The Hindu Business Line : Fund-Bank Spring Meetings — Thus must Finance Minister speak

The spring meetings of the Fund-Bank are about a fortnight away, and the Finance Minister will make his customary speech. More than what he will say, A. Vasudevan suggests the areas he should touch upon covering the international monetary and financial issues so that his credibility goes up.

Points to ponder over for the Finance Minister.

THE International Monetary and Financial Committee (IMFC, formerly known as the Interim Committee) and the Development Committee (DC) will hold the spring meetings on April 16 and 17 in Washington D.C. The statements that the Finance Ministers of member-countries make form the basis for the communiqués of the Committees. The communiqué of the IMFC is by far the most important because of its implications for economic policies to be pursued by member-countries in the near- and medium-term.

India's Minister has traditionally been the member of both the Committees. He represents the constituency consisting of Bangladesh, Bhutan, India and Sri Lanka. Since his statement has to reflect the concerns and perspectives of all the members of the constituency, there would inevitably be some compromises. For example, the nuances of the language to be used in the statement and the references to the constituency's economic policies and performance would have to be acceptable to all the members.

What is expected of the statement

The Finance Minister would, as in the past, comment on the world economy. His comments on industrial countries (ICs) would generally be couched in a pleasant language as our "concerns". He would invariably call for higher growth of the ICs because that could benefit the trade positions of the developing countries (DCs).

In the IMFC meeting ahead, one would expect the Finance Minister to express grave concerns over the large current account deficit of the US, the fall of the mighty dollar, the recessionary tendencies in Japan and Germany, the continued weakness of the banking and financial institutions in Japan, the impact of oil prices on the ICs, and the continuance of large agricultural subsidies in ICs. He may avoid making any reference to the UK economy specifically since its performance is perceived to be generally good.

The Finance Minister may refer to the potential inflationary pressures in the ICs and would urge the countries to pursue appropriate macroeconomic policies to overcome the problem. He may not be specific about the positioning of the rate of interest or the viable fiscal position. He would, however, urge for the ICs to enhance official development assistance and tackle with a sense of urgency some of the structural problems, especially in the European Union and Japan.

The Finance Minister can also be expected to indulge in courteous references to the need for strengthening multilateral surveillance and for continuing with regional surveillance, say, of the European Union. He may call for strengthening of the Fund and World Bank and increasing their capital base.

What ought also to be said

Policy-makers generally do not like suggestions that are not solicited but there can always be exceptions to the rule. The credibility of the Finance Minister would go up if he takes the initiative of presenting the perspectives of the constituency on the international monetary and financial issues of the day in a clear language. Let us note the areas where the Finance Minister should focus in his statement to the IMFC.

He should highlight the huge gap in the financing of the Millennium Development Goals (MDGs) and briefly refer to the failure of the international financial community to consider some of the proposals made earlier to meet the gap. For reasons that are well-known, special allocation of SDRs (special drawing rights) or imposition of Tobin-like tax on currency transactions or imposition of environment taxation to meet the financing gap have not been favoured. The British proposal for a special international finance facility of 2003 was also not accepted. Yet, there is a need to have an objective-focused international finance facility with reasonable structural conditionality and with the participation of OECD and those emerging market and transition countries that have strong balance of payment position, if one is serious about meeting the MDGs by 2015. Such a facility could be dovetailed into the present Poverty Reduction and Growth Facility if need be after due examination of the implications of such an integration by a Task Force. In case the financing gap still exists, there could be supplemental financing from the sale of a pre-determined portion of the gold held by the Fund.

In this context, reference should be made to the sharp increases in the oil prices threatening prospects of many countries in terms not only of growth but also of pursuit of economic reforms intended to improve the quality of development that focuses on such laudable objectives as those contained in MDGs. Oil price increases not only impede fiscal adjustment but also make monetary policies less flexible even when the economies are on the upward moving phase of the economic cycles.

It is not that oil-producing countries are insensitive to the needs and growth aspirations of oil-deficit countries. In fact, in the 1970s, the oil producers had set aside a part of their dollar balances for countries that required additional access to resources for pursuing structural adjustment under a medium-term arrangement. There is no reason why oil-exporting countries cannot provide support to reduce the financing gap in meeting the MDGs at this point in time.

On international standards and codes relating to the financial sector, India's record of internal assessments and issuance of regulators' detailed guidelines have received high praise from many quarters. This is, however, not enough. It is important to have external assessments published and widely circulated for gaining greater credibility. Such an initiative on the part of India would quickly nip in the bud any cynicism about the Indian declarations of compliance with the codes and boost the country's image as an excellent investment destination.

The Finance Minister should also point to the need for the Fund to examine the multifarious aspects of the tsunami disaster. Encouraging the ICs to donate for and the relevant DCs to allocate more funds for programmes of recovery in tsunami-affected regions is a minor task to pursue for the Fund. The Fund should, in fact, encourage international cooperation in meeting such disasters by intensifying scientific and technological research that is being conducted in many parts of the industrial world even if it means that there would be temporary delays in attaining fiscal viability in some of the countries concerned about such disasters.

The Finance Minister should also give unstinted support to the further integration of economic and financial markets. He should call for elimination of market rigidities that bedevil such integration. Such rigidities exist in many of the `new economy' areas and the Fund may like to take the support of the World Bank to ensure that the transaction costs incurred by individuals are minimal and resource allocation is optimal. To take a simple example, an Indian going to the US with a tri-band mobile phone would find it extremely difficult to get a chip card from a service provider in the US and would, therefore, have to make arrangement with the local service provider by paying high costs. Interestingly, this is taken as a problem related to the retail business, but it does show the undesirable face of capitalism at work.

One of the interesting issues is said to be about the medium-term role that the Fund should play in the world economy. The IMF's role has been discussed over the years in a number of forums and in learned books but one is never much wiser than before after following the quintessential issues on the subject. The Fund has failed to come up to expectations on many an occasion but that does not mean that it cannot be an effective instrument for promoting international economic cooperation.

(The author, a former Executive Director of the Reserve Bank of India, can be contacted at asurivasudevan@hotmail.com)

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