Duvvuri Subbarao: The global economy and framework
Intervention by Dr Duvvuri Subbarao, Governor of the Reserve Bank of India, at the G20
Ministerial Meeting, Washington DC, 15 April 2011.
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Chairperson, Finance Ministers and colleague Governors,
1. After its very successful efforts at a coordinated response to the challenges
emerging out of the recent unprecedented global financial crisis and safeguarding the
process of economic recovery, the G-20 is now turning to the more challenging task of
addressing structural imbalances in the global economy. India has had the privilege of
cochairing, together with Canada, the G-20 collective effort towards drawing up a Framework
for Strong, Sustainable and Balanced Growth. The success of this initiative is critical for a
durable global economic recovery and for better global economic and financial governance.
Importantly, the success of this initiative is also critical for the credibility of the G-20 and its
ability to forge a consensus in non-crisis situations.
2. At the Seoul Summit last November, the leaders of G-20 tasked us to formulate
indicative guidelines for the identification of persistently large imbalances requiring corrective
action, including their root causes and impediments to adjustment. Earlier this year at Paris,
we decided to break up the exercise into an integrated two step process. For the first step,
while agreeing on a set of indicators, we resolved to firm up indicative guidelines against
which each of these indicators will be assessed to identify persistently large imbalances by
our next meeting in April. We now need to finalize these guidelines and move on to the
second step of the exercise. Presumably, this would focus on root causes, impediments to
adjustment and corrective policies and actions.
3. Having set the context, I would now like to make four comments.
4. First, the IMF is doing a commendable job in providing timely technical inputs for our
exercise. Developing the indicative guidelines requires selection of reference values or
norms for each indicator, as well as rules to guide the assessment of the indicators against
the norms or reference value to determine if imbalances are large. This has been done using
two different methodologies - structural and statistical. While the IMF's preference is for the
structural approach because of its theoretical consistency, given the inherent fragility and
contestability of econometric estimates that can deviate sharply from the observed data, the
Framework Working Group has designed a method that combines these two approaches.
The question we need to consider is whether there is consistency between the results of the
statistical and structural approaches. If not, how do we deal with the divergences?
5. Second, in the first stage of the exercise, the criteria applied to the systemically
important countries have been more stringent. The screening however has been largely
mechanical though, based as it was, mainly on deviations from the mean or median. There
has been no analysis, however, to check whether such deviations indeed constitute large
and systemic imbalances warranting corrective action. Such a mechanical approach, without
the application of mind, can lead to anomalies. Let me give two illustrations of the type of
potential anomalies using India as a case study.
6. Large deviations from the mean is the criteria adopted for screening in on the basis
of private savings irrespective of whether the country concerned is running a current account
deficit or a current account surplus, or its stage of economic development. If, for the sake of
argument, such a country was running a current account deficit and adjusted its private
savings downwards, it would need to expand its current account deficit and then get
screened in by the external imbalance indicators. In India, for example, our growth has been
driven by domestic savings. If because of the mutual assessment process (MAP), India was
asked to reduce domestic savings, it will increase our dependence on foreign savings,
actually adding to imbalances. This would indeed be paradoxical.
7. The second illustration is the treatment of public debt. Instead of deviations from the
mean/median, what was attempted was deviations from asymmetric reference values for
developed and developing countries, with higher thresholds for developed countries. These
thresholds are based on historic averages rather than on current assessments of debt
sustainability related to expected or projected growth rates. The adjustment period to
stabilize the debt is also very backloaded. The year 2030 is long-term enough, and to
paraphrase the immortal words of Lord Keynes, many of us here may well be dead. One
reason why the fiscal balance in advanced countries is so important to the global economy is
that by virtue of being reserve currency issuing countries their deficits have large spillover
effects.
8. There are two issues here. First, there is no justification for using different debt to
GDP ratios for advanced countries and emerging and developing countries (EMDCs). If we
take a forward looking view, it will be easily apparent that EMDCs will need to raise public
debt to finance their development and in relative terms their public debt as a proportion of
GDP will need to be higher than that of advanced countries. Second, the debt sustainability
of countries should be evaluated not on some global norms, but with reference to individual
country context. To what extent countries will be able to finance the servicing of their debt
through higher growth should be built into the evaluation. Furthermore, the nature of debt has
to be kept in view. For example, in India our public debt is predominantly domestic and
therefore India's potential to influence global systemic imbalances because of public debt is
negligible if not nil.
9. The third comment I want to make has to do with how we are interpreting the intent
of our leaders which was to focus on persistently large imbalances. The question I would like
to raise is whether we should dissipate our energies in the second step by looking at all large
imbalances, or focus instead only on large, systemically important imbalances that have
significant spillover effects. Is it so difficult to identify the latter through a simple statistical
exercise such as country imbalances as a proportion of total imbalances or global GDP? This
way we can focus our attention on the root causes of persistently large imbalances and
impediments to their adjustment as mandated by our leaders?
10. That takes me to my fourth and final comment. A question has arisen whether the
Framework exercise should be looking at only net imbalances of countries or also at
intracountry or intra-regional imbalances, as appropriate. The critical question to my mind is not
whether imbalances are internal or external, or gross or net, but whether the concerned
imbalance generates, or has the potential to generate, significant external spillovers affecting
the wider global economy.
11. In conclusion, let me say that an effective outcome is needed to provide a signal that
the G-20 is not only serious in ensuring strong, sustainable and balanced growth for the
world economy going forward, but that it is, and it intends to remain, an effective and relevant
institution for addressing current structural problems in a fast evolving global economy.
Thank you.