Global rebalancing requires deficit economies save more: RBI

Addressing a meeting of the International Monetary Fund yesterday, RBI Governor D Subbarao said that surplus economies will need to mirror these efforts and shift from external to domestic demand.

"Global rebalancing will require deficit economies to save more and consume less, while depending more on external demand relative to domestic demand for sustaining growth.
"Surplus economies will need to mirror these efforts - save less and spend more, and shift from external to domestic demand," Subbarao said during his intervention in the ongoing Spring meeting of the IMF here.

"The problem we have is that while the adjustment by deficit and surplus economies has to be symmetric, the incentives they face are asymmetric," he said. Managing rebalancing will require a shared understanding on conducting macroeconomic policies to minimize disruptions to macroeconomic stability, he said.

The RBI governor said that letting exchange rates remain aligned with economic fundamentals, and an agreement that currency interventions should not be resorted to as an instrument of trade policy should be central to a coordinated approach at a multilateral level.

Subbarao said the recent crisis has brought home the complex challenges arising from the world having a single reserve currency. In the ongoing search for solutions, he said, one option is to have a menu of alternative reserve currencies which fulfill the required criteria – full convertibility and the exchange rate determined by market fundamentals.

He said that recent international developments mark an 'ironic reversal' in the fears about globalisation.

"Previously, it was the EMEs which feared that integration into the world economy would lead to welfare loss at home. Those fears have now given way to apprehensions in advanced economies that globalisation means losing jobs to cheap labour abroad," he said.

There is concern in some quarters that even as open protectionism has been resisted relatively well during the current crisis, covert protectionism has been on the rise, he said.

"The short point is that in the years ahead, the pressures for protectionism will mount, and protectionism will also take new forms. Global welfare will be maximised when collectively we resist short-term pressures, and put our collective long-term interest ahead of individual short-term advantage," he added.

Since capital flows have become such an emotive topic around the world in recent months, it is important to be mindful of a few realities, Subbarao said. First, EMEs do need capital flows to augment their investible resources, but such flows should meet two criteria: they should be stable; and they should also be roughly equal to the economy’s absorptive capacity.

The second reality that we must remember is that capital flows are triggered by both pull and push factors. The pull factors are the promising growth prospects of EMEs, their declining trend rates of inflation, capital account liberalisation, and improved governance.

Among the push factors are the easy monetary policies of advanced economies which create the capital that flows into the EMEs, he said.