and push factors. the pull factors are the promising growth prospects of emes, their declining trend rates of inflation, capital account liberalization and improved governance. the push factors are the easy monetary policies of advanced economies which create the capital that flows into the emes. what this says is that international capital flows comprise a structural component and a cyclical component. it is the cyclical component that typically causes all the adjustment problems for emes. 15. that said, the multi - speed recovery around the world and the consequent differential exit from accommodative monetary policy has triggered speculative capital flows into emes. the biggest problem thrown up by capital flows is currency appreciation which erodes export competitiveness. intervention in the forex market to prevent appreciation entails costs. if the resultant liquidity is left unsterilized, it fuels inflationary pressures. if the resultant liquidity is sterilized, it puts upward pressure on interest rates which, apart from hurting competitiveness, also encourages further flows. 16. currency appreciation is not the only problem arising from the ultra loose monetary policy of advanced economies. speculative flows on the lookout for quick returns can potentially lead to asset price build up. the assurance of advanced economies to keep interest rates “ exceptionally low ” for “ an extended period ” has also possibly triggered financialization of commodities leading to a paradoxical situation of hardening of commodity prices even as advanced economies continue to face demand recession. hardening of commodity prices has affected those emes which are net importers of commodities. 17. managing capital flows should not be treated as an exclusive problem of emes. in as much as lumpy and volatile flows are a spillover from policy choices of advanced economies, the burden of adjustment has to be shared. how this burden has to be measured and shared raises both intellectual and practical policy challenges. the intellectual challenge is that we do not have a good theory that explains the role of capital flows in the determination of exchange rates. we, of course, have an established theory of current account management and the role of exchange rate as a variable in that. what we now need is a theory that encompasses both current and capital accounts and one that gives a better understanding of what capital controls work and in what situations. that is the intellectual challenge. what is the practical challenge? the practical challenge is that once we have such a theory, we need to reach a shared understanding on two specific aspects : first, to what extent are advanced economies responsible for the

are distilled out, two main worries emerge : first, that countries are not able to resolve their conflicts of interest, and second that at the world level we are bogged down by the tyranny of the present and are not able to resolve the balance between medium term sustainability and short term compulsions. 5. these concerns are valid, but the judgement on g - 20 is perhaps harsh. the global problems we are facing today are complex and not amenable to easy solutions. many of them require significant and often painful adjustments at the national level, and in a world divided by nation - states, there is no natural constituency for the global economy. at the same time, the global crisis has shown that the global economy as an entity is more important than ever. we cannot afford a situation where decisions essential for global prosperity become hostage to domestic concerns. 6. against this background, and keeping in view the vast sweep of this conference theme, what i propose to do in this inaugural address is to highlight the frontier issues on the present day global agenda and emphasize how we cannot resolve them without global cooperation. multi - speed recovery 7. by all accounts, the world has recovered from the financial meltdown and the follow on recession much sooner than we had feared at the depth of the crisis. in its latest world economic outlook ( weo – october 2010 ), the imf projected global growth for 2010 of 4. 8 per cent ; this marks a surprising upward revision from its earlier projection of 4. 6 per cent. this remarkable turnaround in outlook masks some significant geographical variations in the recovery process. emerging market economies ( emes ), contributing nearly half of this growth, have clearly been the engine of this recovery. world trade which shrank by 11 per cent in 2009, is projected to expand by 11. 4 per cent in 2010, again powered by import demand of emes which is rising twice as fast as that of advanced economies. 8. on the other hand, in advanced economies, there are growing concerns about the slowing momentum of recovery, stubbornly high rates of unemployment and persistent output gaps. although specifics vary, the g - 3 – america, europe and japan – are caught in fierce policy debates on stimulus and exit strategies. at the heart of this debate are two issues that pit the short - term against the medium term : first, whether additional fiscal stimulus at this stage will jeopardize medium term fiscal sustainability ; and second, whether continued expansionary monetary stance