The Hindu : Front Page : Manmohan for steps to tackle global economic imbalances

Online edition of India's National Newspaper
Saturday, May 06, 2006

Front Page

Front Page

Manmohan for steps to tackle global economic imbalances

Ashok Dasgupta

"International institutions must respond quickly to rectify the mismatch"

— Photo: Satish H.

SPEAKING ECONOMICS: Prime Minister Manmohan Singh with Asian Development Bank president Haruhiko Kuroda at the opening session of the 39th annual meeting of its Board of Governors in Hyderabad on Friday.

HYDERABAD: Prime Minister Manmohan Singh on Friday exhorted multilateral institutions to evolve "quick and credible" responses to tackle the current global economic imbalances, as otherwise it could lead to a severe crisis.

He was addressing the opening session of the 39th annual meeting of the Asian Development Bank's Board of Governors here.

Dr. Singh said all major international financial institutions should use their collective wisdom, expertise and experience to devise strategies to enable the world economy to cope with the increased unpredictability and volatility of energy prices.

The current account position of nations reflected the mismatch. While the United States had a deficit of $ 805 billion — at 6.4 per cent of its GDP (gross domestic product) — Japan had a surplus of $163.9 billion and China $158.6 billion. Surging oil prices made the oil-rich Gulf nations accumulate a surplus of $196 billion.

The situation called for coordinated action, both from countries having surpluses and those suffering from deficits.

Dr. Singh, however, pointed out that the process of correcting the imbalances could be disruptive if it was sudden and unexpected.

Highlighting the Southeast Asian financial meltdown, he said: "An important lesson coming out of the Asian crisis is the need for effective, quick and credible responses from international financial institutions in the event of a crisis."

The Prime Minister reminded the financial institutions that they had come "under heavy criticism for not acting quickly enough in the aftermath of the Asian crisis."

It was important that they injected, in time, adequate funds in to the economies facing crisis to provide an assurance of stability.

"There is a view that funding must come before, than after the foreign exchange reserves bottom out. It is perceptions that fuel a crisis and it is important to manage them by acting quickly and decisively. Thus, not only the quantum of funding but also the speed with which it is canalised was an equally critical factor." The international financial institutions should be ahead of the curve, identify the potential victims and "go to their support in good time so as to contain the crisis."

Half-hearted measures would not resolve the problem; they would only aggravate it. The Asian meltdown demonstrated that such financial crises could be "contagious" and forex markets were prone to a "bandwagon effect".

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