The Hindu Business Line : Fund-Bank meet: Asia's growth is sustainable

The high point of the recent annual Fund-Bank meet in Singapore was the endorsement by the World Economic Outlook that Asia's growth is sustainable and its recognition that a strong policy framework has been key in enabling the Asian success story. One hopes this will strengthen the IMF's arm in doing justice to all countries, including India, in its allocation of quotas, says S. VENKITARAMANAN.

THE FINANCE MINISTER, Mr P. Chidambaram, made a case at the Singapore meet for justice in allocation of quotas in the IMF.

The recent meeting of the Bretton Woods twins at Singapore was marked by drama. The Indian representative at the Conference, the Finance Minister, Mr P. Chidambaram, found himself on the losing side in the quota battle. The management of the IMF had made proposals that effectively increased the quotas for a few countries in Asia, giving a token appreciation of Asia's emerging dominance in global financial affairs.

Mr Chidambaram's well-argued plea that "Purchasing Power Parity" (PPP) should be taken into consideration in determining countries' relative ranking fell on deaf ears. It must, however, be conceded that the reform proposals gave a fairer deal to China and South Korea. The management of the IMF carried the day and we have to wait for the second phase of reforms before India can attain its legitimate share of quotas.

The quotas in the IMF are relics of the past. They were determined at the beginning when the IMF was set up just after the Second World War and reflected the relative importance of various countries in the global economic scene. It is only fair that India's plea for taking into consideration its relative economic importance on the basis of PPP be accepted.

The IMF has been comparing countries' economic strength on the basis of PPP for quite some time. Its hesitation in applying the same yardstick to quota allocation is difficult to understand. This requires economic diplomacy and the cooperation of the US and Europe. In particular, Europe is not about to concede the claim of Asia, particularly India, to a more legitimate share in the management of and access to the Fund.

One could argue, as some observers have done, that the IMF is becoming relatively irrelevant. In the light of the large capital flows taking place as portfolio flows and FDI flows, countries can very well ignore the IMF's contribution to global financial stability. The capital flows of the first two kinds that are outside the IMF are in hundreds of billions of dollars, while those from IMF are relatively small. But, it is, however, a venerable institution — at least as a "rating" agency — and its certificate of good performance affirms good house-keeping.

It is, above all, the lender of last resort and, in times of crisis, one would need its backing. It is, therefore, important that we should obtain and retain a strong voice in its counsels. The fight about quotas is, therefore, not meaningless and we can only wish the Finance Minister success in all his efforts. He has rightly taken on board such countries as Brazil, in his fight for justice in allocation of quotas in the IMF.

Prescription for US

The Singapore Conference was also significant for the release of the World Economic Outlook 2006. This has come out on expected lines. IMF economists have endorsed estimates of high growth for various countries; in particular, they have supported the Indian authorities' estimates of growth. The WEO 2006 is significant for its emphasis on the urgent need for settling global economic imbalances. (The high current account deficit of the US is financed by the savings of the emerging economies of Asia as well as West Asian oil exporters).

In an elaborate discussion on the consequences of a disruptive unravelling of imbalances, the Outlook points out that if matters are left to the market forces and no policy initiatives, viz. policy corrections, are taken up, the final denouement can, indeed, be disastrous. The US economy will fall into chaos, following a sharp depreciation of the dollar, with all that it means for the rest of the world. It is better to listen to the voice of reason sounded by the WEO and implement the suggested policy initiatives.

One of the most important of these initiatives is fiscal consolidation in the US. While the World Economic Outlook appreciates the efforts taken recently by the US Administration about halving the deficit in the next two years, it is apprehensive that the policy decisions in this regard may not be so easily forthcoming, given the electoral battles in the offing. Expenditure compression of the order visualised may itself lead to a recession in the American economy. The WEO concludes that savings in the US should increase, be it through fiscal consolidation, or monetary instrumenta. But a solution brooks no further delay.

The IMF's advice to Uncle Sam is, therefore, to take a dose of its own medicine, which the US had prescribed liberally for other countries: "Reduce fiscal deficit, devalue your currency and increase your savings. In short, live within your means". "Physician, heal thyself" is the message that the IMF conveys, albeit clothed in its own elegant jargon.

Reflective of the importance of Asia, there is a special Section in the WEO "Asia Rising", a Chapter devoted to the stellar growth performance of Asia. Asia's economic success, the report points out, has come as a result of the growth of its factor "productivity", rather than merely growth of physical investments. True, there have been investments also.

This argument recalls the debate of the 1990s, when economist Paul Krugman tried to chide the new industrialising economies of Asia that their growth was a result of increased investments in physical assets rather than innovation and improved productivity. He had engaged in a debate with Mr Lee Kuan Yew, the then Prime Minister of Singapore, who reportedly worsted the well-known economist.

Key to Asian success

The WEO 2006 confirms that Asian productivity has grown, thanks to increased labour efficiency, technological changes and better environment of governance and Government. This is true both of China and the rest of Asia and it is significant that the report argues that Asia's growth is sustainable. The strong policy framework has been a key element behind Asia's success story. It is good that India is included amongst the developers in the Asian success story in the WEO.

In a Section entitled "Perspiration or Inspiration", the report points out that Asia's strong growth performance can be partly attributed to demographic development, the movement of labour and capital from low to high productivity sectors and technological progress. This is a strong recognition of the fact that Asia is no longer a backbencher in the rate of growth.

The contribution of better educational facilities and improved business conditions, including how to start a business easily, accounts for the higher growth in Asia compared to the rest of the world. Asia compares favourably with the advanced economies on many of the factors that account for higher economic growth and, in Asia, China is ahead. India can do no better than to learn from China in these respects.

The WEO 2006 has significantly endorsed the role of Asia in the world economy. I do hope that IMF will recognise the contributions of the different regions of Asia, not only in its narration of global economic success but do justice to all countries, including India, in its allocation of quotas. It needs to look no further than its own World Economic Outlook for justification, if any is needed.