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Decisions govts take today can affect tomorrow's outcomes: Cyn-Young Park

Q&A with Cyn-Young Park, Asst Chief Economist, Asian Development Bank

Shanu Athiparambath  |  New Delhi 

Cyn-Young Park is assistant chief economist of the She has written widely on the economies and the financial markets of Asia. She was a speaker at a satellite event held in IIFT Delhi, as a part of the recently concluded In a conversation with Shanu Athiparambath, she spoke on the importance of macroeconomic policy in shielding the economy from economic crises. Excerpts:

Q. After the economic crisis of 2007-2008, many economists have argued that the governments should intervene to pull the world economies out of the crisis. Why is it necessary?


A.
There are some recent studies which suggest that growth can be internally generated. If you make capital investment today, it will increase the potential for growth. Education and technology have to be supported by research and development. All these determinant of growth can be supported and supplemented by the public spending during the economic downturn because during the downturn, the private sector cannot make sufficient investment.

Q. If the public sector has to spend money, it has to be taken from the private sector. It has to be taxed. If the private sector does not have enough funds to make the necessary investment, where does the money come from?

A.
In a way, the governments can take a long-term view when compared to the private sector. How much can the government actually spend? It depends on the country’s medium term fiscal sustainability. Unlike the private sector, the public sector can think of tomorrow, and spend today. But, that spending should not be wasted. That will be bad governance. You have to actually have a very strong governance system. The public should be able to ensure good governance.

Q. It almost never happens. The common people in India are not sophisticated policy analysts. A large number of people can barely read.

A.
You have to have good fiscal principles. There should be transparency. A lot of countries do have a better model of governance, and a better macroeconomic framework. Even in Asia, the more advanced economies like Singapore, Hongkong, have clear fiscal rules. The way the public money is being spent can be monitored by the public.  A lot many countries in South Asia have more chronic fiscal problems. It is important that a country has a long term fiscal plan to achieve sustainability. If you lose that, if you deviate from that track, then the market loses confidence. There is definitely a trade-off.

Q. There were economists who argue that when the government offers a stimulus package, or when the public sector spends money during a recession, it is going to prolong the recession.

A.
The decisions governments take today can affect tomorrow’s outcomes. Of course it is important where and how to invest. At the end of the day, if you are investing in the wrong places, you are just wasting precious resources. The government can make a wrong investment, but it can happen to even the private sector.

Q. One argument is that the recession happened because the central banks have kept the interest rates low for long, and that resulted in long term investments that could not be sustained.

A.
I do not think that India’s interest rates are low. Interest rates were low in the United States, and the risk taking behavior is partly responsible for the crisis. Across Asia, I do not think interest rates were kept low.

Q. India’s fiscal deficit is among the highest among the emerging economies. If the fiscal deficit is high, what is the government supposed to do? Should the government cut spending anywhere and everywhere?

A.
It depends on the situation. Countries should aim at medium term fiscal sustainability. There should be a clear plan to ensure that in ten years, the public debt will be at a sustainable level. You have to have a bit of a fiscal room. You can stimulate the economy during the down-turn. If you increase the spending when you do not have the fiscal room, it will undermine the investor confidence and that will aggravate the situation.

Q. The inflation rate has been very high in India for many years. But the western economies typically do not have such a high inflation rate. Why does it happen?

A.
India does import a lot of oil, and the oil prices have gone up. The money should come from somewhere. If the money supply remains constant, it will go up. Oil is a very crucial element in many consumption products. It has very low elasticity. High oil prices are going to raise the prices in general. If the oil prices go up, your real incomes will suffer.

First Published: Sat, December 22 2012. 21:57 IST
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