The governor of the Bank of Israel since May 2005, Stanley Fischer has been one of the most influential policymakers and economists, as vice-chairman of Citigroup Inc., first deputy managing director of the International Monetary Fund, chief economist of the World Bank, and head of the department of economics at the Massachusetts Institute of Technology. In India on an invite from the Reserve Bank of India, Fischer spoke to Mint on the likely impact of the subprime crisis on the global economy, growth, capital flows and “of course, the perennial problem of the exchange rate”. Edited excerpts:
In 2004, speaking of the “period of extraordinary stability”, you said “many a trader wishes the world were a little more volatile”. That has come to pass.
It was an extraordinary period of four-five years and lasted longer than expected. The Indian take-off has been gradual. The rate at which it has taken off now is phenomenal. I think we’ll date it to this period. We also had phenomenal growth all over the world, including Latin America and Africa, especially regions that had been left behind. We hope we can go over this period of relative instability very quickly and we can go back to this nice period of sustained growth.
So, how deep will be the impact of the US subprime crisis on the world and India? Will the stimulus package be enough?
Influential policymaker: Stanley Fischer, governor of the Bank of Israel. (Photo: Sanjay Sharma/Mint)
There is no question that it’s having an impact in the US. The actions of the Fed (the US Federal Reserve) were a result of a series of negative numbers, so it was clear that at a minimum there would be a significant slowdown, probably happening already, certainly in the first quarter. How much farther it would go is not clear. But it is hard to believe that it won’t have an impact on the rest of the world, in terms of the exports from other countries which will also affect their domestic growth. We won’t have decoupling in the sense that what happens in Asia is independent of what happens in the US. But we will have decoupling in the sense that Asia will grow at somewhat lower rates than it would have grown had the US continued to flourish. But this will have an impact on everyone, I am pretty sure.
(US President George W. Bush’s) package is about 1% of the GDP which will have an impact on growth. The big issue about the US economy is the link between the short run and the long run. The short run needs stimulus while the long run needs tightening. If the stimulus comes entirely without dealing with any action or commitment for dealing with the long run, it’s not going to be easy. The dream package is one that gives a stimulus now but also...reaches an agreement on the future burgeoning of the fiscal deficit.
Where and how will investments flow, now that the financial sector is hit?