Prime Minister’S Address At 39th Annual General Meeting Of Asian Development Bank

The Prime Minister, Dr. Manmohan Singh, has urged international financial institutions to pool their collective wisdom, expertise and experience to devise credible strategies to enable the world economy to cope with the increased unpredictability and volatility of energy prices and their impact on processes of world economic growth. Speaking at the 39th Annual General Meeting of Asian Development Bank at Hyderabad today, the Prime Minister said that the challenge before Asia is to create and maintain a regional and international environment that was conductive to maintenance of high economic growth on a sustainable basis. Dr. Singh said that the Governments have a domestic challenge of ensuring that growth process was socially equitable and regionally balanced. “Particular attention must be paid to reduce the income gap between rural and urban areas”, the Prime Minister said.

Referring to the emphasis on infrastructure, the Prime Minister said that India’s infrastructure needs in the next few years would be to the tune of over $150 billion. Dr. Manmohan Singh pointed out that the region needed a comprehensive framework of security that would ensure that the process of economic development was not derailed by the threat of terrorism, threat to environment and to energy security, food security and security of livelihood. The Prime Minister expressed the hope that the Pan Asian FTA could be the future of Asia and that it would open up new growth avenues. Referring to the Asian financial crisis of 1997, Dr. Singh said that an important lesson from the crisis was the need for effective, quick and credible responses from international financial institutions in the event of such a crisis. Highlighting the potential for investment demand in the Asian region, Dr. Singh said that ways must be found for making better use of the collective savings.

The following is the text of the Prime Minister’s speech on the occasion:

“I am delighted to welcome you all to India. We are honoured that the 39th Annual General Meeting of the Asian Development Bank is taking place in the historic, beautiful city of Hyderabad. I extend to you the best wishes of the people and the Government of India. I hope your stay here is going to be memorable and that your deliberations will be fruitful and purposeful. India is privileged to be a founder member of the Asian Development Bank. We are proud of our record of association with the ADB and we are grateful to the Bank for being our active partner in development. Today, as we seek to further accelerate our growth process we look to an even more cooperative relationship with the ADB. We also commit ourselves to strengthening the ADB as an instrument of development and for the improved governance in our region.

While being a regional bank, the ADB has acquired a global relevance because of Asia’s rising global profile. The ADB has played a very important role in dealing with the aftermath of the Asian financial crisis and it responded handsomely to the needs of the people in the wake of the Asian tsunami, major earthquakes and other natural disasters in our vast region. We in India, greatly value the ADB’s expertise in infrastructure financing. ADB’s loans have funded valuable and important projects in India. I am particularly delighted that far away, distant States of our Union – Jammu & Kashmir and the North Eastern States have also benefited from the funding of ADB.

India’s infrastructure needs in the next few years are over $150 billion. The ADB has supported projects in sectors like public transport, power and urban infrastructure. However, I am happy that the ADB is now considering support in new areas like restoration of water bodies, tourism infrastructure and agribusiness. Our investment rate in recent years has climbed up to 31% of our GDP. We expect to see a further increase in the rate of investment and in the rate of foreign investment flow to India in the years to come.

India has a vital stake in the prosperity and stability of Asia. We signaled our renewed commitment to regional economic cooperation with our “Look East” policy. The policy marked a strategic shift in India’s evolving perspective of the world. It helped us pick up the threads from the 1940s and the 1950s, when we were actively engaged in building a new Asia. As a natural corollary of our ‘Look East’ initiative, India has variously reiterated its commitment to work with the ASEAN and individual East Asian States. We are linking India into a web of partnerships with the countries of the region through free trade and comprehensive economic cooperation agreements. We have concluded Free Trade Agreements with SAARC, Singapore and Thailand. We are working on similar arrangements with ASEAN, Japan, People’s Republic of China and South Korea. This web of engagements may herald an eventual free trade area in Asia covering all major Asian economies and possibly extending to Australia and New Zealand. This Pan Asian FTA could be the future of Asia and will, I believe, open up new growth avenues for our own economy. The ADB could also study the benefits of such an economic agglomeration in Asia. India is determined to carry forward the India-ASEAN partnership to an enlarged domain for making the 21st century a truly Asian century. With this vision in mind, we have actively pursued external liberalization by cutting down customs duty rates. The current peak rate, at around 12.5%, is quite close to ASEAN levels. India has the announced policy objective of aligning its duty rates with ASEAN levels. Given the rich reservoir of natural, technical, and scientific acumen that South-East Asia harbours, globalization offers a unique opportunity for harnessing such resources for enlarging not only national and regional, but also overall global growth prospects. Our region has shown its capacity to deal with the challenges of globalisation. However, we must remain mindful of the ups and downs and the uncertainties inherent to the process of globalization. The Asian financial crisis in 1997 hit countries that had built up an enviable reputation as miracle economies. The suddenness and severity of the crisis dented the world’s confidence in globalization, as well as the consensus that had seemed to be shaping up over a model of economic development. That the crisis has been managed, and importantly that these economies are all back on track, some with strong growth rates, is a testimony to the capabilities of these countries, as well as the resilience of the international financial system.

As we look ahead, we need to look back to take stock of the lessons of the Asian financial crisis. With the benefit of hindsight, we now know that the crisis arose due to four important factors: First, the exchange rates were pegged at unsustainable levels. Second, the fragility of financial systems allowed enterprises to borrow without any regard for mismatches in currency composition, or maturity profile. Third, the regulatory infrastructure, especially in the financial sector was flawed. Fourth, governmental systems for monitoring the quantum and nature of capital flows were found to be inadequate.

The post-crisis analysis has thrown up a number of issues such as the preconditions for capital account convertibility, the relative merits of fixed versus floating exchange rates, which are all standard fare now. What I wish to focus though is on the lessons from the crisis at the international level. An important lesson coming out of the Asian crisis is the need for effective, quick and credible responses from international financial institutions in the event of a crisis. First, it is very important for international financial institutions to inject large enough funding to economies in crisis to provide an assurance of stability. Half-hearted measures do not resolve the problem; they only aggravate it further. In the aftermath of the Asian crisis, international financial institutions came under heavy criticism for not acting quickly enough. There is a view that funding must come before rather than after the foreign exchange reserves bottom out. It is perceptions that fuel a crisis and it is important to manage them by acting quickly and decisively. Thus, not only the quantum of funding, but also the speed with which it is channeled is an equally critical factor. Second, the Asian crisis has demonstrated that financial crises can be contagious and that foreign exchange markets are prone to a bandwagon effect. These are a result of imperfections in capital markets, which generate information bubbles and trigger a herd mentality among investors. In panic situations, markets do not adequately discriminate between countries with strong and weak economic fundamentals and seemingly strong economies can also be engulfed by a snowballing crisis. This means that international financial institutions need to be ahead of the curve, identify potential victims and go to their support in good time so as to contain the crisis. This also means that the size of the funding can be quite large.

Third, continuous vigilance and monitoring of the economy are very important. This requires three things:

• credible systems for gathering, monitoring and disseminating information to markets and regulators;
• international standards for economic management;
• competent and effective regulatory systems for enforcing those standards;

In the period since the crisis, many Asian countries have built up sufficiently large reserves. While these reserves constitute a good first line of defence, the build up of these reserves does not diminish the role of the international financial institutions. They must monitor closely developments in economies across the world and advise countries on the course of action to be taken.

The role of international financial institutions becomes even more relevant in the context of growing global imbalances. The current global imbalance is reflected in the huge disparities in the current account positions of different countries. In 2005, the current account deficit of the United States stood at $ 805 billion, which was as much as 6.4% of the GDP of the United States. Also in the year 2005, the current account surplus of Japan was $ 163.9 billion, of the People’s Republic of China $ 158.6 billion and that of the Middle East countries $ 196 billion. While to some extent, mismatches in current account positions are to be expected – and even desirable – in the global economy, large disparities raise concerns about unsustainability and provoke the fear of hard landings. The process of correcting imbalances can be disruptive if it is sudden and unexpected. The present level of global imbalance cannot be sustained forever. It therefore, calls for action both from countries having current account surpluses and those having current account deficits. A coordinated effort is necessary to correct the imbalances to prevent a sudden down turn. International financial institutions need to play a proactive role in this regard.

Our region has become an engine of global growth in recent years. The United States and the Euro-area will continue to display considerable resilience and will remain important drivers of global growth. However, East and South-east Asia, including India, are bound to increase their profile and relevance to the evolving global economy. Asia will continue to increase its share of world GDP and world trade, both as a source of export supply and as a source of great import demand. Asia will consume more food and more energy. Asia will demand better infrastructure and seek improved services. Given the potential for investment demand in the region, we must therefore, find ways of making better use of our collective savings. How can we make sure that the savings and surpluses generated in our region can find investment avenues within our region itself? There is also scope for peer learning within the Asian region from the successes of other countries. The Chinese economy has performed exceedingly well over the last two decades, demonstrating growth rates, which are now the envy of most other countries. This has helped vast millions of people to be pulled out of the grip of acute poverty. Further, the growth of the Chinese economy has fuelled demand for products and services of other countries and the People’s Republic of China, in many ways, has become an engine of growth for the world economy. There is a lot to learn from the Chinese economic experience and the ADB can certainly facilitate it. Our region should also be mindful of other challenges that many of us face. I refer to the challenge of regional stability and security, and, the challenge of ensuring equity, social justice and regional imbalances in the growth process. Our region needs a comprehensive framework of security that will ensure that the process of economic development is not derailed by the threat of terrorism, the threat to our environment and the threat to our energy security, food security and security of livelihoods. At a time when international oil prices are witnessing a steeply rising trend, it is incumbent on all major international financial institutions to pool their collective wisdom, expertise and experience to devise credible strategies to enable the world economy to cope with the increased unpredictability and volatility of energy prices and their impact on processes of world economic growth.

In a globalized world, growth and progress cannot occur in isolation. Countries and international agencies must collaborate to produce welfare-enhancing synergies. The challenge before Asia today is to create and maintain a regional and international environment that is conducive to maintenance of high economic growth on a sustainable basis.

Our Governments also have a domestic challenge of ensuring that our growth process is socially equitable and regionally balanced. The under privileged sections of population must be helped to become effective partners in development. Particular attention must be paid to reduce the income gap between rural and urban areas. We must pro-actively address the imbalances that may have emerged in the process of rapid growth. This must be done in a framework of participatory democracy. Even as we pursue policies to sustain our growth momentum, we must ensure a better balance in the distribution of gains across regions and among various social groups.

For the past quarter century, or more, Asia is once again on the move. Millions of people in our region have been liberated from poverty, ignorance and disease. If we can sustain this growth process, and ensure that it is equitable, we can banish poverty for all times to come. If we can pursue economic development in the framework of an open economy and an open, democratic society, we would have succeeded in restoring to Asia its ancient glory as the land of great knowledge, wisdom, creativity and compassion. The Asian Development Bank has played a very important role in shaping development thinking in our region. I wish your deliberations all success and I wish ADB many more years of active engagement with the people of our region”.