Inaugural Statement by H.E. Mr. Pranab Mukherjee at RIS’s Silver Jubilee Conference on ‘Financial Crisis, Global Economic Governance & Development’

February 6, 2009; 1000 hrs

Dr. Arjun Sengupta, Chairman, RIS

Your Excellency Mr. Haruhiko Kuroda, President, Asian Development Bank

Ambassador K. Kesavapany, Director, Institute of Southeast Asian Studies, Singapore

Dr. Junko Chano, Executive Director, Sasakawa Peace Foundation, Tokyo

Shri Hardeep Puri, Secretary(ER), Ministry of External Affairs

Dr. Nagesh Kumar, Director General, RIS

Distinguished participants of this High Level Conference
Ladies and Gentlemen

I am pleased to be with you this morning to inaugurate this high level conference on ‘Financial Crisis, Global Economic Performance and Development: Responses of Asia and the Global South’ being organised by RIS in collaboration with a number of eminent think tanks and international organisations. It is entirely appropriate that India’s premier policy think tank on international economic issues should mark its silver jubilee with an international conference bringing together leading officials and reputed experts from around the world to deliberate upon the current financial crisis affecting all countries of our planet.

2. On this occasion, I also pay tribute to the late Shri G. Parthasarathy, a distinguished son of India and the founder of RIS. Your organisation has, over these years, acquired a well-deserved reputation of an internationally acclaimed think tank, particularly in the South, which has made significant contribution to policy debates within India and abroad. In areas such as regional economic integration in Asia and multi-lateral negotiations, RIS has done pioneering work. You have, truly, given concrete shape to Shri Parthasarathy’s vision. My congratulations to you, the staff and the faculty on your jubilee!

3. The current financial crisis, had its origins in the sub-prime lending sector in the United States and witnessed the collapse of the banking system in the West. It is, as former US Federal Reserve Chairman Greenspan has put it, “a once-in-a-half-century, probably once-in-a-century type of event”. Before this crisis which erupted in full fury last year, the major global economic problems requiring urgent attention were rising food, commodity and fuel prices and the attendant complications arising from the growing threat of global warming.

4. The speed and ferocity of this crisis does not indicate any signs of abating. There are still no indications as to how it will progress and as to when it will bottom out. Last week’s release of the ‘World Economic Outlook’ by the IMF predicts that 2009 would see the lowest world growth, since Second World War, of 0.5% which means that the global economy will practically stall; asserting that “uncertainty surrounding the outlook is unusually large”, IMF had predicted 2.2% growth for 2009 just three months ago! The World Bank President has stated that the economic crisis has “already pushed an estimated 100 million people back into poverty.”

5. As the debate rages about the ways to restore the health of the global economy, the basic tenets of economic theory, as formulated since the 1990s, are being set aside: as a Nobel Prize-winning economist put it, “there was a mystique to the idea that market participants knew the price to put on this or that risk”. The conventional pre-suppositions have been undermined by the loss of faith in the banking institutions – particularly in the developed economies. The international community is acutely aware that, whilst maximizing individual national strengths, collective action needs to be taken at the earliest to avoid the horrors of the Great Depression of the late 1920s and the 1930s.

6. The course of the current crisis would, also, profoundly alter the structure of the global economy and have far-reaching implications for the future governance of the world: sovereign wealth funds have injected more capital into the emerging markets than the IMF and the World Bank combined. First, the structure of global economic governance would need to be changed profoundly with major developing economies having a say in it; failure to create a new architecture would lead countries towards competitive monetary policies and new investment barriers, increasing the potential for global market fragmentation. Second, as the G-20 Summit Declaration in Washington states, far greater economic coordination – at regional and global levels – would be needed to be achieved about the movement of capital. Last and not the least important, the aid and trade flows to the developing world must be maintained, as the Prime Minister said in his intervention at the Summit, to help stabilize the situation there where the vast majority of the world population lives.

Distinguished Participants, Ladies & Gentlemen

7. As this is a watershed moment in the history of the modern world, we need to think hard about the shape of its future. The global financial institutions need to put more resources for the developing countries in the rural economy, build social infrastructure and connectivities and to strengthen local communities. The resources must be put in institutional capacity-building and skills’ development. It should be a veritable Marshal Plan for the economic uplift of the poorest sections of societies world-wide. To me, there is a necessity, once again, to revisit Gandhian economics with its emphasis on rural self-help and sustainable economic development. Anything contrary would be disastrous.

8. The current crisis may well accentuate the trends which are already evident. The growth rates, as stated in the recent IMF report, in the developing world remain positive even if lower than the earlier projections: the developed countries’ economies would experience a contraction by 2% - the first annual contraction after 2nd World War. In a decade or so, the South may well account for more than 50% of the world income in purchasing power parity terms and more than 50% of the world trade, savings and investment as well as labour force and capital. According to the US National Intelligence Council (NIC), China and India are expected in 10 years to achieve near parity with the US in two different areas: scientific and human capital (India) and government receptivity to business innovation (China) and that the two countries will narrow significantly but not close the gap with US in all remaining factors.

9. India’s per capita income, according to the recent survey, doubled in the last seven years, the sharpest rise being in the last five; inflation adjusted rise in per capita income would be 50%. After an average 9% growth in the last five years, we expect the economy to grow at 7% in the current fiscal despite the global economic downturn. As the next year’s outlook is more downbeat, the Government has taken a number of measures to inject liquidity, bring down the cost of borrowing and stimulate demand through fiscal measures; when necessary, the Government will take further steps to ensure that labour intensive sectors are less adversely affected.

10. I find it most difficult to subscribe to the thesis that the current economic crisis is due in part or in its entirety to high savings rate in Asia. The savings rate in US fell from around 10% of the disposable income in the 1970s to 1% after 2005. The current circumstances make it imperative for the developing countries to enhance regional cooperation to mitigate the adverse impact of this crisis. We have the capability to do so and we need to be creative in our cooperation.

11. Asian regional cooperation structures have evolved significantly in recent years with important geo-political portents. India attaches great importance to deepening and diversifying South Asian Cooperation and with ASEAN. SAFTA symbolises the progress in regional free trade area. At the same time, ASEAN has made significant progress in regional economic integration. A regional financial architecture, drawing upon the high currency balances in Asia, would mitigate the severity of the economic crisis for us. The Chiang Mai Initiative is a major step which itself occurred in the wake of 1997–98 Southeast Asian Economic Crisis: several other variants can be thought of. A regional coordination mechanism can also help in better surveillance so as to prevent further crisis by taking timely action. We, in Asia, have the capacity to undertake significant contra-cyclical steps to drive the economy forward on the strength of the domestic demand by investing more on infra-structure, on labour intensive sectors and on the improvement of the social safety net.

12. Finally, I am confident that this Conference provides an excellent platform for exchange of views and will throw up ideas which would be valuable as inputs to policy makers. I wish your Conference every success.

Thank you!