Interview

'Too early to say how sustained the global economic turnaround will be'

VINOD THOMAS: Need to put in mechanisms for a smoother flow of remittances from abroad. - PHOTO: S. GOPAKUMAR  

Vinod Thomas, Director-General and Senior Vice-President, Independent Evaluation Group at the World Bank, spoke to The Hindu, during a recent visit to India, on why it was too early now to expect a quick and sustained turnaround of the global economy, despite signs of the recession having ended.

In this interview, he says that, with China, India and a few other emerging economies leading the recovery, changes are bound to come in their roles in the global economy and in institutions such as the World Bank and the International Monetary Fund (IMF). As an economist and international development expert, he says that what India will have to watch out for in the year to come may be a further decline in remittances from Indians working abroad because of the lagged impact of the recession. He says that Kerala's initiatives to take care of those returning home jobless from a broad and provide conducive conditions for the flow of remittances are positive, but such initiatives have to be pushed further, not only by Kerala, but also the other States similarly affected by the crisis.

The World Bank has generally been more pessimistic than the International Monetary Fund (IMF) in reacting to this crisis, often downgrading its earlier growth forecasts. Should there be such a divergence in the approaches of the two Bretton Woods twins?

Of course, there can be differences in perception. However, if you look at it closely, there is no significant divergence in the assessment of the crisis and the recovery process; the direction indicated by both institutions is the same. The IMF has forecast three per cent growth for the global economy in 2010 and the World Bank a little less. There are also technical reasons for this difference. In its growth forecast, the IMF uses what is called purchasing power parity figures, whereas the World Bank uses the Atlas method. The combined share of the economies of India and China in the overall global economy is larger in the former case than in the latter. The IMF's method takes into consideration the lower cost of living in India and China, which pushes up the real income and thence the size of their economies. The World Bank's method relies on dollar exchange rates and not rates adjusted against the cost of living.

The IMF, in its latest update to the WEO (October 1), has said that the global economy is out of recession and that world output has turned positive. How do you see that from the World Bank's perspective?

Although the global economy is turning around at the moment, it is too early to say how quick and sustained the turnaround will be. The assessment is that the global economy will shrink by about one per cent in 2009, followed by a growth of little less than three per cent in 2010, driven mostly by China, India and some other emerging economies. China is expected to return to its pre-crisis growth rate of eight - nine per cent and India to six-plus per cent. The growth of industrial countries will remain low. Even with the signs of recovery, however, the unemployment situation continues to be serious. Unemployment reached nearly 10 per cent in the United States this month. The labour market is still not confident. And global poverty has increased by 90 million because of the crisis. So the overall global situation, which will impact India also, is still a matter of concern. And the banking crisis that had inflicted severe damage on the economies of the West needs time to evaporate. The loose regulatory regime that had brought in the banking crisis is being tightened everywhere, wiser by the experience. Also, with more regulations now, its ability to hit a quick turnaround too has been curtailed intentionally. The cleaning up of the old bad portfolios is bound to take time. Part of the reason for the present recovery trend is the increased government spending everywhere. The world economies combined have increased their fiscal deficits by five to six per cent - something unprecedented in history - to stimulate themselves out of the depth of the recession. This cannot go on. Because, increased expenses mean deficits and debts that you have to pay later. Last, but not the least, is the issue of consumer confidence. Consumers are wary; they would rather wait for some more time.

An important outcome of the G20 Summits, especially the last one at Pittsburgh, is the agreement to democratise the World Bank and the IMF. There will be a rebalancing of the quotas in the IMF to give India, China and others five per cent more voting rights. Do we see the emergence of a bigger picture in which developed countries cede their overwhelming influence over the two institutions? Do you see a Chinese or an Indian at the helm of IMF or World Bank in the foreseeable future?

Changes are happening. You know, India and China combined now account for 16 per cent of the world economy. China is now the second largest economy in the world and India, the fourth. The G20 in which they belong is now more influential than the G7, the club of the most developed. The rebalancing is bound to happen. But, with the rebalancing, new responsibilities too will come. Contributions will have to increase. The positions they take on issues such as global poverty, global warming and global trade will all have to evolve. The question of a bigger role for emerging economies should not make us lose sight of the need for greater representations for the poor countries too.

Migrants' (workers') remittances to India have been a major source of strength for India's balance of payments. According to the World Bank, remittances worldwide are likely to decline from $328 billion in 2008 to $304 billion in 2009. How significant is this reduction, which, in any case, is smaller than the decline in private capital flows?

A reduction in remittances can be very significant for India. Developing countries are affected in different ways by this crisis. It can be from decline in trade volumes, private capital flows, remittances, or all these. For instance, China is affected more by trade decline than a decline in private capital flows. I fear that there may be a lagged effect in the year to come, a further reduction in remittances, because many migrants who had lost jobs are somehow managing to keep the flow going, doing part-time jobs or something, waiting for the crisis to blow over. India's remittances in 2008 calendar year was $52 billion, which is 4.3 per cent of India's 2008 GDP of $1,218 billion. You see, there is a serious social angle too in the issue of remittances from migrant workers.

As you know, workers' remittances have benefited the economies of Kerala and a few other States. What steps should the recipient States take to bolster these remittances? The downturn in West Asia has caused job losses especially at the lower end.

Very true. Job losses at the lower end are a real problem. I feel that the recipient States and the country can put in mechanisms for smoother flow of workers' remittances from abroad. The governments should also probe ways to ensure productive investment opportunities for the use of the remittances. Both the money and the skills of the returnees should be used effectively. Kerala has made certain promising initiatives in these directions by announcing new schemes for the returnees to start self employment ventures and small and medium enterprises. Kerala's efforts to use financial instruments to attract remittances for financing profitable projects are also very promising. This is a direction along which Kerala, and also the other States facing the same problem, can go even further.

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