Few can equal his expertise in the macroeconomics of emerging markets and transition economies. Guillermo Calvo, Director of the Programme in Economic Policy Management, at Columbia University, Research Associate at the National Bureau of Economic Research, and the author of Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy, was in the capital to deliver the Sixth Annual India Policy Forum Lecture. Sarika Malhotra caught up with him to get an idea on how India is placed amidst the crisis.
Even as crises originate in industrialised countries, emerging economies pay the price. How do you view the current crisis in this light?
It is not exactly the same case now as it used to be, because emerging markets are ripe. India has been hit by trade shock, with exports? values falling. But from the view of the financial sector, the shock to emerging markets has been much less than it was in 1998. Latin American countries, especially those who had controlled the current account deficit and de-dollarised their economies, are doing quite well. Emerging markets can do much to protect themselves. India has decided to control capital movement, which is not the only thing to do. You can protect yourself also by structuring your financial system in a way that there are no foreign exchange debts.
Do you think G20 will play a bigger role than G8 in shaping international finance?
I am somewhat sceptical because politics is local ? politicians who go these summits are voted by their constituencies back home, and they come together only at these events. So when you have a big crisis, they try find a solution, and once the crisis subsides they return and continue their political fights. I am surprised by the things they have achieved ?like strengthening the IMF and the amount of money that they were able to facilitate for such projects. Which is not good enough ? why not talk about a new regulatory system, coordination across the countries. Are they doing that?
How are the BRICs placed in the recovery path?
The BRIC countries still are heavily dependent on the US, directly or indirectly. They are big and dynamic enough to be part of G20 and amidst the crisis, they have a bigger role in setting up the agenda. The BRICs have a considerable presence of making the problems of emerging markets take a more prominent position on the discussion table but the power is still in the hands of the US. It depends on the US if it is willing to shed some of its extent power and share with the BRICs. With (Barack) Obama in power, who is more of an internationalist, I hope we may be going in that direction. But Obama has to be careful as the American constituencies will be looking at him and if he makes a move that seems like he is going to sell off the US, he will have to pay for it. The direction in which we are going is encouraging but I think it is important for the BRICs to take an initiative ? not just participate as younger members of the group, but pound on the table.
Even as signs for recovery have begun, there is a long way to go. What steps will get the world back on track?
I don?t see any clear path out of this crisis. One path, which we took after the Second World War, was to liquidate the US debt, which was equivalent to 70% the GDP, and people bought patriotic bonds. If you want to replicate that, the rate of inflation will have to be much bigger and more upfront. The second option can be if the investment banks again start playing the game of high leverage and are reassured that they are too big to fail. There is already talk about this, and the move could restore the dynamism in the economy with the risk of producing another crisis in a year?s time. The third one is the path of good equilibrium, where we recover slowly and stay on that level for decades. The third one will be the best bet. But 2010 is too optimistic a guess for recovery.
Lessons for the world from such systematic crisis…
Be careful. It is not realistic that in a few months we will design institutions that will take us up to our best. One has to distinguish between a run-of-a-mill crisis and the one now. There is a shock in terms of trade ? you are poorer ? but it does not destroy the financial systems, the banks, the currency. And a financial systematic crisis, like the Lehman Brothers, there was fear that all the big buildings in New York will collapse. The second type is like a viral mutation, Subprime-may not have proved to be such a big mess, if we had stopped the mutation at the right time. It?s imperative to develop institutions and procedures to prevent such mutations. For example, Mexico got a loan from the IMF of $45 billion before the crisis to keep away speculators. Emerging market funds would also help stabilise the price of emerging market bonds. If there is a crisis, an institution will prevent the price from falling.
Which emerging economy has managed the crisis best?
Chile is a stellar example as it is a market-friendly economy. The major export is copper and they have a rule according to which if the price of copper goes up, they save. Chile has accumulated a lot and has become a creditor in the capital market. Unlike India, it is in a position to increase its fiscal deficit. Though it has been hit, but it has economy well shielded against the capital market shock, which could be devastating for emerging markets.
How India is placed vis ? vis other emerging markets?
India has not developed in a balanced way. It has benefited from sectors that are not industrial, and has concentrated more on high-tech sectors effectively. It has also benefited from Diaspora. Its agricultural sector is inefficient too. Unless you prepare to open up, introduce reforms, not much can be achieved. Relative to other countries, India doesn?t have an upper hand. India has seen a rapid growth and it was expected because it started from a very low level. So it?s more of a catching up than real growth.