Making a strong pitch for poor, developing countries that had been hit the hardest by the onset of a financial crisis they had no hand in causing, Prime Minister Manmohan Singh told the G20 summit here Friday that the stimulus measures being jointly pursued by the group should continue till normalcy returns to the global economy.
Tackling the problem at its root requires a commitment that we will not undertake any premature withdrawal of stimulus, Dr. Singh said in his remarks to the plenary session of the meeting of leading world economies. We must certainly plan for an orderly exit when the time is right but that time is not now. The global economy may now be bottoming out but it is not expected to reach 3 per cent growth until the end of 2010.
India had weathered the crisis relatively well because of the strong stimulus measures it introduced in the second half of 2008-9. However, the fact that some of use have fared relatively well does not mean the crisis has not affected the developing world significantly, the Prime Minister said. The annual GDP growth rate of developing countries had fallen from 6.5 per cent to 1.5 per cent as a result of the crisis, implying a fall in real per capita income.
As a result of this fall, an estimated 90 million people across the developing world are likely to be pushed below the poverty line, he said, adding that lower state revenues would lead to lower levels of public spending on infrastructure, health and education.
As part of a four-pronged rescue strategy for both the world economy and the developing countries, the Prime Minister proposed the continuation of global stimulus measures, increased funding for infrastructure investment to make up for the collapse of developing country exports, and the re-capitalisation of the World Bank to allow for expanded lending. He also emphasized the need to fight protectionist measures.
The G20 had already taken measures to increase the flow of assistance to poor countries but the scale so far was only enough to help them manage their balance of payments at depressed levels of economic activity, the Prime Minister said. They cannot counter the effect of the loss of exports.
Lost exports had to be replaced by expanding other components of domestic demand, especially investment. An obvious area is infrastructure, he said. These investments can be made ahead of requirements and, therefore, are an ideal form of countercyclical activity.
The World Bank was best placed to finance this expansion in infrastructure investment in both the poorest nations as well as emerging economies which were unable to raise money elsewhere because global capital markets had yet to recover. But this could only be done if the capital base of the World Bank and regional development banks doubled.
Acknowledging that the richest countries may baulk at committing additional public resources for such a recapitalization project, the Prime Minister said the quantum of funds needed was small compared to the massive scale of public money used to stabilize the financial system in industrialized countries.