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February 1, 1999


Sinha calls for resilient global financial systems

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Finance Minister Yashwant Sinha has stressed the need to develop an international financial architecture to avoid recurrences of crises that affected southeast Asia and other countries.

Addressing the plenary session of the World Economic Forum in Davos on Sunday night, Sinha said, "It is necessary to make the financial systems more resilient and strengthen their capacities for crises management."

The finance minister said in the new era of globalisation, when capital flows are playing an enormous role and with the flows in the capital account being so large, institutions like the IMF coming to the rescue of countries hit by crises, is indeed relatively small.

Recent crises in various countries have highlighted the need for a new international financial architecture that will make globalisation a smooth and continuously forward moving process rather than an ''on-and-off'' recurrence, he said.

The minister also said that only such a system can provide an equitable environment for both industrial and developing countries to prosper so that the next millennium would bring prosperity for people all over the globe, especially the poor.

Sinha said free mobility of labour across the globe has not received the attention it deserves as an important process of globalisation. The recent crises in various countries of the world have highlighted the need for a new international financial architecture that would address this issue.

The finance minister said the revamped financial architecture should also pay particular attention to the recent history of developing country governments having to assume debt obligations of private sector borrowers because of pressures exerted by lender countries directly or indirectly.

The moral hazards as a result of this practice has meant that creditors have persisted in regarding the liabilities of emerging market banks and businesses as underpinned by sovereign guarantees.

The present global turmoil is, in part, a result of this 'market' practice. A credible mechanism needs to be evolved, in cooperation with multilateral institutions and national supervisors of both developed and developing economies, to ensure that debtors and creditors are fully aware of their respective responsibilities for prudent behaviour.

''We have continued to take measured steps in liberalising capital account in a calibrated manner. We see capital account liberalisation as a process and not a one stroke event. We see it to be embarked upon as a part of overall economic reforms and on our assessment of the emerging international economic and financial architecture,'' Sinha said.

The finance minister said the government has started by consolidating the first phase of reforms and launching the second phase of reforms some of which were announced in the recent weeks -- these include privatisation of airports, corporatisation and privatisation of major ports in new policy for road sector for attracting private investment and the new telecom and information technology policies among others.

Sinha said the government's commitment to reform and the strong macro-economic indicators of the economy should provide considerable comfort to investors.

India's second phase of economic reforms, which is underway now, would provide considerable ''comfort'' to investors, Sinha said.

He said the country had managed to avoid much of the Asian economic turmoil due to its low level of short-term debts in the financial portfolio.

The government has also taken steps to increase investment in education, he said.

Sinha said India's economic indicators are very favourable when compared to other developing countries and the government's reforms should provide ''considerable comfort'' to investors.

He pointed out that India had moved cautiously but systematically from a control-based regime to current account convertibilty and market determined exchange rate.

''We have managed capital account in such a way as to ensure growth with stability and simultaneously added to our reserves,'' Sinha said and noted that the capital account is fully convertible for both direct and institutional foreign investors and also the Non-Resident Indians.

He said India is taking measured steps in liberalising its capital account as part of the reform process. ''We in India are committed to globalisation, free of exploitation and one that brings in high growth, enabling speedy reduction of poverty. We see globalisation as a means to new and substantial opportunities not merely to a few rich but to a vast majority of the working and poor people,'' he said.

Meanwhil, a top International Monetary Fund official has vigorously defended the organisation against criticism that it disregards the social impact of its rescue plans for crisis-hit countries.

"This is nonsense from people who have not read or looked at the programs,'' the IMF's number 2 official, Stanley Fischer, told a gathering of business and political heavyweights yesterday. "It is time that it stopped.''

In a report this January, the 182-nation organisation rejected charges that some of the austerity measures it required Thailand, South Korea and Indonesia to pursue were misguided and worsened the crisis.

However, it conceded some mistakes were made, including misjudging the severity of the recessions that followed adoption of the IMF recommendations in exchange for billion-dollar rescue packages.

Fischer said it is impossible to avoid shrinking economies in dealing with crises, but it is equally an illusion to imagine that the people who design these programs are unaware of their social consequences and do not care.''

Citing turnarounds in South Korea and Thailand as evidence of the programmes' success, he said each one takes into account the circumstances of the country involved.

"It is an outrage and an offence to be told things which are patently not true,'' Fischer said. "If I say that with some feeling it is because I have heard this now in this conference repeatedly by people who should know better.''

This year's WEF gathering has seen widespread calls for some reform of the global economy, but little agreement on how that should be done.

Leaders including South Africa's Nelson Mandela and Egypt's Hosni Mubarak have pointed to pitfalls in the free-market approach.

Mubarak said it must be rethought because it has dramatically failed poor people.

"Our global village has caught fire,'' he said. "We have put out most of it, but there are still pockets that can threaten us all again.''

Calling for business leaders to accept largely ignored United Nations labor and other rights conventions, UN Secretary-General Kofi Annan said the new global market has to win the confidence of people marginalised by globalisation.

Sharing a platform with Indonesian and Indian officials, Fischer stated that "nobody here wishes to withdraw from globalisation''.

"That way isn't there,'' he added. "We have to build a better system. We're doing that.''

Fischer met with Russian prime minister Yevgeny Primakov, who is pushing for renewed credit to Moscow.

Primakov said they had a very positive exchange of views and that he had invited Fischer to Moscow for more talks on restoring a $ 22.6 billion aid package, basically scrapped when economic turmoil hit Russia last August.


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