Why Stanford? What happened?
No. There is nothing specific that has happened. My term at Reserve Bank comes to an end in January 2010. You know there are a dozen great universities in the world and Stanford is one of them. So when I got such an offer, I thought it was worth taking it up. So there is nothing more or less to it.
So given the fact that both Raghuram Rajan report as well as Percy Mistry report did not have the advantage of hindsight with regard to the global recession and since all this rethinking happened after that, do you think a large part of those reports would require to be reviewed? I think your own report would have benefited from the hindsight.
What about CAC, because twice the lack of CAC has insulated us, in 1997 as well as now?
Well, as you may know, I had the privilege of chairing a working group for the committee of global financial systems of the BIS recently on capital flows to emerging market economies. The working group was appointed in mid-2007 consisting of 25 central banks including all the G7 central banks and BRIC central banks. So it was full participation of all the major countries. We reviewed the whole issue of capital flows to emerging markets economies.
It was very interesting because the group was appointed by the vice-chairman of the Federal Reserve Donald Kohn. The motivation at that time was the huge flows to the EMEs and reverse flow taking place from the reserves of the EMEs to the advanced countries. Of course, over the time that we worked everything reversed. So again, it was very interesting that the span of time that the preparation of the report took allowed us to give a balanced report to the BIS.
What we found was that, one, in the academic literature in the review of the evaluation of the benefits of the CAC, economists are not able to find specific benefits of total CAC. A number of academic reviews do find is that the foreign equity flows, in general, are beneficial, both foreign direct investment and foreign portfolio investment. And there is less of a benefit found from the CAC on the debt side. But this is a matter of degrees, not of zero-one issues. So from the literature, you will find that you need to be careful on CAC particularly dependent on development of the financial markets within the country.
Second, on the actual empirical side, there have been increasing cycles of international capital flows since the early 1980s at least. Lot of this actually went to Latin America as debt flows. And it was coincident with relatively loose monetary policy in the advanced countries, the monetary aggregates were rising internationally and so excess liquidity in that sense went off as debt to EMEs, particularly Latin America. Then when the advanced countries tightened the monetary policies, the capital reversal took place. And you had the Latin American debt crisis.
Same sort of cycle took place in the early 1990s when there was relatively loose monetary policy in advanced economies. This time a lot of this went to East Asia. Again, when there was a reversal of the monetary policies, there was a reversal of capital flows and you had the Asian crisis. And what is also interesting is that the recent IMF paper documents this and says that gross capital flows among advanced economies increased from around 8 percent of GDP to around 16 percent of GDP between a period of 5 years from 2002 to 2007.Again as the reversal took place they had problems.
Third, the report also documents about the issue of presence of foreign banks and what happened in eastern European countries and Baltics with a very large presence of foreign banks.
To summarise, the issue really is that, whether it is the presence of foreign banks or CAC, you need to look at these things as intermediate objectives or instruments to achieve some final objectives. They are not ends in themselves. So what you are interested in is that the financial sector and the international economy in the case of CAC helping the economic growth of a country. And we should take measures and decisions which help the economic growth of the country not as objectives in themselves.
(This story appears in the 19 June, 2009 issue of Forbes India. To visit our Archives, click here.)
The policy reforms for indian economy acc. to its economic structure. But generally we tend to develop policy based on developed nations. This should be chg...
on Jun 26, 2009The need of the hour is action oriented results in addition to the foresight which Mr Mohan has.The regulator lost a visionary and the countr lost a economist to tackle the economic crisis facing the economy
on Jun 8, 2009