New Delhi: Jacques Attali is president at PlaNet Finance, a global non-profit organization assisting microfinance institutions. A former adviser to the late French president, Francois Mitterand, Attali is an investment banker and author. His work includes a biography of Mahatma Gandhi. On a visit to India, Attali talks about the current crisis in some financial markets and the edgy relationship between democracy and markets. He also explains why India is a better long-term prospect for investors than China. Excerpts:
You have written a report on the changes the French economy needs. This year and the next one too, economic growth is expected to slow down slightly...
Advantage India: PlaNet Finance’s Attali says the alliance between knowledge and democracy is the key to the future and the fact that India is based on knowledge and not low-cost labour will go in its favour. Photograph by Ramesh Pathania / Mint
Well, they are different dimensions. Here, I am an observer, not part of the government. I have chaired a commission on reforms; these reforms are in the process of being implemented. As far as today is concerned, the world is in a crisis. Global growth is going to decline from 5% to 3% worldwide.
Will the slowing global economy make the financial crisis in some markets worse? Will the impact be far worse because there is a simultaneous slow down in the economy?
Yes, both are linked. Growth was linked to the fact that people were consumed because they believed they had no reason to save because saving was done by itself through higher growth in the value of assets, and a bubble was a substitute, a surrogate to saving. And now, as we don’t have any more of that kind of surrogate to saving, people are wisely beginning to consider that we need to have a cushion, and need to save, at least in Europe, not yet in the US, unfortunately. And, therefore, there is certainly a risk in slowdown of consumption linked to that. Risk will also react to the fact that if there is a slowdown of the economy, a slowdown of credit, banks will have much more difficulties to make profits. It can be a kind of vicious cycle.
If you were to pick out the main reason for the financial crisis, what would that be?
The main reason is that we have a global economy without global governance. The global economy is creating resources by providing resources for creating newer financial instruments. But we don’t have a world central bank to limit the money supply. Today, we have too much resources, which jeopardize the integrity of the system. The lack of a global control on the creation of financial instruments is the most challenging issue around the globe.
You do feel at some level there is a contradiction between democracy and market economics.
It is exactly what I explained. I think that the financial crisis is an example of that. Market and democracy are absolutely congruent. One needs the other. But by nature, market is without border, market wants to go everywhere. It doesn’t consider there is a sector which is limited. Market wants to invest and find profit in education, health...
On the contrary, democracy needs borders. Democracy is implemented within a country and implemented for public good, which is defined clearly by constitutions. We have globalization of market, but we don’t have globalization of democracy. This is a contradiction.
Globalization of the market means globalization of finance, globalization of industry, globalization of labour mobility, globalization of efficiency, but not globalization of public goods such as fair distribution of revenue or health.
And then, the financial crisis is the first example of this contradiction. We cannot have on a long-lasting basis globalization of market without globalization of democracy.
Either we will come back to national protectionism in order to have rules implemented within a specific limit, or you will be able to build global institutions such as—it seems to be an utopia that is badly needed today—a global central bank, or at least a regulation of banks, which is accepted.
But today it is possible to produce money without any control. Some people say the amount of money that was created last year was more than one trillion dollars without any real base. Credit default swap is a way of creating money. Other example is that we have huge growth of world economy and also huge growth of imbalances of revenues.
In this context, could you share your views on sovereign wealth funds because it is global money?
They are interesting characters who play within the market, but with two characteristics which are different from the market. They are what I call patient capitalists, they don’t care about short term, they don’t have shareholders. Second, we are linked to a state. And then we are going to see a huge transfer of ownership of the world into people having control of scarce resources. Sovereign funds are going to create a huge problem in terms of global governance.
Coming to India, you are generally positive about the way microfinance has done here.
We work in 70 countries. We see that almost one-third of all microfinance in the world is in India... Almost 90% of micro-insurance is in India. There are some very good microfinance institutions in India. But there are also some problems.
One is that (microfinance is) mainly rural not urban. Second, it is largely self-help groups, which are quite precarious. When you have microfinance institutions, they are quite small, one million is the maximum number of beneficiaries compared with some neighbour country where there are almost 10 million beneficiaries.
The amount of resources, the amount of expertise for growth of these institutions is small. And the need for new instruments such as new technology, mobile banking, microequity is important. We also think there is need to provide commercial loans to microfinance institutions. It is not yet announced, but we have done our first operation to provide commercial loans to a microfinance institution in India.
I cannot disclose the name, but we made a loan of $8 million (Rs34 crore)... India is a good market for making loans for microfinance institutions.
And if you were to identify the main obstacles to growth of microfinance in India, what would they be?
Well, there are many things. One is linked to commercial microfinance. There is need for down-scaling of banks, growing of existing microfinance institutions and more financial resources devoted. Second is better regulation to be sure microfinance is not used for consumer lending. Microfinance should have nothing to do with consumer lending. Very often in India people are using microfinance for consumer lending.
Thirdly, there is a need for seeing very wealthy people in India beginning to understand that it is their responsibility to deal with poverty issues and then to provide grants, charity as people are doing in Hong Kong, Brazil, Mexico and China. Wealthy national citizens provide foundations that support microfinance.
And also there is a need for India to use its expertise in IT (information technology). IT is crucial for microfinance.
You have written a biography of Mahatma Gandhi. If you were to identify the biggest challenge India faces as a transforming society, what would it be?
Bureaucracy. Mainly bureaucracy for education and poverty. To see money coming down to help. We are in a world of talent. You mentioned my report. In my report I said knowledge is more important than oil. And the fact that young people can make the best of their talents is fundamental for the nation.
India is in a situation where a large part of the youth is not in a position to make the best use of their talent. And that’s a terrible waste. Bureaucracy in the educational system and bureaucracy in the distribution system...money doesn’t reach, schoolteachers are not used as they should be. That’s my point of view. But I think India will be the most important nation of the world, more than even China.
First, the population. Second, the link between democracy and markets. There is a democracy here. Third, the fact that India is based on knowledge and not low-cost labour. The alliance between knowledge and democracy is the key to the future.