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IHC Annual Lecture 2015 by Governor RBI, Dr. Raghuram Rajan Strengthening Global Economic Governance

Stein Auditorium: 6th November 2015

Dr Raghuram Rajan

Thank you for inviting me.

While I was asking Dr Karnik what I should speak on, he said, “We know your

views on domestic economy, why don’t you talk about what is going-on in the

world.” So that is really the focus of my talk today and of course I will be open

to questions.

2.I think the starting point is, it is very hard to understand what’s happening in

the world’s economy. Why is that so? Well 7 years after the global crisis you

usually feel that economies get back to reasonable growth. We have not seen

that. We have seen very slow growth, punctuated by disruptions in Europe,

now in emerging markets. But also the single biggest economy in the world –

the United States, keeps threatening to grow. Every year by the end we

expect next year will be much better and then we get a miserable quarter, a

first quarter typically, as this time. So something is going on which we don’t

fully understand. I will talk about potential explanations a little later.

3. The other aspect that one has to keep in mind is, even while growth is slow,

there is a tremendous pressure for growth both in industrial countries and

emerging markets. I will talk about reasons for this. You have an un-yielding

object which is growth and an irresistible force which is the need or public

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demand for growth. What happens when you have an un-yielding object and

an irresistible force? Something has to give. I would argue that what gives, is

Policy. Policy now essentially has moved in a direction across the world which

is trying to create the illusion of growth but may in fact reshuffle growth

around. That is really a palliative, and it can actually make things worse and I

would argue that some of the crises which we have seen in the past could be

attributed to similar kinds of policies. So where I want to end is that all this

suggests that in these kinds of environments we really need rethinking of what

rules of the game should govern global policy. Should it be a sort of free for all

as it is today, or should we go back to some kind of a policy structure which is

governed by global institutions based on agreed upon rules. I would argue

there is certainly some rationale for going in that direction given what we see

happening around the world today.

4. Let me start with the question of why is industrial countries’ growth so slow.

When you see a recession, it is deep but the recovery is also equally steep.

That’s the typical recession and recovery usually because inventories build-

up, production is cut back as inventories are built up; then you find because of

low production, inventories are drawn down and then comes time to rebuild

them again and things get better. This hasn’t been a typical recession in

industrial countries because it has been accompanied by a significant amount

of debt, over levered balance-sheets in households, in firms and in

governments.

5. Debt need not be a real problem if you are willing to write it down. If you are

willing to write-off excessive debt it doesn’t need to be a problem but if lenders

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are unwilling to write off debt for a variety of reasons including political, it

could be a problem; because households which want to consume, can’t buy

consumption goods because there are debt payments to make; your banks

which want to lend, can’t lend because they have over leveraged balance

sheets; and corporations which want to invest can’t invest because they

themselves have over leveraged balance sheets and they have to make

interest payments rather than investment. We’ve seen some of this in our

country also but certainly this is a possible explanation of what is going on

around the world.

6. That said, if in fact debt is holding back growth and you can’t write down

debt, there are alternatives. Perhaps you can stimulate growth by getting the

less indebted parts of the economy either to invest or to spend. And therefore

a lot of people post-crisis advocated various kind of stimulus, fiscal stimulus

for example. A number of countries undertook massive fiscal stimulus

packages, including India. We spent a tremendous amount in an attempt to

restart growth. Very quickly a number of industrial countries ran out of space

to do more fiscal stimulus because they found that the government debt load

had increased tremendously and they had to cut back because government

debt credit worthiness itself was coming under question, for example, in

countries like Spain and Italy.

7. Now the IMF mantra has been that those without fiscal space may stop

spending but rest should spend. The right thing to do in this time, is to spend

on infrastructure which will be a long term investment and will pay back over

the long term. So if there’s weak global demand, let’s create more demand by

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spending on things that you need over the long term. The IMF exhortation

across the world has been ‘build out infrastructure’. Also it is cheap at times

like this because labour is cheap, labour is available, cost of raw material like

steel, cement is low, why don’t we build big projects?

8. For a country like ours, it is pretty straight forward that we need more

infrastructure, it makes sense to build out infrastructure. Of course, the

difficulties are in things outside of infrastructure such as land acquisitions and

so on. Some of these problems exist in industrial countries also. Nobody

wants a highway running through their front yard. But they have a bigger

problem which is they already have built out a lot of infrastructure. So what is

obvious to them is repairing the existing infrastructure. Everybody in the

United States will point to potholes around; they will point to the decrepit

status of some of the airports. But repair doesn’t take lot of money, doesn’t

create lot of employment. New infrastructure does that. But it is not clear

where you build out the new infrastructure. So in industrial countries, for

example in Japan, when you build out new infrastructure often it tends to

serve vested interests, pork barrel interests. Some politician wants to build

something in his backyard but that doesn’t necessarily add to the needed

infrastructure for the country and increase the rate of growth. So these are

often not well thought of projects and don’t create long term sustainable

growth. Instead what they create is more debt because government took debt

to finance the infrastructure; and it created a project with not much value from

that project.

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9. A Classic example of this in the United States - the project that was thought

of as new and interesting but hasn’t really taken off is high speed rail. One of

the most important things about high speed rail is that it is meant to connect

two cities which are not so far away but have large populations which

commute from one city to another on a regular basis. For example Los

Angeles and San Francisco would be good places to connect through high

speed rail. But often the high speed rail is used for poorly connected and

poorly populated areas because that’s where the political will is to put them

and it is easy to buy land for high speed rail but it doesn’t pay for itself and in

the long run it creates more debt than value.

10. So the bottom line here is prudent fiscal spending. After the initial burst,

post-crisis, spending has run out in some sense, partly because a number of

countries couldn’t do more given their high debt loans and partly because

there wasn’t anything that was clear, immediate that could be spent on, that

would generate value in the long run. What do you do if you can’t do fiscal

spending?

11. Another alternative has been, let’s see if we can bring down interest rates

and get monetary policy to push the economy forward. The idea here is that in

the developed countries investment is still very low and savings picked up

post-crisis. So if savings are high and investments low and you want to get up

demand, you want people to spend more and you want people to invest more,

the ideal policy is to bring down interest rates. Bring down interest rates

because they don’t want to save more if interest rates are low. With low rates

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people will invest more and savings would come down. Economists basically

say that if there is a situation where the neutral rate or natural rate of interest

is lower than the current rate, push the interest rate down. So monetary policy

could also do some lifting in order to spur growth in the industrial countries

and that was what the central banks did post-crisis. But very quickly they

found they could not push down interest rates beyond a point. Once you get

close to zero or slightly below zero you can’t push it much further. This is what

is called the Zero Lower Bound problem. You can’t have seriously negative

interest rates because nobody would put their money in the bank to get

negative interest rates, getting less back in principal compared to the money

you put in.

12. What do you do if you have seriously negative interest rates? Take cash

and put it under your mattress or if you’ve got too much cash you hire a

security company, buy a safe, put the money in the safe and put the security

company to have guards around it. It costs you less. Today for example, in

certain countries like Switzerland the interest rate is negative 0.75%. So if you

are a large investor with 100 million dollars it costs you 750,000 dollars to just

keep your money in the bank. So rather than keep your money in the bank,

you’d take out the money, put it in a safe (it won’t cost that much) and have a

24x7 guard around it and may be that will make you better off. So the point is

that you can’t reduce interest rates below a certain level. Given that they have

done all that they could on conventional monetary policy and yet you don’t see

investment picking up, the central banks are thinking we should do something

more. We should do unconventional policy in order to push down rates.

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13. Also you must ask why hasn’t investment picked up when people are

willing to give you money close to free. If interest rates are close to zero

they’re basically lending you money for free. Why hasn’t investment picked up

with such low interest rates? One possible answer is, anybody who is

investing doesn’t think he can recover his money. Any investment even at

zero interest rate is a negative investment, negative NPV investment. What

are the situations in which that can be the case? Probably when you think that

there is already existing capacity, and demand is very low, so it doesn’t really

make sense to put more investment on the ground. So one possibility is, that

demand is thought of as very low. Why would people suddenly think that

demand is very low? Why would business people in the industrial countries

think that demand is very low, don’t we understand this because 7 years after

the crisis they should be thinking that things are picking up and they should be

investing. Perhaps part of the answer is that this is an aspect of ageing that

we haven’t fully understood, because one of the countries which has been in

deep slowdown for some time has been Japan. May be what is happening in

Japan is now playing out across the European countries and perhaps even

across some countries in Asia for example - China is growing old very quickly.

So may be what we are seeing is that low demand reflects the fact that people

are getting older. We have already got factories to produce for everybody who

is around, as the population shrinks there will be excess capacity because

there aren’t enough people to consume the stuff and perhaps therefore

investment falls down.

14. Another possibility is that we can put in investment in the ground but

productivity is very low. For a variety of reasons we haven’t seen productivity

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pick up in industrial countries and if you can’t add reasonable growth in

productivity, perhaps profitability over the long run will also be low. These are

explanations that are given for low demand but there is a third explanation

which is that perhaps in doing all the stimulus, you are creating conditions

which will be troubling over the medium term. So as you kept interest rates

really low, financial asset prices have gone through the roof, there are also

some distortions there. Everybody fears what happens when central bank

starts raising interest rates. You’re a worried firm. You don’t know what will

happen then. Better not invest right now. Keep your capital structure safe,

build the bullet proof balance sheet, start investing once these policies abate

and you get back to normalcy. In the new normal it may be that people are so

worried about the policy structure that they in fact don’t invest despite zero

interest rates.

15. These are examples why people don’t invest. There are also questions

about why people are saving so much? Why the counterpart of relatively low

investment but also low consumption, is higher savings and capital account

surpluses which you’re sending to the rest of the world, which is happening in

industrial countries. Why have savings also not fallen with such low interest

rates? Again ageing may be the culprit. If people are ageing and they also

think that some of these governments have high debt loans, they are not

going to be able to fulfil their promises of high social security, high pensions,

that they promised in the past as well as good healthcare, you basically want

to provide for yourself. And you provide better security to yourself by

increasing savings. That is one possibility why savings are still relatively high

at such low interest rates.

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16. Another possibility is partly a result of the crisis. The crisis had an

enormous effect on equity prices and so on and the people who had their

money invested during the crisis may have suffered a large wealth shock.

They would have also suffered a wealth shock if they had invested in housing

which fell in price. These people might think I want to retire, I don’t have

enough money because my nest egg got wiped out and I need a certain

retirement goal. As we push interest rates lower and lower they are getting

less and less in their fixed income assets. So they say, “I need to save even

more in order to make my retirement goals” and in fact savings increase rather

than decrease as you reduce interest rates. The point here is, we’re in a world

that we don’t really understand. These are some possible explanations. But of

course we have to weigh them and see which one is more important. It is

quite possible that the very low rate we are keeping right now, rather than

moving the economy towards a place where savings fall and investment goes

up, may in fact do the opposite: may be creating conditions for higher savings

and lower investment. We don’t know, but these are possibilities.

17. I talked about fiscal, I talked about monetary - neither seems to be the

answer. We spent many years trying to do both. Now both kinds of

interventions are meant to be a bridge, a bridge towards strong sustainable

growth. When temporarily the economy is in difficulty we lift it through stimulus

so that it goes back to a stronger growth. But what if the real problem is that

the underlying growth, for a variety of reasons that we talked about, is really

low. How do we get these stimulus packages to work when everybody knows

that they may not be enough, that the underlying long term growth of the

global economy has fallen? And this is where the point of productivity comes

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back. It may be that productivity growth in the world economy has gone off

because some of the big inventions we had in the past, have been rolled out

and some of the inventions today will take long time to make their way into

growth. Twitter, Facebook all these things not necessarily increase economic

activities so much and therefore we are in a period of very slow growth for a

long time. We have to find other ways of growth rather than stimulus or debt

fuelled growth. Here you run into a political constraint.

18. This is best reflected in Jean-Claude Juncker’s statement, “we all know

what to do on structural reforms, we just don’t know how to get re-elected after

we’ve done it.” That says it all; that structural reforms are difficult. They

typically involve hurting some segments of society immediately. Those

segments vote. The segments that are getting benefitted are usually

segments that are unidentified right now, don’t really know they will be

benefitted in the long run. Example, today you liberalize the taxi business in

Paris, the existing taxi drivers immediately know that their business would be

hurt. Because the Uber guys and other taxi apps will come and guys who

haven’t trained for many years, who haven’t bought their licenses will compete

with them, drive down taxi prices. So taxi drivers know immediately they will

be hurt. But who knows that they’re going to be Ola or Uber drivers down the

line? These are kids working in university today who might decide suddenly

that making money by driving a cab is actually better than being an executive.

Right know they don’t know. They first have to get into a job first, where

they’re at the bottom of the totem pole doing photocopying for somebody, and

find that stuck in an office for nine hours a day where photocopying isn’t much

fun. Better be out driving that Uber cab - that is when they realize their career.

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19. So the point is that it’s very clear who’s going to be hurt by the structural

reforms, much less clear who is going to be benefitted. This is the wrong kind

of equation from a political perspective. Political perspective is that, you want

immediate gains; the pain should be down the line. But structural reforms

imply immediate pain, gain is down the line. Therefore it’s the wrong equation

politically, which is why Jean-Claude Juncker made this statement.

20. So can’t do the stimulus because we have run out, does not seem to be

effective; can’t do the structural reforms because they’re too painful. So why

not accept lower growth? This is a real question. Industrial countries are a

very good level of per capita GDP- USD 50, 000 per capita in the United

States. Plenty of money, why do you need to grow at these levels? Why not

stay happy? Beautiful countries, lots of open space, why do they really have to

go helter-skelter for growth? We do because we are at USD 1, 500 per capita.

We need to grow much more in order to have enough to eat and enough

health care for everybody. But they are already there.

21. I would argue that there are at least four reasons why they need to move.

One is too many promises have been made in the past when growth was

strong. We’ve talked about the entitlements. The biggest burden in the United

States today is entitlements which are not likely to be delivered upon, given

current growth path and given current taxation. Entitlements like social

security (which is their pensions) as well as healthcare - just unaffordable. So

in order to be able to pay these in the future you need growth. Otherwise you

might as well start writing down all these promises. Government promises are

enormous, including government debt which has built up to 100% of GDP in a

number of countries, 200% of GDP in Japan. To pay this down, you do need

growth.

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22. Second, I talked of average per capita income, but this per capita income

is not evenly distributed. There are people who are employed, the insiders, the

older people. They got a good deal. They are going to benefit from the

promises that were made because promises won’t run out when they retire.

The people who have a raw deal are the youth today, who are largely

unemployed and who will never be able to recoup the promises that were

made because all the money would have run out by the time they retire. So

bad for the youth and good for the insiders who are already employed. No

wonder youth unemployment is a huge issue across Europe, is a huge issue

in the United States and the young are very anxious and to some extent very

angry. Which is why many of them are supporting populist left and right wing

parties, because the populists always have easy answers to problems that

they have.

23. Then there is inequality that is, even within the middle aged people – there

are those who have skills and those who are unskilled or moderately skilled. If

you were working as an auto worker just before the great recession, you’re

probably laid off now and you haven’t been able to get a job because

significant number of job cuts took place in the auto sector. So the moderately

skilled have moved down into lower skilled jobs – gardener, hamburger flipper;

all those kind of jobs, while the skilled, the guys who have higher degree

education, have a second degree, are working as consultants, as lawyers and

so on, have a much higher quality of life, much higher incomes. There is a big

divide opening up in industrial countries as a result of globalisation which has

taken away the low skilled job and technology, mechanisation,

computerisation which has again taken away the routine jobs. That means the

high-skilled, non-routine jobs and those high-skilled, non-routine jobs typically

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require strong education and also low-skilled, non-routine jobs are

increasingly getting mechanised, once again just like driving a car. Maybe 10

years from now, driving a car, being a taxi driver is probably not going to be a

viable occupation because we will have driver-less cars. So the point is that

inequality is also increasing. Given that inequality is increasing, there is the

need to create good jobs to keep people at least moderately happy and so

once again the need for growth; because any unit of additional growth is not

creating same number of good jobs today as it was in the past. The example

here is something like Google may substitute for so many libraries, may

substitute for so many cinema halls etc. as source of entertainment; but it

employs only 30,000 people, displacing 300,000- 400,000 people. So we are

becoming much less job intensive.

24. Keynes predicted this in the1930s. He talked about technological

unemployment and he said that would be a good thing because once we

produce enough, we can all take a holiday. The problem with technological

unemployment however is distribution. That the gains to technology go to a

few people, which gives us the enormous question of how to spread it through

the rest. From an economic perspective it is pretty straight forward, just take it

from rich and give it to poor, no problem. But then you look at the details. Take

it from rich then rich will no longer have incentive to innovate, to produce etc.

So it is easier said than done. But this is a problem that we face today.

25. Lastly, central bankers in industrial countries have got very worried about

deflation because they think deflation was the source of tremendous problem

to Japan. It is important to avoid deflation and in order to avoid deflation they

better get growth going. We have had low growth for almost a decade since

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the crisis. Some people argue that they are in the third phase of crisis. First

phase was subprime crisis, migrated to Europe as the sovereign bond crisis,

now it is migrated to emerging markets as the corporate crisis, as they have

high debt. So we have a crisis which is morphing across the world. It is the

same crisis and it is taking the world into a situation of very slow growth. So

what we do here? How do we move ahead? Everybody is looking to everyone

else to step up. We need somebody to grow faster and pull the rest of the

world along with it. But nobody is willing to step up. How do we force

somebody else to step up? Let’s try and give them a push. And this is where

the unconventional monetary policies come along. If we can’t grow ourselves,

let’s try and depreciate our currency relative to their currency. If we depreciate

relative to their currency their people will buy our goods. As they buy our

goods, we get pulled along. Let’s force these guys into providing some growth

to us.

26. This seems far-fetched. Is any country doing this? I would argue some of

the unconventional monetary policy which is seen from some of the large

reserve currency areas, may in fact reflect this. That some of the fundamental

underpinnings of growth in those areas is not that monetary policy is pouring a

lot of domestic investment but that monetary policy is depreciating the

exchange rate, making it easier for those countries to export outside and

essentially taking demand from other countries.

27. Is this a safe environment for countries that are trying to depreciate vis a

vis each other and in a sense trying to borrow growth? Problem is, it isn’t.

Because the way this happens is, I do some very unconventional monetary

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policy. What that does is, generally it leads to capital flows out of my country,

exchange rate depreciates, capital flows into my neighbouring country. That

country’s exchange rate appreciates and as a result I get some growth for little

while. But in the process of doing this the ofher country’s fragilities increase

because as capital flows into that country its real estate prices increase,

people start demanding too much, debt levels increase and that country

becomes more and more fragile.

28. Now I would argue that if you think about that as a model for growth it

reflects what’s been happening for last 20 years and in fact reflects the

various crises we have had since then. Think about the early 1990s when in

order to boost domestic economy, which was directly hit by previous debt

crises, industrial countries led by the United States cut interest rates to the

bone, Capital flowed out of the emerging markets, flowed out to Latin America,

flowed out to Asia. Those countries said “Wow! This capital is coming in, we

love it. Let’s go and build new cities, new airports.” Malaysia did a lot of it,

Thailand did a lot of it. Except when interest rates started going up in industrial

countries once they fixed their economies, the capital wanted to flow back.

First country to go under was Mexico, Tesobono crisis. After that we had the

Asian financial crisis when capital pulled out. Then we had the Latin American

crisis. So a variety of crises in 1990s, at which point the emerging economies

said perhaps we shouldn’t be doing this. When capital comes in we shouldn’t

absorb it and build big new cities, we shouldn’t borrow a lot. Instead what we’ll

do is we’ll send it back out. We’ll build up reserves. And so there’s an

enormous wave of reserve building in the Asian countries post-financial crisis

and also in some Latin American countries.

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29. Where did this money go? It went back to the industrial countries and now

the industrial countries had a lot of capital flows coming in. Those of you who

are students of economics may remember Ben Bernanke’s famous global

savings glut speech in 2004-05 when he said that United States was facing an

enormous wave of inflows from emerging markets building reserves and this

was distorting asset prices in United States. He was right because the

conditions were being laid for the financial crisis that eventually came. But it

distorted asset prices not just in United States but indirectly, through variety of

channels, in Europe where countries had large deficits. So in 2007- 12 we had

the big crisis there and industrial countries said we can’t do this. We can’t

keep absorbing capital, let’s stop doing it. Let’s send capital back out, hence

the extraordinary monetary policies they had to send capital back to the

emerging markets. And emerging markets once again forgot the lessons of

the past. We did massive stimulus packages to spend the money and look

who is in trouble? Brazil is in trouble, China is in trouble, Russia is in trouble.

We in India I think, tried to pull ourselves out of the problem we were in and

we are making some headway. But across the emerging markets you see the

consequences of absorbing the capital and the capital now wants to go back

and a number of countries are in difficulty, leading to large depreciation in

exchange rates.

30. So we have this problem in the world of musical crisis. We are sending a

crisis from here to there and they send it back. Nobody wants to be the

venue for the crisis, very hard to avoid it. I think monetary policy is partly

responsible for all this and we need more stable, sensible, monetary policy.

Which is why I have been personally saying for some time that QE1 was

good, but beyond that harder to find positive effects. And similarly with some

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of the other accommodative monetary policies across the world. It is probably

good for the world if we brought all this to an end because it would allow more

normal asset prices to establish. But there is difficulty in coming out of these

extraordinary policies because if in fact the extraordinary policies were partly

responsible for keeping your exchange rate depressed, when you reverse the

extraordinary policies and you’re the only one doing it, your exchange rate

appreciates considerably and that serves to slow down your growth. So we

are really in a situation where everybody is deep in the well and if we are the

first one to try and climb out of it everybody catches out on to your foot. And

therefore it is very hard to climb out. This is what is called the Prisoner’s

Dilemma for those of you who are students of economics. Better nobody

wants to be the first person out. I think this is a great source of problems.

31. I’ve talked a long time about problems. Let me talk quickly about potential

solutions. Very clearly the world has depressed demand and we need to

expand demand and clearly we need to expand demand where it is most

needed. To my mind demand is most needed in the emerging markets

specially through infrastructure investment. Countries like ours could do

massive infrastructure investment for next 10-15 years and still not be done.

We have enormous projects we could do. But really the key here is to attract

patient risk capital. We have a deficiency of risk capital in this country. Many

of our projects are done with too little equity and are over leveraged. We need

more risk capital, sensible, patient risk capital.

32. One source of sensible, patient, risk capital are the large multilateral banks

but they haven’t been given too much money to lend in the past and that’s

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something that should change, and help the kind of infrastructure that we

need. What about industrial countries? And I would argue that even though

building new roads, new airports is difficult in these industrial countries; there

is one place where it’s very clear that they need to make investments, and that

is in Green Energy. Their coal power plants, their energy inefficient plants

need to be replaced. By rights it is the industrial countries who should be

making these investments given that the stock of carbon out there is largely a

consequence of their past activities. Therefore, green technology being used

and implemented in industrial countries could create a wave of new

investment which I think they could certainly pay for and probably should pay

for but will also help us in the longer term goal of limiting climate change. I am

not saying emerging markets don’t have a role. We obviously have to move

towards greener technology as we make new investment but in terms of

replacement of old investment, industrial countries may have a bigger role to

play especially because they bear more responsibility for the carbon that is out

there.

33. I would also argue that apart from this increasing investment, we also

have to be very cognizant of the limits of monetary policy, which we have

been less careful about in last few years. I would argue that with very low

interest rates, distortions increase and you may not get the desired effects.

Cutting interest rates so low may have consequences that we don’t fully

understand and one has to be very careful about sustained, unidirectional,

unconventional monetary policy. That also means that when a country

embarks on this, we need more rules of the game. Today the country just

looks at whether it makes sense for itself because all central banks have only

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domestic mandates. We don’t look at what happens across the world when we

have a particular policy. We only look at it indirectly in the sense that if I do

damage to some other country across the world and that country imports less

of my stuff that is going to be a problem. That is the indirect way we take into

account what the effect will be but we don’t take into account the direct

effects. I would argue going forward in this inter -connected world because

capital is so fungible across borders, because it moves with rapidity across

borders, monetary policy in large countries affects everyone. Therefore,

increasingly we should discuss what the effects of our policies are on others

and figure out a way that we limit the long term spillover to other countries. We

need rules of the game which tell us what is allowable what is not allowable

and we need an impartial umpire in the world to say whether your policies are

doing more damage than good or your policies are ok. That makes rethinking

global financial architecture in a way that satisfies everyone and puts us on a

better path. Happy to elaborate in the discussion.

34. Lastly, we need better growth of safety nets. Let’s assume we can’t do

anything about monetary policy. Countries can do what they want but this

global capital going into a country and then rushing out creates enormous

problems for countries in terms of their ability to handle that kind of capital.

Many countries need liquidity at times when the capital is rushing out but the

global system is not well designed to provide that liquidity. Yes we can go to

IMF but countries have big political problem in going to the IMF. They typically

go too late for the kind of support that they need. Could there be better global

safety nets without the kind of stigma that is there in approaching the IMF?

Could central banks for example work out inter central banks swaps that

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would work to boost the country that is in trouble and help it negotiate

difficulties. For example we have a swap arrangement with Japan and we also

have swap arrangement with Sri Lanka. Sri Lanka actually called on the swap

in order to deal with temporary difficulties that it had. We lent it USD 1.5

billion dollars. The point is, could this be a more generalised arrangement

without neighbours having to look for themselves but also have the

international community work together to provide these lines. Again I would

be happy to talk more about this in the discussion.

35. Lastly, in this global economy which is getting integrated in ways that were

unimaginable only a few years ago, there is a sort of vacuum in terms of

global governance. Historically, United States provided the kind of leadership

creating the kind of institutions. Of course we all have questions sometime

about whether those institutions were impartial and so on, but nevertheless

the global governance had an entity thinking about what had to be done next.

We find that no longer do we see a kind of consensus on how to navigate,

how to govern global arrangements. There is a vacuum. United States having

got entangled outside more than it desired, is perhaps backing away little bit

from driving change. And emerging markets which have gotten a lot bigger

have not stepped forward to fill that vacuum. Europe is very focused on its

internal problems and as a result nobody really is looking after the global

economy. So the question is, are the emerging markets, who clearly are going

to be playing a bigger part of the globe going forward, willing to take more

responsibility? Willing to take more responsibility in determining the agenda

for global governance? We always keep talking about quota in the IMF, in the

World Bank, about governance reform and so on and so forth. That certainly is

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important but we also need to provide ideas to the world about how we want it

to change and that is where we are lacking. Our think tanks, our universities

have to step up to the plate to give our ideas to the world. How do we want the

world to look? Thus far we are much more reactionary. The agenda is set in

Washington or in Frankfurt or in London and then agenda comes to us and we

react to it. But we rarely set the agenda. It is time that as we grow bigger, we

set the agenda which means we think more global responsibility so we also

build capacity in our countries to provide the ideas that the global economy

needs.

36. So bottom line is lots of demand for growth. Policies that add to global

growth would be better but we haven’t really discovered those policies. May

be they’re around the corner but we have largely succumbed to policies that

shift growth from one country to another. We’ve stayed away from

protectionism, but that is not something that we can be reassured about, if we

have more years of slow growth we may descend into that. We certainly have

descended into comparative easing across countries. Comparative monetary

easing attempts to depreciate the exchange rate and at this time when each

country has significant problems, it is not willing to forego these policies. So

this is in a sense, a plea for discussion of what is globally optimal. Let’s try

and work on how we manage that and that requires not just the industrial

countries rethinking what they are doing but emerging markets rethinking how

they can play a more constructive role in the global economy.

Thank you

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