New Delhi: The global economic recovery has held up thus far, but several threats still remain, according to Robert Zoellick, president of the World Bank. “I hope that we will have a sustainable recovery, but I think we need to recognize that there are danger points that we are going to need to face this year just as we faced last year. It is going to require the key economies in the international system to try to work together and manage the differences, because if they spin out of control, that increases the anxiety in the markets and that will hurt everybody,” he said. Edited excerpts:
The overall economic situation in India is one of high growth, along with a challenge of high inflation. What are your views on this?
First off, I think it’s been very good that India has been able to recover very strong growth so quickly. It’s been good for India, and it’s part of the general trend we have seen in the economy around the world, where a number of the developing countries have had sound programmes to return to growth. (I) estimate that India is back at about 9% growth, which is very significant. I am trying to get a better sense of some of the causes of inflation myself, but my preliminary reading of that situation is that it’s caused more by bottlenecks on the supply side than it is by overly strong demand. So the causes of inflation are very often important in trying to understand how to deal with it.
So, as opposed to necessarily tightening monetary policy or restricting some of the demand from the government side, I think the focus has to be on what are some of the things you need.
Way forward: World Bank’s Robert Zoellick says India can offer ways to capture some of the increased supply globally to benefit consumers as opposed to trying to control prices or impeding the market. Ilmars Znotins/Bloomberg
For example, the increased production and productivity of agricultural products; how to try to make the markets work more effectively; and for the medium- and long-term growth for India. These will be even more important—issues like infrastructure.
So, this is actually a good sign. It’s a sign that the growth potential is very strong, but a combination of public and private policies, and our support from the World Bank needs to focus on some of those bottlenecks.
Do you think that the current spike in inflation threatens to undo much of the good work that India has undertaken, especially in the context of the global slowdown?
I hope not, but the nature of my own work, and I am sure for the Indian officials, is never to take any of these issues for granted. Some of the factors that led to some of the increases in agricultural prices should come down over the course of coming months. I know they are very difficult for people today. But it also depends somewhat on the government policies that are taken. So, everything from some of the trade policies, to open up some of these markets for imports of agricultural goods, to try and overcome some of the impediments to increased agricultural production.
I don’t believe this is a phenomenon of necessarily too much money chasing too few goods. And, of course, it can’t be divorced from what’s happening in the overall international economy as well. That’s one of the reasons why I also came to talk to India about, say, the G20 (Group of Twenty) process.
One of the things that you mentioned in the context of inflation is perhaps for India to open up its agricultural markets a little more. Could you expand on that?
I think over the course of the past five or six or seven years, India has lowered some of the barriers to trade in agricultural goods. Some of these were quotas. Some of these were tariffs. So it has already taken various steps.
But as I understand, the Indian agriculture system, it’s quite complex. There’s the different role of different states and reserves versus the national government, and so it really can be more of a safety valve. I was saying it more as a positive, so in a sense that—and it depends on the overall global production. But in some areas the prices are moving very high. As opposed to trying to control prices or trying to in some way impede the market, you can offer ways to capture some of the increased supply globally.
Now this will vary by product. In the case of India, some of the increased prices in agriculture have been primarily onions, some vegetables and milk. Whether there’s opportunity for imports, I know the government has already looked at it in the onions area, but perhaps in milk and others there may be additional opportunities. So this is an issue not only for India; it’s for all in the global economy.
Would you go to the extent of advocating higher foreign direct investment in retail?
When I was talking about some of the basic primary goods, I wasn’t jumping to the retail sector. But over time, what many economies have found, not only developed economies like the US, but I have seen this in Mexico, Brazil and China, that some of those large distributors can capture the benefits of their supply chains with better, effective logistics.
So, I think that would obviously create additional opportunities to benefit the Indian consumer.
Now, I know there’s been resistance to this from some of the retail operators within India. And so the question with many changes like this one would be if Indians decide they want to move in this direction how do you transition, so you deal with the current structure while making a more efficient future structure.
What is your current assessment of the shape of the global recovery?
I think the good news is that the overall global recovery seems relatively solid. There is a challenge in that it is a multi-speed recovery, so we have the developing countries growing more quickly and as your question suggested, now having to deal with some of the questions of inflation and how they level off the growth. This is India, but also China, some in South-East Asia, some in Latin America. While the developed (world) is recovering, it’s not recovering at a pace that will deal with some of the large-scale unemployment, so there are still tensions in the system and there are still downside risks. You just look at the newspaper, there are concerns coming out of dealing with sovereign debt issues in Europe, also some of the municipalities in states dealing with the US. Then there is always the challenge we are dealing with now, with food prices, you have the challenge in India, but there is also a question of will this put some strain on the global system. That depends on stocks and some of the overall production and you are seeing prices increase. So bottom line is, I hope that we will have a sustainable recovery, but I think we need to recognize that there are danger points that we are going to need to face this year, just as we faced last year, and it’s going to require the key economies in the international system to try to work together and manage the differences. Because if they spin out of control, that increases the anxiety in the markets, and that will hurt everybody.
Is the G20 proving to be sort of forum that will manage this new recovery, the new normal as you have called it?
I think it is at an early stage. I think the good news was that when the crisis hit, the G-20 rose to the occasion by and large in terms of the type of efforts to keep the economy on track and not let it slip into a problem like the 1930s. We are now at a stage with this multi-speed recovery where economies were facing different challenges. Their policy mix will have to be an integrated one, but reflecting differences depending on where they are on the economic cycle. The G20 has the benefit of including more economies, particularly some of the larger emerging market economies. So that makes it more representative of the global economy than the G7. It has a disadvantage of being larger and any time you have a larger group, it’s sometimes hard to get beyond bureaucracies and just the talking action. In my view, one of the roles for organizations like the World Bank and the IMF (International Monetary Fund) and the WTO (World Trade Organization) is that we can, in a sense, be servants of the international economy. This is a challenge for us though because we have many members who are not in the G20 and they are sensitive to that, but we can in some ways use our expertise, our identification of issues and our ways to try to bring the countries together on some of the challenges, whether they be monetary systems or food security.
Done of the key takeaways from the last G20 was, if I may put it that way, the failure of the US and China to resolve their differences over the currency issue.
Well the US and China are highlighted because they are both major economies. But it really is an issue that affects others too. So the Chinese currency policies have created some anxiety in some other large emerging market countries such as Brazil, which has a flexible exchange rate, and so I think this all goes to the issue of, number one, trying to make sure that they avoid slipping back with trade protectionism. Number two, keeping one’s eyes on the fundamentals of growth. So one of the things that I am trying to caution is all the talk about exchange rates and monetary policies and others one has to look at some of the structural aspects of growth. Just as we are talking about in India, and these are clearly going to be part of the Chinese discussion for their next five-year plan, how can they shift the more domestic demand-led growth? It won’t be easy, but I think they are trying to move in the right direction. Similarly, there is debate in the US about some of the structural aspects of growth.