As the resident representative for the International Monetary Fund (IMF) in India in 1994, Charles Collyns was up close to the most exciting phase of economic reforms. Collyns is now the deputy director of the research department at IMF. After more than a decade, Collyns returned to India to give a series of talks to explain the main themes from the Fund’s latest World Economic Outlook (WEO). He took some time off from his schedule to speak toMint on a range of issues. Edited excerpts:
How would you characterize the current phase of global growth?
This is the strongest five-year period of growth since the early 1970s. But it’s even better than that in two important respects. First, it is very well distributed around the world; it is not just a few countries that are doing well. In fact, you know the US economy has slowed and yet, growth in the rest of the world is very robust. Not just Europe and Japan, but India and China are very much leading the way; you have strong growth wherever you look—Africa, Eastern Europe, Latin America and the pace is accelerating.
And second, I think the growth is sustainable. As you know, in the 1970s the strong growth ended in the oil crisis and in a decade of stagflation. I think a lot of policy mistakes were made at that time, both by the advanced countries and the developing countries. This time the policy framework is so much more robust. I think the policymakers have learnt a lot from the lessons of the past and are generally avoiding the imbalances that occurred in the past. I’m not trying to say everything’s fine, but nevertheless, the overall situation, as we see it, has improved quite a lot.
So, how important is the US economy today in the context of global growth?
We always used to think that when the US sneezes, the rest of the world catches a cold. The present phase shows that’s just not true. I think the US is no longer the only locomotive for the global economy. There are many sources of strength, both in Europe and also in India and China. This is very welcome.
WEO says that exchange rate adjustments are not a panacea?
It has to be a combination: adjustment of the exchange rates and change in the pattern of domestic demand. If you just use the exchange rate, then you would need large movements in the exchange rate that could lead to a destabilization of the financial market. What we hope to see is moderate market-driven changes in the exchange rate, together with natural adjustments of private and individual savings and investment behaviour. A combination of all of that would help reduce the global imbalance.
It’s the first time an institution like the IMF is flagging the adjustment costs of globalization in detail.
We think it’s an important issue and the reason is that we see that globalization is the major reason for growth in the global economy. But I think one has to recognize at the same time that there are distributional consequences; that there are people who might be hurt in the short run by increasing competition for labour from outside. That fact may lead to political concerns and may even lead to a rise in protectionism. To avoid that I think it is important to recognize that this is an issue, rather than pretend it is not there, and then to think about the best way to address it.
What is your assessment of the Indian economy at this point in time?
The Indian economy is doing really well. It is pretty nice to come back after 10 years to see that the per capita (income) has doubled, the size of the economy has doubled, you’ve had a growth rate of about 8% for a number of years now. So, clearly, the economy is doing extremely well because it’s really engaging with global economy and not turning its back on the world. And it can compete very successfully in a whole range of areas—not just the service sector, but also in manufacturing. But there’s still the issue of how fast the economy can grow without overheating.
How real is the overheating problem?
It is a serious concern and RBI is certainly concerned. India has one of the higher rates of inflation. In other parts of the world, inflation is generally under control. Some people argue that you need inflation for growth, but I disagree. I don’t think there is a trade-off between inflation and growth. In fact, one of the strongest supports for growth is to maintain a stable and low-inflation environment. If there are signs of overheating, of rising inflation, then it is important for monetary policies to move gradually, but progressively, to tighten conditions and bring inflation back in line with the objectives. I think RBI has been taking action in this area.
What is your medium-term outlook?
At the moment, the growth between 7% and 8% is fully possible, but with additional reforms, there is clear potential for India to grow even faster. China has shown how fast an economy can grow when it has large human resources to supply that growth. You certainly have the potential to grow at 9-10%, if you’re able to move forward with the policy reforms needed to use resources in a dynamic way and to integrate with the world economy.
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