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| 'The US economy may be flat for 10 years, may drag others' |
| Devika Banerji / Jul 21, 2009, 01:05 IST |
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 While many economists and analysts are saying the worst of the economic crisis is behind us, Guillermo Calvo, professor of economics at Columbia University, takes a much more conservative position. In an interview with Devika Banerji, he says the world economy might crawl for another decade. Edited excerpts:
You have said the cost of the economic bubble overrides its benefits. How does this happen?
From the Latin American experience, when the bubble burst, the benefits were on the negative side. The point is that when you look at a bubble, it (the benefits) is probably not there. We need to be careful; probably, the bubble is something we will have to live with and if it bursts, we might have to incur a large cost.
Can we go back to the peak of the bubble?
The bottomline is, if we take the case of the US, the economy will crawl for a long time.
There is another bumpy prospect, that we go back momentarily to the situation prior to the current crisis, and then in one or two years have another crisis. I would not discount that. If you talk about the US economy for another 10 years, it would be quite flat, and it might drag the global economy. For India, too, it will be difficult to get back to 9 per cent growth in the coming decade.
What can India do?
Be more competitive, bring in reforms. There is a lot of room to grow, as the capital income is pretty low. Increasing competitiveness is a solution.
Both internal and external competitiveness?
For the US, probably the internal sources of growth have weakened, so I am tempted to say external. But for countries like China and India, internal competitiveness should be the focus.
The average income in India is still pretty much below South Asian countries. Would you state it as an argument for opening up our markets?
India has a long way to go. You can keep the economy relatively closed, and experience shows if a poor country with a lot of potential opens up, it grows. But sometimes it might also suffer because of external factors like the present circumstances.
What would be an ideal policy roadmap for India? Will opening up the financial sector help?
I would not rush to open up the financial system because, at this point, we want to regulate to prevent an unnecessary crisis. It is essential to have regulation in a setup where we still don’t know which way the capital is flowing. So, I will wait till there is light at the end of the tunnel. Even if it is there, I would still go cautiously. I would not suggest changing the structure in a way which is discontinuous. However, complete liberalisation of trade should be there.
What can India’s banking sector learn from this crisis?
The advantage of having a highly regulated system where we have an obligation to invest in government bonds is that even though the fiscal deficit is quite high, you have low inflation, because you have automatic funding. So, one has to be very careful. If one does not fix the fiscal deficit, liberalising the banking sector can bring about inflation. It is better to have a less regulated banking sector, especially if regulations are clever and useful. But then it will be essential to fix the fiscal deficit.
What suggestions do you have for fiscal consolidation?
Assuming that you would not be able to fix the fiscal deficit in the short run, the government will have to work at getting funds from outside, because the risk is that a large fiscal deficit will crowd out the private sector in the domestic market. So you need to be careful, especially if you continue implementing fiscal stimulus packages. If you do that, you will have to arrange funds to refund it or the end result will provoke major contraction.
Do you have a time table in mind?
The time table is a political question. The question would be the political ability to raise taxes and streamline government projects, but that is a political issue. With most of the fiscal deficit being funded by domestic sources, I will suggest looking at foreign sources like the World Bank.
How about issue of government debt overseas?
If you can find the market.
Is there any associated risk?
No, if it is a sustainable programme. If you borrow short term, it might be a risk. The reason why I was thinking of the World Bank is that you can have capital at a lower rate for a long period.
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