Citing the rapid growth of India after it carried out economic reforms beginning 1990s, noted economist and former US Treasury Secretary Lawrence H Summers has questioned the relevance of lending power of top global financial institutions like the World Bank in the 21st century.
Appearing before a Washington audience, Summers said that in 1991, when he was working as the chief economist of the World Bank, the first "really important situation" in which he had any visibility at all was the Indian financial crisis that took place in the summer of 1991.
And at that point, India was near the brink, he said in his keynote address at the Center for Global Development's annual Global Development Changemaker Dinner.
"It was so near the brink that, at least as I recall the story, $1 billion of gold was with great secrecy put on a ship by the Indians to be transported to London where it could be collateral for an emergency loan that would permit the Indian government to meet its payroll at the end of the month," Summers said.
And at that moment, the World Bank was in a position over the next year to lend India $3 billion in conjunction with its economic reform programme, he said, adding that the United States had an important role in shaping the World Bank's strategy.
That $3 billion was hugely important to the destiny of a sixth of humanity, he told the audience.
"Today, the World Bank would have the capacity to lend India in a year $6 billion or $7 billion. But India has $380 billion in reserves dominantly invested in Treasury bills earning one per cent," he said, adding that India itself has a foreign aid budget of $5 billion or $6 billion.
"So, the relevance of the kind of flows that we're in a position to provide officially to major countries is simply not what it once was," Summers said.
He said if India had not converged substantially and if emerging markets had not emerged, it wouldn't have anything like those quantities of reserves.
The idea that the success of the developing world is an obvious positive objective of the US economic policy is not as readily apparent to the current generation as it was to previous generations, and that is not an entirely irrational feeling on their part, Summers said.
He said America's assistance and the assistance of the multilateral institutions in which it had great leverage is much less significant than it once was.
"The idea that simply making it work -- the idea that people should be taxed heavily to make it work better is a much less intuitive idea politically for deep reasons in the current context that it ever was before, and the capacity for marginal money to make a major difference in major places is vastly less than it ever was before," he said.