IndiaPost.com - 'Developing countries victims, not cause'

India Post News Service

WASHINGTON DC: Emerging market countries are not the cause of this (economic) crisis, but they are amongst its worst affected victims, said Indian Prime Minister Dr. Manmohan Singh, addressing the G20 Summit on Financial Markets and World Economy in Washington DC on Nov 15. With developing countries increasingly adapting to globalization, Singh said, it would be a "great pity" if the developed economies were to weaken their support to the open policies in the developing world because of a "failure to protect them from a recession which is not of their making." In a lucid statement, Singh, an eminent economist in his own right, said the leaders were meeting "at a time of exceptional difficulty for the world economy."

He said the financial crisis, which a year ago seemed to be localized in one part of the financial system in the US, has exploded into a systemic crisis, spreading through the highly interconnected financial markets of industrialized countries, and has had its effects on other markets also. "It has choked normal credit channels, triggered a worldwide collapse in stock markets around the world," he said.

"The real economy is clearly affected. Industrialized countries were expected to slow down in 2008. They are now projected to be in a recession in the second half of the year, and there is as yet little prospect of an early recovery. Many have called it the most serious crisis since the Great Depression." Singh said urgent steps need to be taken to forestall any protectionist tendencies "which always surface in times of recession."

"We are willing to work constructively with other major players to reach a balanced and mutually beneficial outcome," Singh assured the gathered leaders. With trade flows in developing countries slowing down owing to a temporary market failure in the area of export credit finance, Singh said, there was an urgent need to intervene to overcome market failure.

"A collapse of trade is the last thing that one wants in the current crisis, with all its implications for growth and employment," he said. "Concerted government action in expanding export credit financing on reasonable terms will help support the pace of development in developing countries, which is critical for achieving poverty alleviation and employment objectives."

Singh said recession would hit the export performance of developing countries and the choking of credit, combined with elevated risk perception, leading to lower capital flows and reduced levels of foreign direct investment. The combined effect will be to slow down economic growth in developing countries, he pointed out.

"India is experiencing this negative impact," Singh said. "After growing at close to 9 percent per year for four years, our growth rate is expected to slow down to between 7 percent and 7.5 percent in the current financial year. The pace of growth next year will depend, in part, upon how long the global recession lasts and how quickly global capital flows return to normal. Much of India's growth is internally driven and I expect we can maintain a strong pace of growth in the coming years, but many developing countries will be hit harder."

A slowing down of growth in developing countries will push millions of people back into poverty, with adverse effects on nutrition, health and education levels, Singh stressed. "These are not transient impacts but will impact a full generation. If we are to prevent a slide back and ensure that Millennium Development Goals are achieved, we need to ensure that growth in developing economies is not affected." Singh said it would be worth considering some fiscal stimulus by countries that are in a position to do so to help mitigate the severity and duration of the recession. Such a measure would send a strong signal to investors around the world, Singh pointed out.

"Resort to fiscal stimulus may be viewed as risky in some situations, but if we are indeed on the brink of the worst downturn since the Great Depression, the risk may be worth taking. We should therefore take all possible measures at the national level to complement any coordinated international stimulus," he reiterated. The international community, he said, needs to consider special initiatives to counter the shrinkage of capital flows to developing countries that is almost certain to occur over the next two years.

"The initiative by the IMF to establish a new liquidity facility is a welcome step. However, we must also consider whether the IMF is adequately funded for the task it will face in managing this global crisis. Looking ahead we must plan for possible additional demands on the IMF if the global recession is pronounced. This suggests that we must activate a process for replenishing IMF resources," Singh added. An alternative to the IMF as a source of quick disbursing liquidity is the establishment of short term swap arrangements.

The existence of such arrangements will reduce the burden on the IMF and will add to confidence in the system. Countries in a position to do so should consider the scope for expanding such arrangements, Singh suggested. Suggesting that the current crisis required new and innovative ways of solving the financing problems that will restrain infrastructure investment, Singh said the World Bank / IFC and the Regional Development banks should aim at making an additional $50 billion per year in support of infrastructure development in the public and private sectors.

"This window can be wound down once normalcy returns to global capital flows," he added. "The convening of this Summit has raised expectations in many circles that we will work to produce a new Bretton Woods II," Singh concluded.

"The world has certainly changed sufficiently to need a new architecture, but this can only be done on the basis of much greater preparation and consultation. We can, however, signal that we are serious about starting a process that will, in time, produce an architecture suited to the new challenges and vulnerabilities facing the world economy and reflective of the changes that have taken place in the economic structure.

We must also give the world a clear signal of our resolve to take specific coordinated action to handle the current crisis in a manner, which restores confidence and which also responds to the needs of developing countries. We need to ensure that the processes we set in motion today safeguard and promote the welfare of our future generations."