The presidential election gave Americans a choice to change the system of governance so that they could face the global financial crisis in a better manner. The crisis has resulted in a massive shrinkage of private capital flows from emerging markets to a tune of something like US$ 700 billion. This has adversely effected the growth of many developing economies, including India. India is in the process of electing a new Parliament. Does the country also have a similar opportunity as the United States? Can this be used to help India reverse the impacts of this crisis?
Demand to have a new global financial order is being made surprisingly not only by Asia, but also by the trusted economic satellites of the US. The new global financial order has to correct, what many nations feel, is the slanted strategic balance of power of international financial institutions towards US. President Barack Obama has taken a conciliatory stance and accepted, “In a world that is as complex as it is, it is very important for us to be able to forge partnerships as opposed to simply dictating solutions,”
Developments in the industrialized countries and the extent of the crisis are forcing the West to look at a new set of politico-strategic-economic ideologies based on weltgeist (world spirit). Weltgeist will be largely determined by the position of emerging countries as their influence in shaping these discussions and deciding on the future financial order is on the increase. Therefore, the role of the new government in facing the crisis will depend on the strength of the alliance of emerging nations.
India, China, Brazil and Russia represent about 70 per cent of the world GDP. China and India's economies, particularly, have both the strength and resilience against the present crisis. They have huge domestic markets, sufficient financial resources and opportunities for investment. China with a dollar reserve of 70 percent of its foreign exchange reserves of 1.9 Trillion can use its reserves to help and lend to countries on the brink of defaulting and can play a major role globally in protecting the value of the dollar. India’s strength is based primarily on its position. The India position, which is a mid-way between the unfettered free rein to markets that the US offers and the conservative socialistic calls of Europe, gives it a role in the emerging schema of international restructuring.
These factors strengthen the position for the active participation of China and India in the ongoing process to evolve a new global mechanism to deal with the global financial crisis. Acceptance of these facts by the developed nations has changed international perceptions and also increased the influence of these emerging nations in matters of international finance.
The international regulatory forum for banking supervision i.e. the Basel Committee and the Financial Stability Forum (FSF) are the two forums that bring the different international finance groups together. The FSF now includes all the countries in the G20, which were not a part of the forum earlier. The Basel Committee's members have been expanded to include Brazil, China, India, and Russia. These developments make emerging countries an important part of that new emerging system towards global consensus.
There is also ''a high level'' of unity amongst the BRIC countries both on the diagnosis of the current financial crisis and the main measures that need to be taken. They have called for a major revamp of the current global financial system. The Brazilian finance minister, Guido Mantega, said the ''emerging countries are ready to shoulder the financial consequences of a bigger participation at the IMF." Though the BRIC nations want a part in efforts to deal with the international financial crisis, but without a reciprocal and equal redistribution of influence and authority, the BRIC nations are reluctant to assume major responsibilities.
The hands of the emerging nations are also being strengthening by regional groupings that are emerging, particularly in Asia. Asia is trying to establish coordinated regional currency agreement, similar to that in Europe with supporting mechanisms for an effective intraregional exchange rate arrangement. This will not be easy as it includes a common capital account regime, intraregional credit mechanisms and rules for interest rate and currency adjustments, but steps are afoot and the hope is that they will bring in some success. ASEAN +3 have already signed an initiative to establish an independent surveillance unit to promote objective monitoring - the Chaing Mai Initiative. This is giving a new thrust to cooperation to countries in Asia.
China is trying to rope in India into a combined force to face the crisis. Chinese Ambassador, Zhang Yan, in a Confederation of Indian Industry (CII) conclave, said both the countries should work together to press the developed countries to bear their responsibility and prevent them from shifting the burden on to developing countries. Yan said, “We shall push for reform of the existing international financial institutions with a view to increase the role of China and India in decision-making process and empower them with greater say and representation in the international financial institutions.”
Regulation and restriction on market forces on the basis of global consensus is essential. The key issue is, ‘how can the interests of individual nations be safeguarded!’ Nations are protecting themselves by agreeing to a new Financial Stability Board without giving up their role as national regulators. The proposal is to have some sort of system of a college of supervisors; though each regulator will control what an institution does in its own country, being part of the college, and based on what they learn, they can improve the system. In short, the crisis will lead to steps that will expand the perimeters of regulation, and will set up a college of supervisors, and countries will set up global standards.
India is set for a coalition government. There are three possible combinations that can emerge from the results of the General Elections, with major parties spearheading each of these possible combinations. Unfortunately, the manifestoes of all major parties describe how they will expend the wealth of the nation, rather than how they will add to the nation’s wealth. Therefore and evaluation has to be made on the basis of their different core competencies as they would have different impacts.
The core competence of the Congress Combination is economic growth, but their focus on inclusive growth raises questions on how far they will go. The BJP combination’s core competence is security, however considering the developments across the border, how much focus will it give to the economic opportunities afforded now? If the Third Front came to power, the question that arises is how will this combination deal with the communist viewpoint?
The difference between the first two combinations may not be very significant on India’s role at the international level, but it will be acutely felt in regional cooperation. The efforts required here are much challenging. Trying to build a protective financial architecture, which strengthens itself over time, is a really creative act that requires a special focus of the ruling dispensation.
The elections will show the choice people make. The right choice of the government will help the country in facing future economic crises in a globalized world more effectively. Who knows what lies ahead in this world of extreme turbulence!
Upendra Kachru
May 2, 2009
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