May 25, 2020
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Lending Some Advice

India's policy thrust proves justified as the IMF's handling of the global crisis comes under scrutiny

Lending Some Advice
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"The brute fact is that after five days of intense discussion and debate, we are still at a loss as to why contagion has continued to spread. Nor do we seem to have achieved clear and effective measures to contain the crisis." —Yashwant Sinha, Finance Minister

IN two sentences India's finance boss captured what happened—and what did not—at the semi-annual meeting of the World Bank and the IMF, a Washington DC jamboree that brings together the world's economic leaders.

Sinha, in trying to offer his own diagnosis of the contagion, added: "I wonder if our apparent ineffectiveness in coping with this new global crisis could be due to the limitations of the Bretton Woods institution in handling crises spawned by massive reversals of private capital flows in a highly integrated global capital market."

After five days of discussions—over oysters and lobsters with plenty of wine—when global leaders failed to find a way to stem the crisis, a frustrated Sinha warned: "We may be at the edge of a full-blown global recession."

The Bank and the IMF, he said, "responded with commendable speed" to the crisis that erupted in East Asia in July last year, but the "quality" of the response should be reviewed. He said that in recent months India has "not entirely been spared" from the contagion effects of the East Asian trauma, given that 20 per cent of India's exports goes to East Asia. Foreign direct investment has also suffered, Sinha said, but so far "outflow has been modest in comparison with others in the region".

In a telephone interview with Outlook, Sinha summed up the sessions in Washington saying: "We have been able to put forth a point of view, which is refreshingly different from the points of view of either the crisis-hit countries or the G-7. In this gloom-doom scenario, India and China were mentioned in positive terms."

Asked why India got good grades at the meet, Sinha responded: "There was allround appreciation of the policies we have followed and the precautions we have taken. It is not (because of) luck or capital account stabilisation, but good management. That everybody realised."

"The language of the West," said Sinha, "has changed about capital account liberalisation. Even the IMF, which is the biggest advocate, is now saying that it must be done cautiously. I wouldn't say that there was some sort of vindication of our position. We should approach the task (ahead) in all humility without recrimination and without a spirit of condescension."

During the sessions—and at satellite meetings—there was plenty of blame being thrown around with the IMF getting bashed from almost all quarters, including sister organisation—the World Bank. Harvard's brilliant professor, Jeffrey Sachs, thundered: "It is time that the world take a serious look at the Fund. In the past three months, this small, secretive institution has dictated economic conditions to 350 million people in Indonesia, South Korea, the Philippines, and Thailand. It has put on line more than $100 billion of taxpayers' money in loans."

 "These bailout operations," Sachs warned, "if handled incorrectly, could end up helping a few dozen international banks to escape losses for risky loans by forcing Asian governments to cover the losses on private transactions that have gone bad. Yet the IMF decisions have been taken without any public debate, comment, or scrutiny. While it pays lip service to transparency, the IMF offers virtually no substantive public documentation of its decisions, except for a few pages in press releases that are shorn of the technical details needed for a serious professional evaluation of its programmes. Remarkably, the international community accepts this state of affairs as normal. The situation is out of hand."

James Wolfensohn, the Australian-born World Bank president, in a speech that touched many a heart in the developing world, remarked: "We have learnt that when we ask governments to take the painful steps to put their economies in order, we create enormous tension. It is people, not governments, that feel pain.... We must learn to have a debate where mathematics will not dominate humanity—where the need for often drastic change can be balanced with protecting the interests of the poor. Only then will we arrive at solutions that are sustainable. Only then will we bring the international financial community and local citizens with us."

By default or design, India scored in the melee. Sums up Sinha: "All in all, in various committees, it went off well. I put across the point that India is neither the cause nor a victim of the crisis and therefore we can take a more objective view. Developed countries are the cause of the crisis and developing nations in East Asia and Latin America are victims of the crisis. I think, it was in that context that our voice was heard clearly."

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