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Our Bureau

Favours using part of forex reserves for infrastructure development

PROFESSOR JOSEPH STIGLITZ at a lecture organised by The Hindu in Chennai on Thursday. - Shaju John

Chennai , Jan. 4

Noble laureate Professor Joseph Stiglitz has cautioned against capital account convertibility and allowing short-term capital into Indian economy, terming it a force that can "create instability".

Research has shown that capital market liberalisation is fraught with risk without rewards, he said on Thursday at a lecture organised by The Hindu.

"Some people say there would be no FDI without capital market liberalisation, which is obviously wrong," he said, noting that China received copious foreign investment without having capital account convertibility.

"You cannot create jobs with money that comes in and goes out, but you can create instability with it," Prof. Stiglitz said.

Observing that for many years India did not allow foreign capital and that proved to have adverse effects, Prof. Stiglitz noted that to "now open completely" would be a "mistake". Stressing that the distinction between short-term and long-term capital inflows was "fundamental", he said that while long-term capital (FDI) would lead to growth, short-term capital flows would not.

He gave the example of Chile, which disallowed short-term capital inflows into its economy and yet got long-term investments and growth.

Answering a question, Prof. Stiglitz said that he favoured using a part of India's forex reserves to fund the foreign exchange component of infrastructure development. While noting that such a measure was controversial, he said that it "makes sense".

Global reserve currency system

Answering another question, he said that a global reserve currency system should be created, perhaps taking the initiatives of the ASEAN in investing their surpluses in each others' bonds, as the nucleus. Other Asian countries could join in the initiative, later the European countries and the US too.

As various countries kept investing their foreign exchange reserves in US bonds, the US was borrowing at a rate of about $3 billion a day.

Over time, this level of borrowing would become unsustainable and consequently, the US dollar would cease to be seen as a "store of value".

As a result, countries would begin to pull out their money from the US and invest in other currencies.

This in turn could destabilise the US economy too. It is therefore in the interest of the US too to support an alternative global reserve currency system, he said.

In response to another question, Prof. Stiglitz cautioned against "excessive fiscal austerity" and gave Brazil as an example of a country that was done in by such a measure.

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