There is a need for better capitalised multilateral financial institutions to provide capital to emerging economies to support long gestation, large-scale investment projects in emerging markets, said Raghuram G. Rajan, Governor of Reserve Bank of India.

Delivering the 6th R Venkataraman Endowment Lecture on ‘India And the International Financial System’ at Madras School of Economics here today, he said private investors rarely have the risk appetite that governments or multilateral institutions have. Augmenting the capital base of multilateral institutions such as the World Bank, the African Development Bank and the Asian Development Bank, can help provide part of the patient risk-tolerant capital the emerging world needs, he said.

He said in the 1990s emerging markets borrowed from the rest of the world to fund infrastructure development projects. But, it did not end well, with credit booms, large unviable prestige projects and eventual busts. It also highlighted the inability of emerging markets to manage large increases in domestic investment funded by foreign capital inflows.

So, it is proved that emerging markets’ reliance on foreign capital for growth was dangerous. With investment prudently limited to domestic savings, it curtailed their ability to serve as growth engines for the world. Hence risk capital from well-capitalised multilateral institutions would be an ideal choice, he said.

There is also a need build stronger international safety nets. Access to the line would get activated by the IMF Board in a situation of generalised liquidity shortage. Such proposals would allow access to liquidity to those countries that do not have own, bilateral, regional or multilateral liquidity arrangements to fall back on, he added.

And, every country should develop a consensus for free trade, open markets, and responsible global citizenry. “If we can achieve all this, we will truly have set the stage for the strong sustainable growth we all desperately need,” Rajan said.

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