'India's growth rates are 13 years behind China'
In Delhi to deliver a lecture at the International Conference on Economic Policies for Inclusive Development, organised by the ministry of finance, Nobel Laureate Andrew Michael Spence spoke to Gautam Chikermane about the outbreak of protectionism, capital inflows and how the conservative approach to finance by Indians helped us keep the global credit crisis under control.business Updated: Dec 03, 2010 00:56 IST
In Delhi to deliver a lecture at the International Conference on Economic Policies for Inclusive Development, organised by the ministry of finance, Nobel Laureate Andrew Michael Spence spoke to Hindustan Times about the outbreak of protectionism, capital inflows and how the conservative approach to finance by Indians helped us keep the global credit crisis under control. Excerpts:
You say conservative debt policies in emerging economies such as India, Brazil and China helped them ward off the global credit crisis. Did you mean individuals being conservative or regulations?
It's both. There is and was very little evidence of excess leverage on the household side which is very diligent and which I believe is partly cultural and partly regulatory in most countries. Clearly, regulation does play a role in Asia. For the financial sector side, it is mainly regulation and learning from past experiences including the crisis.
But the crisis is a fairly recent phenomenon…
No, take the 1997-98 crisis. That's where the learning occurred. So, by the time we got over to this crisis, external debt was low and there was almost no external debt denominated in somebody else's currency, which I feel is extremely risky because if you lose control of the exchange rate then you are done. If liabilities shoot up then there is no way to end.
Could it be that a general sense of financial insecurity has led to this conservativeness? And as India develops, will we shed this culture? Has this been the global trend?
Well, there are not enough examples.
Do you think the G20 is doing enough to contain the outbreak of protectionism?
No, to address that risk one has to address the distributional issues. For instance, if major markets are having problems and they are not acting with the global economy then there is a risk to take their fate into own hands and put barriers. Specifically in Europe and the US, if there is a lingering, long, stubborn and high unemployment problem, then I can imagine that they say 'OK, enough' and some of these markets be protected and we can employ people in those sectors. I don't think that its the most likely outcome but I don't think that just announcing that openness is important is enough. Nice though it may sound, that's what the G20 has done so far.
G20 handled the crisis well but has been a poor manager of the post-crisis recovery.
Yes that's a great assessment.
Is free market a fair weather friend of America?
No, I think historically it's not.
I mean, there is always protectionist sentiment because of the obvious reasons. The effects of foreign competition land locally but the benefits are spread all over the place.
So far, American leadership has managed to maintain a pro-open global economy stand but it was a pretty benign environment in which growth was quite adequate.
Is it more a theoretical issue because politics tends to push them towards shutting the doors?
Yes, it's pretty complicated. But I think that when we start to become really protectionist, then it has to be political pressure that results from large chunks of population finding the effects of openness to be adverse in a serious way. For instance, surveys in US say that Americans think that there would not be as many opportunities for their children as they had experienced themselves. This is absolutely new. I have never heard that before. I think that's a concern.
There are concerns that if the Chinese economy doesn't grow fast enough, it could have implications for developing economies like India.
Well, China is a large trading partner and there are prospects of it growing even larger. Also, when $6 trillion economy grows at 10%, its impact is huge. In fact, growth coupled with huge size matters a lot. It is really important.
Both India and China are being touted as engines of global growth. India grew by 8.9% in the last quarter but even if we grow by 10%, it's about $120 billion and China's 10% would add another $600 billion. Is that global growth?
My guess is that India's growth rates are around 13 years behind China. But you must remember that appreciation also gets in the way. So, if you go back and look at China and just do the 10% growth, you won't get where they are today because appreciation was, and still is, 6%. So, in an external currency like the dollar, the growth is actually quite extraordinary. I feel it is going to be another decade before India has the kind of systemic impact in terms of size that China does now.
You said the high fiscal deficit of India is ok as long as it is backed by high growth. Do you see that playing out over the next decade as well?
If the country is growing at 8-10%, external debt does not rise. Also a McKinsey global report suggests that we are entering a period where there is going to be massive investment boom in the world, led by India, China and across whole lot of emerging economies. There is going to be huge investments in infrastructure to support the high growth.
The question is: where are the savings going to come from, the finances and investment and what is it going to cost to extract those savings. And then there is going to emerge a scenario when the interest rates are going to rise. And if that's true, the more investment you do now the better it is as they are going to be more expensive later.
So, if I were a policymaker here, I would be hunting around for all the things that we could reasonably try to accomplish to accelerate the investment process now partly because it stimulates growth rates.
With growth tapering out in the developed economies, do you, therefore, see an asset transfer to developing economies, as FDI?
I don't think that is going to be major bone of contention. You might not want FDI in very, very weak sectors too fast, like retail. So, I am a pragmatist about this. You do have to make judgements on growth and development policy and strategy, about match between job creation and job destruction and if they get out of line then you got trouble. But with that qualification, there is nothing bad about FDI it brings technology.
What about speculative flows?
I would probably be little harsh on hot money.