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PM moots coordinated fiscal stimulus to mitigate severity of recession

Credible system of multilateral surveillance needed, Manmohan tells G-20 leaders

— PHOTO: AFP

Halting the slide: U.S. President George W. Bush greets Prime Minister Manmohan Singh at the White House in Washington on Friday, prior to a dinner with leaders attending the G-20 Summit.

WASHINGTON: Advocating a multi-faceted approach to tide over the current economic crisis, Prime Minister Manmohan Singh on Saturday mooted a coordinated global fiscal stimulus to help mitigate the severity and duration of the recession to give a strong signal to investors worldwide.

Dr. Singh told the world leaders at the G-20 summit, convened by President George W. Bush, that there was a need for a credible system of multilateral surveillance that could signal the emergence of imbalances as the crisis was “far from over.”

Dr. Singh made a prescriptive address covering various areas needing urgent attention such as reforms of the multilateral financial institutions to enhance concessional flows, a caution against protectionist policies and changes in the global financial architecture to avoid a recurrence of the crisis.

He also sought a mechanism of consultation that could yield results in terms of policy coordination.

He was heard with rapt attention by leaders, including Mr. Bush, British Prime Minister Gordon Brown, French President Nicolas Sarkozy, Japanese Prime Minister Taro Aso and Russian President Dimitry Medvedev.

Cautioning that a slowing down of growth in developing countries would push millions of people into poverty, Dr. Singh said: “These are not transient impacts but will impact a full generation.”

The Prime Minister said that since the crisis was global it called for a coordinated global response and this summit was, therefore, timely.

“In our discussions, we need to distinguish between the immediate priority, which must be to bring the crisis under control as quickly as possible with as little adverse effect on developing countries, and the medium term objective of reforming the global financial architecture to prevent similar crises in the future,” Dr. Singh said.

He said that as far as the immediate priority was concerned, a number of important steps had already been taken by countries to inject liquidity into the financial system, recapitalise banks and other systemically important institutions.

Some countries also introduced a number of innovative, even unorthodox measures, to restore confidence so that the financial system could start functioning again.

“These measures have had some effect, but the crisis is far from over. Credit channels remain clogged and the signs of distress in the real economy suggest that additional measures are needed,” he said.

“A coordinated fiscal stimulus by countries that are in a position to do so would help mitigate the severity and duration of the recession. It would also send a strong signal to investors around the world.

“Resort to fiscal stimulus may be viewed as risky in some situations, but if we are indeed on the brink of the world downturn since the Great Depression [of the last century], the risk may be worth taking. We should, therefore, take all possible measures at the national level to complement any coordinated international stimulus,” the Prime Minister said.

The international community, Dr. Singh said, needed to consider special initiatives to counter the shrinkage of capital flows to developing countries that was almost certain to occur over the next two years.

He said the initiative by the International Monetary Fund (IMF) to establish a new liquidity facility was a welcome step.

“However, we must also consider whether the IMF is adequately funded for the task it will face in managing this global crisis. Looking ahead, we must plan for possible additional demands on the IMF if the global recession is pronounced. This suggests that we must activate a process for replenishing IMF resources.

Dr. Singh suggested that an alternative to the IMF as a source of quick disbursing liquidity was the establishment of short-term swap arrangements.

The existence of such arrangements would reduce the burden on the IMF and would add to confidence in the system. Countries in a position to do so should consider the scope for expanding such arrangements.

He said depressed conditions in the global economy were likely to produce a downturn in private investment in developing countries which would worsen recessionary trends.

“It is necessary to take steps to counter this development. Expanding investments in infrastructure by the public sector and also the private sector where possible is an ideal countercyclical device … It has the immediate effect of stimulating demand counter-cyclically and the longer-term effect of laying the conditions for an early return to faster growth. Investment in infrastructure is today perhaps the best signal for reviving private investment, including FDI, tomorrow,” he said.

Maintaining that the willingness of the leaders to take specific steps to support developing countries in this period of exceptional difficulty would be a test of their collective leadership, Dr. Singh said implementation of economic reforms aroused domestic fears and uncertainties.

“We have persevered in this process and have benefited from it. Economic performance in almost all developing countries has improved. In the process, attitudes towards globalisation have begun to change and people all over the world have come to appreciate the enormous benefits that can be derived from global economic integration.

“It would be a great pity if this growing support for open policies in the developing world is weakened because of a failure to protect developing countries from a recession which is not of their making,” he said. — PTI

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