The Hindu Business Line : New body proposed for assessing early warning in systemic instability

An organisation to assess systemic stability of major economies of the world composed of elite economists and with decision-making authority is the need of the hour to put the world economy, buffeted by the financial market meltdowns, back on the rails.

Proposing this idea in an interview to Business Line, former Chief Economist of the World Bank and IG Patel Professor of Economics and Government in the London School of Economics (LSE) Lord Nicholas Stern said that it is important that such an organisation is well-respected and not “interfered with politically. I think in the current situation of the International Monetary Fund (IMF) or the Financial Stability Forum (FSF) that is difficult to do”.

He said such a small but very elite body with people of real authority and eminence would have the job of looking at the big economies such as the US, Europe, Japan, China and India for signs of instability and speak early and not wait and see. It would not be a lender nor command any sanction but only make an early assessment looking for systemic instability.

Lord Stern said that the size of resources involved in the rich country would preclude them from being funded as they have to put their own houses in order and it is better that an early warning system from “a very high level and very strong” body would be necessary. Such an assessing body is extremely important and it has to have its effects through its authority at individual involved and through its insulation from the critical process.

“The problem with the Boards of the IMF and the World Bank is that they act as approvers of document — this is the kind of assessment we don’t want to be approved or disapproved by the people who are being criticised and that is why independence is important”.

At the same time, Lord Stern said it is important for these Bretton Woods institutions to be “much more democratic and that the existing structure of the world and not the 1940 structure, is reflected”. When these institutions were founded, most of the world was shut out in the sense that they were colonies and had small representations and following decolonisation, “we see strong growth in economies outside the traditional rich country and this reality has to be reflected in the governance of these institutions”. The size of the votes should also reflect the size of the economy and population such as China and India, he added.

Lord Stern said that there is recession in the US, the UK and probably recession coming quite soon in Europe and the big developing countries China and India are part of the world economy and “when demand falls in some of their major markets, they will feel the impact. When world credit starts drying up, they will feel the impact. So what we need now in the world is in the short-run strong demand expansion. That is beginning in monetary policy and it is beginning in terms of the support to the financial sector through recapitalisation of banks, through the bank guarantee of loan, through supply of credit.”

Alongside, fiscal policy is also used for “its direct expansion of demand through cutting of taxes and expenditure” which need to be co-ordinated because when one country expands and the other country does not it would create distortions. The balance of that expansion between managing financial policy on the one and fiscal policy on the other varies from country to country, he said, adding that China, for instance, put in place a massive $600 billion stimulus and the fiscal expansion of the UK is coming. “The US already saw expansion in monetary policy and Europe too, would follow, including India, and my guess is that India will start and we need this expansion policy,” he said.

“India is not yet so strongly affected like others. But it will come simply because India is connected through demand, connected through credit with the rest of the world and it would need these measures to stay growing,” Lord Stern said.

He also urged the rich countries to show “strong gesture” for opening up trade both agriculture and other goods and services and conclude the Doha Round to increase world demand. Similarly, the world should use this time to move on cutting down emissions standards and promote green growth, he added.

On India’s growth prospects, he said, “India’s potential is so big and the Indian people are so creative and private sector quite dynamic” that India should focus on providing more for agriculture and rural development and put public services delivery for employment, education, rural infrastructure, vaccination and mid-day meal scheme as a very high priority.

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