Global rebalancing will require deficit economies to save more, Subbarao tells IMF

The Reserve Bank of India has said global rebalancing will require deficit economies to save more and consume less while depending more on external demand.

Addressing a meeting of the International Monetary Fund on Saturday, the RBI Governor, Dr D. Subbarao, said that surplus economies will need to mirror these efforts and shift from external to domestic demand.

“Global rebalancing will require deficit economies to save more and consume less, while depending more on external demand relative to domestic demand for sustaining growth.

“Surplus economies will need to mirror these efforts — save less and spend more, and shift from external to domestic demand,” Dr Subbarao said during his intervention in the ongoing Spring meeting of the IMF here.

“The problem we have is that while the adjustment by deficit and surplus economies has to be symmetric, the incentives they face are asymmetric,” he said.

Shared understanding

Managing rebalancing will require a shared understanding on conducting macroeconomic policies to minimise disruptions to macroeconomic stability, he said.

The RBI governor said that letting exchange rates remain aligned with economic fundamentals, and an agreement that currency interventions should not be resorted to as an instrument of trade policy should be central to a coordinated approach at a multilateral level.

Dr Subbarao said the recent crisis has brought home the complex challenges arising from the world having a single reserve currency.

In the ongoing search for solutions, he said, one option is to have a menu of alternative reserve currencies which fulfil the required criteria — full convertibility and the exchange rate determined by market fundamentals.

He said that recent international developments mark an “ironic reversal” in the fears about globalisation.

“Previously, it was the EMEs which feared that integration into the world economy would lead to welfare loss at home. Those fears have now given way to apprehensions in advanced economies that globalisation means losing jobs to cheap labour abroad,” he said.

There is concern in some quarters that even as open protectionism has been resisted relatively well during the current crisis, covert protectionism has been on the rise, he said.

“The short point is that in the years ahead, the pressures for protectionism will mount, and protectionism will also take new forms. Global welfare will be maximised when collectively we resist short-term pressures, and put our collective long-term interest ahead of individual short-term advantage,” he added.

At the same time, the global crisis has shown that the global economy as an entity is more important than ever, Dr Subbarao said.

“Given the deepening integration of countries into the global economic and financial system, uncoordinated responses will lead to worse outcomes for everyone,” he said.

Early warning

Noting that the overarching problems confronting the international monetary system stem from weaknesses in detecting and communicating early warnings of impending crises and management of global liquidity, the RBI Governor said this calls for fundamental reform of the international monetary system.

“It is also important to evolve a mechanism to address the challenges of stemming volatile capital flows and to strengthen multilateral adjustment mechanisms to deal with imbalances and sources of instability,” he argued.

Stating that the surveillance function is critical to the IMF's overall mandate, Dr Subbarao stressed that ensuring consistency and comprehensiveness across the various levels of surveillance is important, as is the candour and even-handedness of the IMF — that systemic risks are pointed out irrespective of where they may originate.

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