High growth needed to ‘manage domestic political tensions’ – RBI chief
View(s):While there are few areas exhibiting “robust” growth around the world, this type of increase is the need of the hour since current slow growth is “dangerous” because emerging and industrial countries require high growth to “manage domestic political tensons”, according to Dr. Raghuram Rajan, the Governor of the Reserve Bank of India (RBI)
Speaking at the recent, 65th Anniversary Oration of the Central Bank of Sri Lanka, on the theme “The Global Financial System and Rules of the Game”, Dr. Rajan was quoted in comments released to the media as saying, “In an environment of such tensions, there is a tremendous pressure for growth in different countries and such countries are more likely to focus on the policies attempting to divert growth from others rather than creating new growth”.
He also noted, of the 2008′s global financial crisis, “Sustained exchange rate interventions by emerging market central banks, as well as an excessive tolerance for leverage in industrial countries contributed to an eventual global disaster”.
Adding to this, Dr. Rajan also stated, “Before the crisis, many emerging markets were exporting to China and China was exporting to the industrial world. Nevertheless, industrial countries’ demand was built on shaky foundations. For example, in the United States, it was based on private debt, whereas in Greece it was based on public debt and a number of countries were built on very low interest rates, excess spending and debt accumulation, which came to an end with the crisis. Although the Federal Reserve has intervened with relevant policies during the sub-prime mortgage crisis, the crisis then spread from the United States to a full-fledged crisis in the Euro zone and finally, to a crisis in the emerging market economies”.
Commenting further, he opined that “traditional measures such as fiscal stimulus were deemed as inadequate to provide a solution for countries to get out from the crisis. In fact, such traditional measures have not had the force that is necessary to pull these economies out of the problems. In some economies such as Europe and Japan, there was not enough space for government spending as they were highly indebted. Even the private sector refrains from spending when they are confronted with large and devastating crises. In such circumstance, a tremendous amount of spending is needed by the governments to offset the impact. However, spending money by the governments would take time in terms of evaluating the viability and suitability of the projects, monitoring, etc. In the meantime, monetary stimulus is also associated with certain limitations”.
Dr. Rajan also highlighted that the “major cause of weak demand and the delay in revival of growth may not be related to fiscal or monetary stimulus, but it would be the real problems in the global economy that have to be fixed. In the backdrop of the crisis and sluggish demand by industrial countries, emerging countries which were focusing on export led strategies need to reorient and refocus their policies towards new sources of demand, particularly the domestic demand. At the same time, as an alternative explanation, low growth could be associated with the changing world in terms of innovation, which is less effective to impact on productivity levels. In particular, it is observed that post-World War total factor productivity growth was lower than its high levels prevailed during 1920-50. More recently, while productivity growth has fallen further, growth has been affected by plateauing education levels and labour participation rates, as well as shrinking labour force”.
(JH)