The independent expert group on multilateral development bank (MDB) reforms met in Delhi over the weekend to discuss its second report, which will be presented to FM Nirmala Sitharaman within 10 days. Larry Summers and N K Singh, co-convenors of the panel, spoke to TOI on the recommendations. Summers also discussed the state of global economy and India’s prospects as a manufacturing base. Excerpts:
You talked about the reform in the report on MDBs. Are you happy with the outcome so far?
Summers: I’m encouraged by the response. I am very grateful to the FM (Nirmala Sitharaman) for having commissioned our report, and for the energy she has put in to push along the suggestions contained in our report. India had a very successful G20 meeting. It will be remembered as an important global economic moment for PM Modi, and for the country. We are moving down the road. But it is a long road. While the sentiments in our report were embraced, I am not sure that the extent of the danger on the status quo path has been fully recognised. It’s a long way from good sentiments, to bold financial commitments to rapid implementation… rapid and effective implementation on carrying through on those financial commitments. So, I would say it’s going well so far but there are quite a few miles that need to be travelled with respect to MDB reform.
Do you see a change in the developed world’s stance?
Singh: The UK has announced something, and the US has announced on the guarantees, not on recapitalisation so far. Germany has indicated some forward movement. Most G7 countries are moving, although we have to persuade Japan. There is much greater traction on the recommendations.
The expert group is finalising its second report. How will you address the issues around private funding and MDB reform?
Singh: In line with the mandate of the Delhi Declaration, the big story of our second report is going to be on better, bolder and bigger MDBs. Better also means simpler processes. For instance, can we cut the time to half from concept to disbursement. So, say, from 24-26 months, can we get it to 10 or 12 months? Similarly, we alter the culture to go out and seek private capital. We can look at the rigorous application of the cascade principle where we use more private funds and other aspects such as guarantees. One of our big recommendations is a very robust country platform… at least 40-50% of the lending to come from the country platform. Recapitalisation is an inevitable part of the process.
How do you see the threat of inflation playing out across several countries?
Summers: The figures for the last few months have come in rather favourable on inflation and the strength of the US economy. But I’m still very concerned about the prospects for a soft landing. My concern is that there’s a very difficult balancing act that the Fed has to strike between, on the one hand, a harder landing as the effect of interest rates speed through, and on the other hand, still prevalent inflationary forces. While there has been some disinflation in wages, it has not yet reached a point where we can be anything close to confident that inflation is going to fall to the 2% target. So, the Fed is in the right place of being heavily focused on inflation, maintaining its flexibility, being committed to achieving its target, and watching the data carefully. But even though we’re in the right place, there is no assurance that we will achieve a soft landing.
How do you view the developments in China… the slowing economy?
Summers: The next years are unlikely to be easy in China. Some quite fundamental indicators point negatively in China. The desired level of capital flight from China seems to be very large. The fact that Chinese parents are having only half as many children as they were six years ago is a source of concern. The overhangs of protracted financial crises are typically rather long. We will be in an era, where over some sustained period, India will grow faster than China. The primary consequences of the Chinese slowdown will be for China… I don’t expect it necessarily to have a large impact on growth in the rest of the world.
Do you see a shift of manufacturing from China? Will India be able to absorb that?
Summers: That depends critically on the choices that India makes. The degree of concern about China points to a very substantial opportunity for India. At this point, India is not yet the primary source of being the first place to look for people who leave China. People who leave China are more likely to think first of Vietnam. If they’re oriented to the US market, there is substantial production that is moving towards Mexico. But there’s a very big opportunity here for India, if it is able to create systems that permit investments to take place rapidly, and if it is able to make allowance for imported inputs to come in, in relatively unrestricted ways. For India to take maximum advantage of this opportunity, further loosening of restrictions in the Indian economy will be required. If India is going to meet its potential, with a strong global economy and truly bold policy action, it could aspire to increase its economy eight-fold by the mid-century. But that would require India to grow at 8% a year, which is a very ambitious target.
What is your view on India’s self-reliance focus?
Summers:
Over last 70 years, India made too many mistakes of excessively emphasising self-reliance. It has made too many errors of resisting globalisation than it has made of embracing globalisation. I’m not in a position to comment on details of programme, but, when I hear about India embracing global connection, I am more comfortable than when I hear about India talking about self-reliance. There’s a long tradition of stagnation-inducing policies, justified by arguments about self-reliance, that leads me to think that India should be apprehensive down that road.
You talked about the reform in the report on MDBs. Are you happy with the outcome so far?
Summers: I’m encouraged by the response. I am very grateful to the FM (Nirmala Sitharaman) for having commissioned our report, and for the energy she has put in to push along the suggestions contained in our report. India had a very successful G20 meeting. It will be remembered as an important global economic moment for PM Modi, and for the country. We are moving down the road. But it is a long road. While the sentiments in our report were embraced, I am not sure that the extent of the danger on the status quo path has been fully recognised. It’s a long way from good sentiments, to bold financial commitments to rapid implementation… rapid and effective implementation on carrying through on those financial commitments. So, I would say it’s going well so far but there are quite a few miles that need to be travelled with respect to MDB reform.
Do you see a change in the developed world’s stance?
Singh: The UK has announced something, and the US has announced on the guarantees, not on recapitalisation so far. Germany has indicated some forward movement. Most G7 countries are moving, although we have to persuade Japan. There is much greater traction on the recommendations.
The expert group is finalising its second report. How will you address the issues around private funding and MDB reform?
Singh: In line with the mandate of the Delhi Declaration, the big story of our second report is going to be on better, bolder and bigger MDBs. Better also means simpler processes. For instance, can we cut the time to half from concept to disbursement. So, say, from 24-26 months, can we get it to 10 or 12 months? Similarly, we alter the culture to go out and seek private capital. We can look at the rigorous application of the cascade principle where we use more private funds and other aspects such as guarantees. One of our big recommendations is a very robust country platform… at least 40-50% of the lending to come from the country platform. Recapitalisation is an inevitable part of the process.
How do you see the threat of inflation playing out across several countries?
Summers: The figures for the last few months have come in rather favourable on inflation and the strength of the US economy. But I’m still very concerned about the prospects for a soft landing. My concern is that there’s a very difficult balancing act that the Fed has to strike between, on the one hand, a harder landing as the effect of interest rates speed through, and on the other hand, still prevalent inflationary forces. While there has been some disinflation in wages, it has not yet reached a point where we can be anything close to confident that inflation is going to fall to the 2% target. So, the Fed is in the right place of being heavily focused on inflation, maintaining its flexibility, being committed to achieving its target, and watching the data carefully. But even though we’re in the right place, there is no assurance that we will achieve a soft landing.
How do you view the developments in China… the slowing economy?
Summers: The next years are unlikely to be easy in China. Some quite fundamental indicators point negatively in China. The desired level of capital flight from China seems to be very large. The fact that Chinese parents are having only half as many children as they were six years ago is a source of concern. The overhangs of protracted financial crises are typically rather long. We will be in an era, where over some sustained period, India will grow faster than China. The primary consequences of the Chinese slowdown will be for China… I don’t expect it necessarily to have a large impact on growth in the rest of the world.
Do you see a shift of manufacturing from China? Will India be able to absorb that?
Summers: That depends critically on the choices that India makes. The degree of concern about China points to a very substantial opportunity for India. At this point, India is not yet the primary source of being the first place to look for people who leave China. People who leave China are more likely to think first of Vietnam. If they’re oriented to the US market, there is substantial production that is moving towards Mexico. But there’s a very big opportunity here for India, if it is able to create systems that permit investments to take place rapidly, and if it is able to make allowance for imported inputs to come in, in relatively unrestricted ways. For India to take maximum advantage of this opportunity, further loosening of restrictions in the Indian economy will be required. If India is going to meet its potential, with a strong global economy and truly bold policy action, it could aspire to increase its economy eight-fold by the mid-century. But that would require India to grow at 8% a year, which is a very ambitious target.
What is your view on India’s self-reliance focus?
Summers:
Over last 70 years, India made too many mistakes of excessively emphasising self-reliance. It has made too many errors of resisting globalisation than it has made of embracing globalisation. I’m not in a position to comment on details of programme, but, when I hear about India embracing global connection, I am more comfortable than when I hear about India talking about self-reliance. There’s a long tradition of stagnation-inducing policies, justified by arguments about self-reliance, that leads me to think that India should be apprehensive down that road.