India, the IMF's Poster Child for Capital Flows

♠ Posted by Emmanuel in , at 12/06/2010 12:00:00 AM
It's always one step forward, two steps back with the IMF moving into a post-Washington Consensus age, it seems. We've talked about it becoming kinder and gentler with regard to conditionalities--or maybe not. Today, let's revisit the tolerance of states implementing capital controls in contravention of the Washington Consensus--or maybe not. IMF Managing Director Dominique Strauss-Kahn seemed to raise more questions than answers in his recent speech in Delhi lauding India's approach to the subject matter. Unlike a certain even more populous neighbour, India does not actively clamp down on capital inflows (or at least so far). Unlike a certain nominally socialist regime, nor does it try to manage the level of its currency.

So, for what it's worth, this latest iteration of DSK is broadly in the Washington Consensus mould. (Hear that, China?)
Today, India is once again receiving strong capital inflows—more than $50 billion over the last year, or 4 percent of GDP. And while other countries facing surging capital inflows cry foul, India has neither undertaken massive intervention, nor further tightened its existing system of capital controls—in fact the limits on foreign investment in long-term debt were recently increased.

In my view, this approach is the right one. As noted by Prime Minister Singh at the Seoul Summit, “even as we try to avoid a destabilizing surge in volatile capital inflows, there is a strong case for supporting long-term flows to stimulate investment, especially in infrastructure.” He also pointed out that recycling surplus savings into investment helps address developmental imbalances. I am confident that with India’s strong track record of vigilance, capital flows can be put to good use without sacrificing financial stability.

Shifting focus to the medium term, how best to achieve strong global growth?

Rebalancing global demand holds the key. In economies with excess external deficits, public and private saving must increase. And in economies with excess current account surpluses—including many in Asia—domestic demand needs to increase. Stronger financial safety nets and financial market development can promote this shift from external to internal demand. In many emerging economies—including China—currency appreciation is also an important part of the solution. Finally, structural reforms remain essential in all countries to raise productivity and boost growth.
It could've come straight out of Bernanke's mouth if you ask me. And for those looking at more ammunition for the argument that the IMF remains an America-friendly institution first and foremost, DSK lauds the imminent $600 billion helicopter drop care of B-B-B-Bennie and the Feds:
Because public debt in the advanced economies is so high, the burden of this support falls on monetary policy. And because interest rates are already very low, less conventional measures may also be needed. In the U.S, for example, the Fed recently announced a $600 billion program of quantitative easing. It aims to prevent damaging deflation and support the recovery. Of course, the Fed’s actions carry implications for the global economy—and I will address the issue of capital flows shortly. This is why it is so important to have a collaborative approach to rebalancing the global economy.
I guess some things never change.