The Rediff Special / Michel Camdessus

'India needs to act now to ensure it too reaps the full rewards from the globalisation process'

Michel Camdessus, managing director of the International Monetary Fund, took a two-day pleasure tour of Goa, visiting temples, churches and the countryside. He ended his trip by addressing the Goa Chamber of Commerce and Industry at the state capital of Panjim on March 3, 1997.

He stressed that India needs to globalise rapidly and gave advice on how the developing world could do this. Here is the full text of the speech:

Ladies and gentlemen. It is always a rewarding and enriching experience to come to India. This time, however, I feel particularly fortunate to be here - not just here in India but, especially here in Goa.

It gives me the opportunity to pay tribute - here on his own ancestral soil - to the career of a most distinguished son of this land, my colleague and great friend, Mr P R Narvekar.

But before I do that let me make a few remarks to you about the outlook for the world economy which is undergoing a process of rapid globalisation and the opportunities and challenges this phenomenon holds for India.

By globalisation, I mean the integration of economies through trade, financial flows, technology slipovers, more rapidly available information, and cross-cultural currents.

This phenomenon is not a new one, of course, but it is reshaping the world economy. And what better place to talk about these developments than Goa, which during the 16th and 17th centuries - also known as Goa Dorada or Goa's golden age - was the epicenter of maritime trade between Europe and the countries of South East Asia and the Far East.

Indeed, Goa has a long history of international contacts through trade and commerce, and has long been an important gateway to India.

The brisk expansion of world trade and the unprecedented degree of capital mobility have allowed many countries to develop much more rapidly than would otherwise have been possible. As a result, new power houses have emerged and the relative economic power of countries is shifting.

Virtually every country in the world - developing and industrial - is trying to come to grips with these changes and what they mean for their economies, their people and their cultures and ways of life.

What is clear by now is that countries that are in a position to open up their economies, attract investment, and participate in the expansion of world trade stand to gain enormously from the globalisation process.

In this regard, one cannot help but be struck by the results that East Asian and Southeast Asian countries have achieved in the last 10 to 15 years - not only high and sustainable rates of growth, but equally important, the kind of "high-quality" growth that also fosters human development, promotes equity, safeguards the environment, and promotes cultural values.

Of course, these countries have taken different approaches to get where they are today, and they still face many challenges. Nevertheless, it is worth mentioning the common elements of their success.

It is now nearly universally accepted that at the domestic policy level, there is no substitute for stable macroeconomics policies that give confidence to financial markets, raise domestic saving rates and attract foreign investment.

Likewise, transparent and predictable regulatory policies, investment in human capital, and open trade regimes are also essential ingredients in developing a dynamic private sector. Indeed, the most effective economic strategies have been those that are outward-oriented and led by the private sector.

These elements have all been a part of the strategy that has formed the core of East Asia's success. there is also ample evidence that when the state dominates the economy, resources are often misallocated, and private investment and growth suffer. To be sure, governments do have an important role to play, but it is mainly to facilitate economic activity, not to take the place of private transactors.

As successful as some East Asian countries have been, they still face a number of important challenges. Among these are the need to continue to deregulate goods, labour and financial markets, while guarding against domestic and external imbalances and, very importantly, ensuring the soundness of the financial sector.

The enormous increase in the volume of capital flows has clearly put new strains on domestic banking systems Furthermore, large capital inflows have also generated strong demand pressures, which are manifested in widening current account deficits and rising domestic prices.

Reducing these imbalances and the concomitant risks of overhearing, and strengthening their financial systems will remain the main challenges for the foreseeable future.

Unfortunately, however, many developing countries have not yet begun to reap the benefits of globalisation. They have not witnessed the virtuous circle that emerges when macroeconomic stability, coupled with market liberalisation, catalyses domestic saving, attracts private capital inflows, and raises growth - which, in turn, unleashes a fresh wave of liberalisation, saving, investment, and growth.

As a result, some countries have been unable to raise living standards significantly and have continued to lose ground in relation to the more advanced economies.

Where does India stand vis a vis the strategy I just outlined?

These past few days I have seen for myself the tremendous changes that have taken place since India embarked on its reform program just five years ago. The far-reaching program of industrial deregulation has unleashed the forces to create a thriving private sector.

The difficult steps of liberalising trade and opening the doors to foreign investment have initiated India into the global economy.

The results of these efforts have been impressive. Real growth has averaged 7 per cent during the past three years, led by substantial increases in private savings and investment.

Today, India is at a crucial crossroads. The strong economic performance of the past few years and the favorable external environment provide a unique opportunity for India to accelerate its growth to the rates seen in the Asian "tigers" and to make major inroads in reducing poverty.

But India needs to act now to ensure it too reaps the full rewards from the globalisation process. As we have seen in the East Asian economies, the potential benefits can be enormous: the expansion of savings to finance critical investment, improved efficiency from greater competition, and the spillovers of technology - can all contribute in significantly raise living standards across all of India's population.

The most difficult challenge ahead is to tackle the large fiscal deficit decisively. This is critically needed to maintain macroeconomic stability and to raise a national savings to finance India's growing investment needs.

We have already seen how the recent high real interest rates and credit constraints have led many Indian firms to postpone investment. But the only way to address these problems is through fiscal consolidation. Any attempt to bring down interest rates through faster monetary expansion will only lead to higher inflation, which hurts the poor the most.

Of course, fiscal consolidation must be also be well-designed to avoid unduly hurting the poor. Unproductive expenditures must be curtailed and well-targeted social safety nets need to be provided.

The second key challenge is to launch a bold second wave of structural reform to complete the process that was started five years ago. Among others, further steps are needed to liberalise trade, strengthen the financial sector, and formulate policies which allow firms greater flexibility to respond to competition and structural changes.

All of these are prerequisites to making India a leading, dynamic economy in the 21st century.

Now, let me turn back to my colleague and native Goan, Mr Narvekar. On reaching the milestone of his sixty-fifth birthday, Mr Narvekar decided to retire a few weeks ago from his post as deputy managing director of the IMF.

This was no ordinary retirement. For one thing, Mr Narvekar, served the Fund for longer than anybody else, for almost 44 years. But it is not mainly as the holder of a long-service record that he will be remembered, but for the personal and professional qualities that shone through everything he did.

To his work, he brought all the classic qualities of a successful public servant - hard work and dedication; great clarity of thought and expression; and good sense and practicality.

But he also brought qualities which are much rare. He knew how to reach out to our member countries not simply as a dutiful public servant fulfilling the needs of his own organisation but as an enlightened human being thinking of their needs.

While he maintained strong links with his native country, his vision was truly global. And his dealings with all -whether the most junior colleagues or the highest officials - were marked by an unfailing humility and sense that all human beings, whatever their circumstances, are entitled to courtesy, respect, and dignity.

Most of his career was spent working on Asia at a time when the region was emerging dramatically from economic backwardness. He can be proud of the role which - as a trusted advisor and confidant of many governments throughout the region - he played in this process, not least in drawing the lessons from the experience of Asia's most dynamic economies for three countries, including India, who embarked on a similar road somewhat later.

While without parallel in his intellect, vision, and breadth of economic and humanistic culture, he dealt with all whom he met, whatever their circumstances, with humility, courtesy, and a strong sense or the needs on others.

While the maintained strong links with his native country, his vision was truly global. He never lost sight of the ultimate goal of helping human beings throughout the world to live together in peace, prosperity, and contentment. This unique set of qualities served the fund in an outstanding fashion, especially in his role as deputy managing director, in guiding the steps we had to take to adapt the Fund to the challenges of globalisation.

Mr Narvekar, it is my special privilege to be able to say to you here in Goa how much the Fund and the whole international community have benefited from your many years of distinguished and faithful service. You never lost sight of the fact that the ultimate goal of all our efforts is to allow human beings throughout the world to live together in peace, prosperity, and contentment. For all that you have done and for all that you have inspired other to do, it is my privilege to say well done and thank you.

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