duvvuri subbarao : global challenges, global solutions – some remarks lead intervention by dr duvvuri subbarao, governor of the reserve bank of india and leader of the indian delegation at the international monetary and financial committee ( imfc ), international monetary fund, washington dc, 16 april 2011. * * * mr. chairman 1. recent experience suggests that globalization offers incredible opportunities but also poses immense challenges. if the years before the global financial crisis – the period of the so called “ great moderation ” – demonstrated the benefits of globalization, the devastating toll of the crisis showed its costs. just as in the case of an economy, there are price setters and price takers, in the international economy too, there are economies which shape the forces of globalization and those that have to shape their policies to adjust to those forces of globalization. the post - crisis reform effort – whether here at the imf or at the other global fora such as the bcbs, fsb, wto – is all aimed at managing the forces of globalization for maximizing our collective welfare. for these reforms to be sustainable, it is important that they are even handed as between those who shape the forces of globalization and those who have to adjust to the forces of globalization. emes in the global context 2. before i get to specific issues, let me make a brief comment on emes in the global context. the shift in the global balance of power in favour of emes is by now a familiar story. it may be useful to put some numbers around that. setting gdp at 100 in the base year of 2000, against the aggregate growth of 17 per cent in the decade 2000 – 10 of advanced economies, emerging market and developing countries ( emdcs ) grew by 82 per cent and brics ( brazil, russia, india, china ) by a whopping 127 per cent. when we look at shares in global gdp, the share of advanced economies in the global gdp dropped from 80 per cent in the year 2000 to 67 per cent in 2010, with a mirror increase in the share of emdcs. 3. 2010 was a year of recovery, and emes powered this by contributing to nearly three quarters of global growth in 2010. emes were also the motive force behind the estimated expansion of world trade by 12 per cent last year, an impressive reversal from shrinkage of 11 per cent in 2009. 4. these trends have an interesting implication for the decoupling

to be shared raises both intellectual and practical challenges. the intellectual challenge is to build a better understanding of the forces driving capital flows, what type of policy instruments, including capital controls, work and in what situations. the practical challenge is the need to reach a shared understanding on an organizing framework for cross border spillovers of domestic policies in capital - originating countries, and the gamut of policy responses by capital receiving countries. 9. managing capital flows involves two important things. first, we need to make a judgment on how important the externalities are. and, second, we need to make an objective assessment of what combinations of policies may be used to minimize their impact. now that it is broadly accepted that there could be circumstances in which controls can be a legitimate component of the policy response to surges in capital flows, policymakers must have the flexibility, and discretion, to adopt macroeconomic, prudential and capital account management policies. importantly, they should be able to do so without a sense of stigma attached to particular instruments. framework for the adjustment process 10. let me now move on to the third issue which is the framework for the adjustment process to secure and preserve global financial stability. the adjustment process should ensure that individual actions of countries add up to a coherent path forward. i want to emphasise two aspects of this. first, the imf ’ s surveillance function is critical – it assumes a vital, pre - emptive role in preserving global and national stability. the forthcoming triennial surveillance review provides an opportunity to take stock of the steps taken and to assess recent experience, including the adequacy of the legal framework for surveillance. second, reserve accumulation has to be viewed in the context of economic growth and development. the insurance that reserves provide against sudden stops and reversals of capital flows far outweigh the opportunity costs of holding reserves. the experience of the crisis has amply demonstrated this. what constitutes an adequate level of reserves is a country - specific question, involving a judgment based on practical experience. clearly, there can be no “ one - approach - fits all ” to such assessments. bis central bankers ’ speeches global reserve currency 11. my fourth point relates to a global reserve currency. the recent crisis has brought home the complex challenges arising from the world having a single reserve currency. in the ongoing search for solutions, one option is to have a menu of alternative reserve currencies which fulfill the required criteria – full convertibility ; the exchange rate determined by market fundamentals