'Faster growth of developing nations creating new avenues'

Industrialised countries must pay greater attention towards ensuring the sustainability of their high levels of consumption. These levels involve a per capita carbon footprint we know to be unsustainable. Serious efforts by these countries to lower their carbon footprint would trigger new technologies which alone can provide a solution to this problem. Over time, this will also allow other countries to make their growth patterns more sustainable.

Developing countries face different challenges. They have much lower per capita incomes and growth is essential for them if they are to raise their population to a basic level of living that would ensure human dignity. The post-2008 slowdown in industrialised countries has had an adverse impact and this must be countered so that these countries can return to the path of rapid growth. Though the growth in developing countries has slowed, it has remained more robust than many would have expected. This “growth resilience” reflects the fact that many developing countries now have stronger human and institutional capacities to grow. These economies are not de-linked from industrialised countries; the links are strong but operate on a higher underlying growth potential.

 

Slower growth in the industrialised world would limit the export potential of developing countries. However, faster growth in developing countries is creating new opportunities for trade expansion, which would help offset the loss of markets in the industrialised world.

The shift in economic weight in favour of the developing world is a natural consequence of the process of convergence and should be welcomed. Faster growth in the developing world is not only good for them, but also has positive feedback effects on the industrialised world, which could help the recovery in those countries.

Our experience in India reflects what I have said about the developing world. In the five years prior to the crisis, the economy grew at an average nine per cent. After the crisis, it slowed down to an average of just over seven per cent. We believe India has the potential to grow at eight-nine per cent for the next 20 years in an inclusive manner. There are many challenges we have to face domestically to achieve this target and we believe we can do so. However, we would be greatly helped if the global environment is supportive and we are willing to work with others to make it so.

What can the global community do to restore growth in the developing world? I have already mentioned about the need to reach an agreement on the resolution of the sovereign debt problem in the euro zone as early as possible. An early resolution will remove much of the uncertainty which currently pervades financial markets and affects investor sentiment adversely. Resolution of this uncertainty, and the consequent elimination of downside risks, is actually as important as getting faster growth in the industrialised world.

Growth in developing countries depends critically on a well-functioning international financial system which channels resources efficiently around the world. Given the higher growth potential in developing countries, a well-functioning financial system should ensure sufficient flow of long-term capital towards them.

However, the current state of the global financial system does pose problems. Excessive leverage, built up in the past due to consciously lax regulatory policies, is now sought to be corrected. This is being done at a time when a large part of the banking system of industrialised countries has been weakened by the sovereign debt problems in Europe, and the extent to which it can be recapitalised remains uncertain. The consequent de-leveraging could have an adverse effect on longer term capital flows. Excess liquidity resulting from a lax monetary policy in industrialised countries, combined with de-leveraging by the banks, could create an excess of short-term capital, even as longer term capital dries up. This will not be to the advantage of developing countries.

Multilateral development banks (MDBs) can play a major role in correcting these aberrations. Until recently, it was thought that private financial markets were efficient and, for this reason, the financing of productive investment in developing countries could be handled by the private sector. The crisis has taught us that many assumptions about efficient intermediation were not correct. We also know that in the short run, the international banking and financial system would be under strain. This is, therefore, a time when MDBs, especially World Bank, should expand their lending for infrastructure development in the developing economies. Investment in infrastructure would contribute to strengthening the growth potential of developing countries. The scale of the challenge can be appreciated from the fact that if World Bank is not recapitalised, the scale of lending by the International Bank for Reconstruction and Development from next year onwards will be no higher in real terms than it was 10 years ago!

The international community responded promptly to the need to provide additional resources to the International Monetary Fund after the crisis. A further expansion is being considered to deal with the spillover of the sovereign debt crisis. These resources will be used primarily to assist richer countries. There is surely an equally overwhelming need to recapitalise MDBs to meet the requirements of developing countries for financing infrastructure.

Trade is universally regarded as the most important lubricant for development. It is unfortunate, therefore, that the negotiations to complete the Doha Development Round are languishing. An early conclusion of this, in a manner reflecting the priorities of the development agenda, would send a major positive signal to the global community. The economic woes we face today cannot be overcome without the major developed countries taking the lead to stimulate economic growth. There is an urgent need for far-sighted leadership which can call for tough decisions while managing popular aspirations.

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Excerpt from the statement by Montek Singh Ahluwalia, deputy chairman, Planning Commission, at the high-level thematic debate on ‘State of the World Economy and Finance in 2012’ at the UN General Assembly in New York on May 17