Globally accepted norms of transparency in financial assessments are needed
After the Sensex nosedived on August 16,a TV channel asked me to participate in a debate. The two dominant political combines,each swearing by globalisation,were at each others throats,with a wellknown and very competent economist speaking for one of them. When the anchor got to me,I had to gently remind them that the withdrawal of the American stimulus as the US economy gets back on its feet has resulted in similar chaos in other emerging markets. Domestic reform is important but global markets can be particularly harsh if an economy doesnt have a clearly worked out strategy.
My friend,the Cornell-based Indonesian economist Iwan Azis tells a revealing story about his country losing a quarter of its GDP,even though all its fundamentals were good. This was when the Thai baht took a knocking in the Asian financial crisis of the 1990s. Political players need reminding that in the early part of this century,the international consensus was that India had gone through a period of growth and technological change in the 1980s,much before the big-bang reforms of the 1990s. Yet in 1990,politically motivated criticism from foreign governments had prompted a run on the rupee.
It was heartening to hear the government tell central bankers that fresh thinking was needed. To expect large-scale FDI under the present conditions is wishful thinking. This week,many of us from different parts of the world got together to give our teacher,Nobel Laureate Lawrence Klein,a Festschrift. In 1995,while working with the economics department at the University of Pennsylvania,I had given a seminar on the first-generation economic reforms. On that occasion,I remember,Klein had said that India should concentrate on FDI rather than on other kinds of financial flows. Even though foreign debt investors have withdrawn,foreign equity investments in India have held,despite the volatility. Whatever resources we may raise,including those through tariffs on gold imports,should be used to bolster investment at home. We must urgently review the functioning of PPPs,which are needed even more today. Confidence in the domestic economy must be revived. Instead of neverending laments,politicians should tell us what their prescription for a 6 per cent growth rate in 2013-14 is.
The chest-beating of opposition parties during the liberal hour before elections,as John Kenneth Galbraith put it,is no great cause for worry,for the electorate and the global investors know to discount it. But the systematic and coordinated running down of the India story by international consultants,most of whom are affiliated to large global private banks,is interesting. Now that their role in precipitating the financial crisis of 2008 is no longer under scrutiny by American regulators,these consultants feel free to turn their attention to the Indian growth story. Yet the role of international private bankers in precipitating the 2008 crisis is well known by now and was,in fact,one of the big policy takeaways from the Seoul G20 summit.
What are the morals of this story? There must be domestic recognition of the arguments made by our negotiators at the Seoul meetings of the G8 and G20 that emerging economies need a stable global economy in order to grow,as well as a degree of transparency and honesty in financial transactions and negotiations. At Seoul,the Koreans and the Japanese underlined the compelling need for globally accepted norms of transparency in financial assessments. They pointed out the complexity of the problem - who will guard the guards? The discussion has led to the beginning of a process that has only seen slow progress. As we turn to Raghuram Rajan,who will take charge as governor of the RBI in September,we must appreciate the role our central bankers,right from the days of Y. Venugopal Reddys governorship,have played in the context of the G20 meetings.
The writer is chancellor,Central University of Gujarat
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