Speeches / Statements
Keynote Address by Minister of State Dr. Shashi Tharoor at the RIS-Japan Economic Foundation Symposium
24/09/2009
‘ Under economic crisis, how should Asia promote further economic integration’
I would like to thank you, Dr. Sengupta, for inviting me to deliver the keynote address at the inaugural session of the International Symposium on the theme ‘under economic crisis, how should Asia promote further economic integration’. I take this opportunity to compliment RIS and the Japan Economic Foundation for organising this symposium. Over the years, RIS has played a significant role in exploring the future directions of our foreign economic policy and today's Symposium is yet another significant contribution to this effort. I welcome the collaboration of our Japanese friends in this RIS endeavour. The Japan Economic Foundation, since 1981, has done admirable work in building cooperation with their counterparts in Asia and elsewhere. The partnership of RIS and Japan Economic Foundation for this Symposium is both timely and important.
Even as we meet in New Delhi today for this Symposium, the Summit of G-20 will begin later today in Pittsburgh. Prime Minister Dr. Manmohan Singh in a statement yesterday prior to his departure to attend the G-20 Summit mentioned, inter alia, that he was looking forward to exchanging views with several of the leaders who will be present including the new Prime Minister of Japan H.E. Yukio Hatoyama.
Developing a perspective on the future of Asia during and after the current global financial and economic crisis is a daunting task. “The future is never what it used to be”. However I believe that, given the professional background of both the RIS & the Japan Economic Foundation, the two organisations are eminently qualified to do so. In a way, the current crisis has questioned the very assumptions underlying the global economic order as we have known it since the end of the Second World War. Not only was this evident in the failure of analysts to understand the genesis and the nature of the gathering crisis but also in the realisation that the path to global recovery would be quite different from the recovery from earlier recessions. Even before the current crisis burst upon us, the non-sustainability of the global macro-economic imbalances was looming larger by the day. The pressure on the dollar, the low savings and high consumption in the western markets, shift of the manufacturing sector and some services to developing economies especially Asian, and the high agriculture subsidies in the western economies were the underlying causes for these growing imbalances. In addition, volatile food and oil prices, and mitigation and adaptation challenges created by global warming ensured that the dimensions of this crisis were different. The challenge of coping with the diverse manifestations of this crisis is compounded by that of a perceived need to strengthen international financial institutions and make them more effective. It may be recalled that the G-20 Summit in London agreed to mobilize additional financial resources for these financial institutions largely to sustain growth in emerging markets. So, in a manner of speaking, we are - practically - having to rewrite our textbooks.
The sudden financial and economic meltdown in the west was the result of the failure of global regulatory and supervisory mechanisms; excessive speculation and greed (“casino capitalism”); and ideological preconceptions of the most powerful actors and policy makers (‘market fundamentalism’) mainly in the developed countries. Originating in the US sub-prime housing sector meltdown, the toxic assets were exported to Europe and the rest of the world.
The crisis spread to emerging economies through capital and current account routes of the balance of payments (BoP). The effect of the financial crisis on emerging economies thereafter was mainly through reversal of portfolio flows due to unwinding of stock positions by Foreign Institutional Investors (FIIs) to replenish cash balances at home. Withdrawal of FII investment led to stock market crash in many emerging economies and decline in the value of local currency vis-à-vis US dollar, as a result of supply-demand imbalances in domestic markets. Together with slackening global demand and declining commodity prices, it led to fall in exports, thereby transmitting the financial sector crisis to the real economy. Countries with export-led models of growth and those dependent on commodity exports were more severely affected. The direct impact of the financial crisis on the Asian financial market has been limited because Japan, Korea, Taiwan, China, and Singapore have relatively less toxic assets in the US financial market. However, indirect impacts have been significant, with large GDP contractions witnessed in Japan, Korea, Malaysia, Thailand, and Singapore, whereas countries such as India, Indonesia, and Vietnam are facing smaller GDP contractions. Job losses in Asia have been enormous.
The crisis brought to an abrupt end the surge in private capital flows to developing countries that had occurred during 2003-07. In 2008, total net international flows of private capital to the developing world fell to $707 billion (4.4 percent of developing-country GDP) from the record high level of $1.2 trillion). The downturn affected all developing regions in various degrees, with the exception of the Middle East and North Africa, where flows increased slightly. Emerging Europe and Central Asia were the hardest hit, accounting for half of the $451 billion decline in capital flows.
The Indian economy was not significantly affected by the global financial crisis in the initial stages, which had set in around August 2007. In fact, the initial effect of the global financial crisis was positive, as India received huge FII investment inflows of US$ 22.5 billion during September 2007 to January 2008, as against US$ 11.8 billion during April-July 2007. In its more intense phase, the global financial crisis spread to India through capital and current account routes of the balance of payments (BoP). The extent of reversal of capital flows from India was US$ 15.8 billion during five months following the end of “positive shock” period in January 2008 and the monthly export growth became negative after July 2008 and import growth became negative after August 2008.
Yet, the overall Balance of Payment situation remained resilient despite signs of strain in the capital account. India’s GDP growth was 6.7 per cent in 2008-09. The first half of 2008-09 saw the Indian economy recording a growth of 7.8 per cent in GDP, despite the build-up of uncertainty in the international commodity and financial markets. Among the domestic growth drivers, gross fixed capital formation (GFCF) retained some of its momentum from the preceding years with a growth of nearly 11 per cent. In the second half of 2008-09, GDP growth declined to 5.8 per cent, with a further decline in private consumption growth to 2.5 per cent and a significant moderation in growth rate of GFCF to about 6 per cent over the corresponding period of 2007-08. However, the Government of India adopted a pro-active fiscal policy with the roll-out of two rounds of fiscal stimulus packages. As a result, the growth in government final consumption expenditure shot up to nearly 36 per cent, partly making-up for the shortfall in other components of the domestic aggregate demand. The overall GDP growth for the fiscal 2008-09 at 6.7 per cent surpassed all estimates and forecasts, made by international agencies and analysts, mostly ranging from 5.5 per cent to 6.5 per cent.
The crisis is abating somewhat but the prospects remain uncertain. On the positive side, emerging and developing economies are projected to regain growth momentum during the second half of 2009, albeit with notable regional differences. Growth projections in emerging Asia have been revised upward to 5.5 percent in 2009 and 7.0 percent in 2010. The upgrade is the result of improved prospects in China and India, in part reflecting substantial macroeconomic stimulus; and a faster-than-expected turnaround in capital flows. There are signs of the crisis bottoming out: industrial production has either stabilized or is expanding, global trade is picking up, and financial market stress has reduced.
However, let me emphasize that despite the positive trends I have talked about, significant downside risks remain. The consensus in the recent G20 Finance Ministers meet was that unless the recovery is secured, the measures need to be continued. The path and timing of exit strategies will be crucial. Nationally contextualized and yet globally concerted exit strategies will determine the recovery path in the medium term. Cohesive and well-coordinated international action is an urgent requirement. The massive stimuli packages also have the potential of building steam for inflationary pressures, if not handled properly.
The other set of challenges lies in the financial sector. The pace of recovery is crucially dependent on the repair of the balance sheet of impaired financial institutions in the developed world – especially the issue of cleaning up the toxic assets. Structural reforms in the financial sector, financial inclusion and completing the set of financial reforms outlined in the London G20 Summit declaration will be crucial. Being capable of monitoring the global economy and having forward looking forecast tools to give early warnings of any build-up of crisis will be essential.
The continuing resilience of Asia would depend on how well it manages the regional integration process. Asia's export-led growth model, centred on US and European markets in recent decades, can no longer be relied upon to sustain the region’s economic growth beyond the crisis. Consumer spending in US will remain sluggish over many years to come and this will be a structural phenomenon, not a temporary one. Asia will need to shift the current export-led production structure away from the advanced economies to the regional market in the medium to long-term; it certainly means calibrated and synchronized decision-making in Asia about reorientation of its export destination with production decisions. A fundamental rebalancing towards domestic demand is needed if Asia wants to preserve the high growth rate that has characterised its recent past.
How is this rebalancing to be carried out in Asia? This is an important but a complex question for the reasons stated above. It requires forethought, considerable planning and technical expertise and - if I may say so - enlightened self-interest. Asia, today, has the intellectual and financial wherewithal to carry out this rebalancing - having learned the right lessons from the Asian financial crisis of 1997-98. As I can see, the Asian leaders are alive to both the opportunity and the challenge.
In order to promote further economic integration, Asia clearly needs to go beyond the ASEAN Free Trade and Investment Area. In this connection, India has recently concluded FTAs with ASEAN and Korea and similar arrangements are being negotiated with other East Asian countries: India is, also, negotiating with ASEAN an agreement on services and investments which it hopes to conclude in the near future. Currently, there is an array of overlapping bilateral and plurilateral free trade agreements in the region which could be taken to a higher level of economic integration. These include the South Asian Association for Regional Cooperation (SAARC) which now has 8 member countries and which, we believe, can effectively promote regional economic cooperation and integration in the South Asian region. Even while re-starting the Doha round, the Asian leaders envisage an Asia-wide economic partnership agreement. At the forthcoming East Asia Summit in Thailand in October, 2009, the leaders of the participating countries would be presented a blueprint for realizing a Comprehensive Economic Partnership in East Asia (CEPEA); an important decision has been taken by the East Asia Summit Economic Ministers’ meeting, in August this year, in Bangkok to discuss the recommendations on this at the Senior Officials level.
Financial cooperation and integration is another area for swift action; the Chiang Mai Initiative has been welcomed as it creates a framework for multilateralised currency swaps between ASEAN Plus Three grouping (ASEAN, ROK, Japan and China). Cooperation in the banking sector is a focus of East Asia Summit member countries. Trade integration and facilitation, especially encouragement for the small and medium-sized firms, is again another area whose potential is being recognized. Sustained economic growth, with national emphasis on poverty alleviation, needs to be the priority for all Asian countries and our collective endeavour should never lose focus on it; this is also necessary for creating national demand in our times of weak external demand. We need to make considerable collective effort for skills development, especially involving the less advantaged sections of the local community in both urban and rural areas. Infrastructure development is again a major area for pan-Asian co-operation and the work carried out presently needs to be considerably scaled up; an example coming straight to mind is the proposed Delhi-Mumbai Corridor where Japan is playing such a crucial role. India, too, needs to play a more active role than hitherto. It goes without saying that our collective pan-Asian effort should be to ensure that the competitiveness of Asian products and services remains strong.
If I may say so, given the magnitude of the problems, the Asian countries need to fast-track these processes. The leaders have welcomed the decision of the Economic Research Institute for ASEAN and East Asia (ERIA), ADB and the ASEAN Secretariat to work together to prepare, as soon as possible, a coherent master plan for upgradation of sub-regional development initiatives.
Prof. Sengupta,
Mr. Hatakeyama,
Distinguished participants.
With these words, I will conclude by saying that in the Ministry of External Affairs we look forward to the deliberations of this symposium and their outcomes. I wish you all success in these very important discussions you will hold in the next two days.
Thank you!
New Delhi
September 24, 2009