done better than what was perhaps anticipated. While we have got certain things right, there are others that need our attention and follow-up, both at the international as well as the national levels.

Ladies and Gentlemen,

6. Let me start by recollecting some of the lessons and issues that we need to keep in our mind as we collectively find solutions to address them and move towards a new international economic architecture.

7. Foremost, we have seen that markets with no regulatory supervision are prone to asset price or debt bubbles that lead to cyclical fluctuations in economic activity. Unlike in the past, in the present age of globalization such fluctuations are more likely to have serious cross-border social and economic implications. Governments and central banks therefore have to play a key role in supervising and regulating markets, collectively and individually in their respective economies.

8. Secondly, greater attention needs to be given to transmission channels of contagion, the herd behaviour of investors, excessive risk-taking during boom years and risk aversion during crisis. The effort to identify and strengthen institutions that are considered ‘too big to fail’ and ‘too interconnected to fail’ is part of the effort to limit systemic fallout of contagion.

9. Thirdly, curbing speculative activities in the areas of credit and price derivatives, for example, requires pro-active domestic oversight and regulation, as well as global coordination.

10. Fourthly, unfettered growth of the financial sector can have dangerous implications for the real economy, as was seen during the recent crisis, when the financial sector crisis spilled into the real sector. Financial sector innovation should serve the objective of real sector development and promote financial stability.

11. Finally, for sustained growth and stability global structural imbalances have to be addressed, sooner rather than later. The huge build up of reserves in some countries and deficits elsewhere, massive trade surpluses in some and deep trade deficits in others are not sustainable. More nations need to come forward and share the responsibility to contribute to global prosperity. The critical gaps in international policy making and regulation, in risk management and international development cooperation need to be bridged.

12. There is a need for pursuing effective international cooperation and strengthening institutional mechanisms that support and sustain equitable global development. International financial institutions need to reflect in their functioning the realities on the ground. Indeed, if there is one lesson to be drawn from our recent experience, it is that we need to be vigilant in tracking economic developments at the global level as well as in our respective domestic constituencies.

13. Even as we make progress on several fronts, including on the issue of global economic monitoring and governance, the question is how much should we regulate and where do we draw the line?

14. If we do not regulate economic activity at all, we can have poor people getting trapped in debt and a repeat of the crisis of 2007. On the other hand, if we over regulate, we will kill innovation and harm economic growth. The solution to these dilemmas is not easy. The U.S. has tried to address some of these concerns with its new Dodd-Frank legislation. We, in India are also exploring new ideas in financial regulation that protect the vulnerable but allow markets to flourish. There is a lot that can be learnt from the best practices in one part of the world to guide policy response in the other.

15. At this point, I must draw your attention to a rather unique developmental approach by India in recent years. We are not waiting any more for the phenomenon of ‘trickle down’ to happen with our significant growth trajectory. Instead, India has embarked on one of the largest efforts in history for direct entitlement of the poor and massive asset creation in the rural sector. It is also rolling out 100,000 ‘IT kiosks’ with an eye on ‘e-governance’, ’e-education’,’ e-health’, telemedicine – as many as 83,635 have already been rolled out in rural India.

16. We have passed the ‘right to education’ bill, allocated $24.3 billion in the last three financial years for the Mahatma Gandhi National Rural Employment Guarantee Act and $10.7 billion on Bharat Nirman project for rural power, roads, drinking water, telecom, irrigation and housing. Our substantive GDP growth will be accompanied by direct inclusion of the underprivileged, who will in turn contribute to our rising growth trajectory.

Ladies and Gentlemen:

17. The current phase of globalization has shrunk the world and made boundaries between countries irrelevant. At one level, it has reduced us to a single entity, such that developments in one part of this global entity have pronounced implications on the other part.

18. This crisis has shown us the pitfalls of an unquestioning dependence on the functioning of liberal markets to sustain and enhance human well-being. Yet we have also seen how these very markets have been the means to bring unprecedented prosperity to a large part of the world over an extended period of time. They have opened up real possibilities for many of us in the developing world to make genuine progress in addressing some of our persistent problems of poverty, livelihood, health, education and security.

19. I believe that globalization has the potential to benefit us all, through greater trade, more specialization and the flow of capital from where there is a glut and the returns to capital are low to where there is a shortage of capital and the returns to capital are high.

20. The U.S. more than any other country, has demonstrated to the world what can be achieved by having an open economy and keeping the channels of trade and business open. There is a lesson in this for all of us. Indeed, we need to move on and have an early conclusion of the Doha trade round.

Ladies and Gentlemen,

21. The designation of the G20 as the premier forum for international economic cooperation has brought together advanced and emerging market economies at the same table on an equal footing. This has been a major step in the direction of improving global governance and shared responsibility for larger public good. We welcome this and commend the US and other developed nations in taking and supporting this step. Indeed, it is not surprising that the G20 could concert the decisive response to enable the world economy to move on the path to recovery.

22. The G20 spearheaded a commitment to implement coordinated macroeconomic policies, including fiscal expansion of US $ 5 trillion and the use of unconventional monetary policy instruments. It took the initiative to significantly enhance financial regulations, notably by the establishment of the Financial Stability Board and strengthened the International Financial Institutions, including the expansion of resources and the improvement of precautionary lending facilities. We need to persist with and strengthen this mechanism as we move forward to create a more dynamic and equitable economic architecture for global trade and sustained growth.

Ladies and Gentlemen,

23. I believe that economics and economic relations are important, but it is essential to recognize that these relationships are embedded in a certain geo-political reality. We have to be realistic and manage global geo-politics to create the pre-conditions for economic prosperity. Nations working together both regionally and globally can become critical forces for geo-political peace in the world and for creating the social and political pre-conditions without which no nation can grow and prosper.

24. There are dangers and risks of disruption in the world that we have to be attentive to at all times. Consider the Straits of Malacca. More ships pass through this corridor carrying goods and freight, than any other comparable sea-corridor in the world. If a war or a terrorist attack disrupts this trade route, the entire global economy will be plunged into a crisis. This is an area of interest not only to the neighboring nations, such as India, Indonesia, Singapore and Malaysia but to the whole world.

25. Managing political tensions, creating multiple stake-holders with interest in peace are essential to prevent such disruptions and political turmoil. Given our shared interest in peace and stability in Asia, India and the United States can work together to promote this objective.

26. The friendship between our nations is built on deep, shared values, and the commitment to democracy and secularism. We are both multi-racial and multi-cultural societies that have found strength in our diversity and in our convictions. In addition, we now have important economic inter-connections, based on trade, investment and the movement of people. This has led to increasing warmth between our nations.

27. With gradual economic reforms, pursued through a broad based domestic political consensus, so essential in democracies, India is now an open, competitive market economy whose engagement and integration with the global economy has been growing rapidly. Trade between India and the United States has more than doubled between 2004 and 2008, with both trade in goods and services being broadly balanced. As Indian companies seek to position themselves better in the global market place, they have invested over $25 billion between 2004 and 2009 in the US, creating jobs and prosperity, just as US companies have been doing in India. India’s growth is primarily domestic demand-driven and not export-led. With the Indian economy expected to grow between 8 to 10% over the coming decade, the opportunities for business engagement with India will multiply manifold. Sustained high growth will catapult India into one of the three largest economies in the coming decades. The Indian economy will be one of the nodes of global economic momentum and stability.

28. The nuclear agreement between our nations and what it can do to alleviate the demand for greater energy and electricity is a significant symbol of our collaboration. The 10th of October, 2008, when our two nations signed the Agreement for Peaceful Uses of Nuclear Energy, must go down as an important date in history. In October 2009, the Indian Government announced its intention to set up Light Water Reactor (LWR)-based plants in cooperation with the US at Chhayamithi Virdi in western India and at Kovvada in southern India. While this has created further scope for business interaction between our two nations, it has also improved the possibility of lighting up more homes and bringing water and energy to the Indian farmers.

29. There is also a lot of scope for collaboration between India and the U.S. in the area of education. Both India and the United States have comparably large higher education systems. In India there are 15.6 million students; in the U.S. there 19.7 million students. There is also a lot of flow of students between the two nations though this is largely in one direction—from India to the U.S. In 2008 there were 3,146 American students in India and around 100,000 Indian students in the U.S.

30. Academic interaction between nations is a source of soft-power relations between nations. It builds the flow of knowledge and technology and contributes to peace. I am glad there is so much academic interaction between our nations but the scope for building up more is immense. I do want India to be a hub of global education and to have many more American students coming to India for education.

31. Indian students and their families are today hungry for more knowledge education. America is a world leader in terms of higher education and research and can contribute to our efforts. Cooperation between India and the United States in this sector will be mutually beneficial, building expanding and durable links between our peoples which will be the connecting tissue of our relationship.

Friends,

32. We live today in a small world. There is need for greater international cooperation to manage global challenges. These can not be tackled by any single country alone. A strong partnership between India and the United States would be vital in this process. In this context let me mention how delighted I am at the prospect of welcoming President Obama to India next month. We recall his hospitality to India last November, when our Prime Minister was made the first state guest. President Obama had said that the US-India partnership would be one of the defining relationships of the 21st century. I share this sentiment and that our country is ready to take this friendship forward. I am sure that his visit will strengthen cooperation between India and the United States and lay out a vision for our strategic partnership based on our shared values and our shared interests.