Transcript SAARCFINANCE and Reform of Global and Regional Financial

SAARCFINANCE and Reform of
Global and Regional Financial
Architecture
Ramgopal Agarwala
Distinguished Fellow,
RIS
E-mail: [email protected]
February, 24, 2011
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SAARC in the context of theory
of regional public goods
• The theory: regional co-operation best
when the region is facing some common
threat or can exploit a common
opportunity.
• The current financial crisis creates an
external threat as well as an opportunity
which can be used to enhance regional
co-operation.
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Oxygen-Tent Recovery in the North
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For much of the first decade of 21st century, the US and several
other countries in the North have been living beyond their means.
Warnings, among others, by Larry Summers were ignored. The
inevitable fall came.
Disastrous economic performance in the first twelve months after
collapse of Lehman Brothers. Worse than that of the Great
Depression. Drama not yet over.
Trying to solve solvency problem by unbridled liquidity creation.
Modest recovery with serious downside risks:
- Continued high rate of unemployment rate with adverse effect on effective demand and future
productivity.
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Weak financial sector with losses not yet fully worked out.
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High sovereign debt risks
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Dismal outlook on real estate sector
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Carbon constraint
Medium/long-term future may be not very different from that of
Japan’s in last two decades: 1-2% annual GDP growth
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Vibrancy in South Asia
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Global crisis no more than a blip for South Asia. Modest slowdown
followed by rapid recovery.
Emerging as the fastest growing region, surpassing East Asia
Fundamentals favorable for sustained rapid growth:
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Demographic advantage of relatively younger population
High level of internal savings and surplus savings in several neighboring Asian countries.
Increased opportunities for trade in services, which could be an area of comparative
advantage for South Asia
Relatively large space in any carbon-emission budget that may be defined globally and
opportunities of having a relatively clean slate for developing low-carbon economies.
Headroom (i) for growth in labor force participation rate, (ii) for increasing educational
content of labor force, (iii) for acquisition of technology from abroad, and (iv) for marketoriented reforms in domestic, regional and international arena.
If the current dynamism can be maintained, prospects of reaching
developed country status by the middle of this century provided there
is sustained policy reforms at national and regional level and
supportive external environment. Accelerated process of
convergence in income of South Asia with that of the developed
countries will mean fulfillment of G20 endorsement of the
convergence theme in Pittsburgh in 2009.
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Shared risks from external
environment
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Risk of Slowdown in Exports to Developed Countries
– Slow growth in developed countries
– Risks of reduced elasticity of imports w.r.t. income
– Rising protectionism
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Risk of Slowdown in Long-term Capital Inflows
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Risk of Hot Money Flows and Dollar Crisis
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Measures to Mitigate External
Risks
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Further Liberalization in Exports of Goods and Services to Asia
and Meeting Infrastructure Deficits
Mobilizing Resources for Funding ‘financial viability gap’ in
Infrastructure Investments
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Reforming International Financial Architecture for Reducing Hot
Money Flows and Mitigating Risk of Dollar Crisis
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Designing Pan-Asian regional financial architecture for providing
balance of payments support and concessional funds for
infrastructure investments
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Growing Consensus on Reform of
International Financial Architecture
• Support from the UK, Germany, France, Italy,
Russia and China
• Stiglitz Commission Report under UN auspices.
A key point:
– “If the international agency in charge of creating global reserves is issuing the
global currency there is no need for “backing” for the global currency, except the
commitment of central bankers to accept it in exchange for their own
currencies.”
• Support from US experts such as Fred Bergsten
and Brookings Institution in a IMF sponsored
seminar
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Need for Consensus-Building on Pan-Asian
Financial Architecture
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Present programs limited in coverage and scope. Ineffective
Need for Pan-Asian coverage to maximize complementarities
– Energy and water resources
– Financial resources
– Demographic complementarities: ageing population in one part and young
population in the other
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Present programs do not provide either the funds or the institutional
mechanism for BOP support or infrastructure investments
Need for a Reserve Bank of Asia to provide institutional mechanism and
create a parallel regional currency (an Asian SDR) to provide BOP support
and create seigniorage to fund regional public goods
Multi-reserve currency system has precedents and is viable today.
Win-win outcome for surplus and deficit countries in the region as well as
the developed countries.
– Three benefits for the surplus countries: (a). better and more secure returns on
reserves; (b). relief from pressures for revaluation; and © increased exports for
infrastructure investment in rest of Asia.
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Need for consensus on benefits and strengthening of political will
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Role of SAARCFINANCE in Accelerating
Reforms of Global and Regional Financial
Architecture
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SAARCFINANCE mandate allows activism on global and regional financial
architecture
The common risks from external environment and opportunities for common
action provide text book validation for regional action for providing regional
public goods fro benefit of all countries, large or small. Can introduce new
rationale and new dynamism to the SAARC process.
Commissioning of an Eminent Persons’ Group to prepare a report on
reforms of global and regional financial architectures.
Preparation of SAARC position papers on global and regional financial
architectures.
Using the G20 forum for presenting the SAARC case for global reforms and
EAS and UNESCAP forums for presenting the case for regional financial
architecture.
Lobbying for regional financial architecture at bilateral levels particularly with
regional surplus countries , namely, China and Japan.
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Thank you
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