New Delhi, India (March 3, 2011) – Lael Brainard, the United States Under Secretary for International Affairs, an office of the Department of the Treasury, was in India this week and delivered remarks to the Institute of International Finance.
Brainard expressed that this was to be the first of many visits to help translate President Barack Obama’s vision of economic partnership between the United States and India into tangible results. On this trip, she made several site visits including a hybrid solar-powered cell phone tower that was made possible by a fusion of technologies from both the U.S. and India and underwritten by equity investments from Indian and American partners along with U.S. export financing.
“By helping to bring households in remote rural villages into the circle of economic opportunity, and doing so in a way that promises to be both cost-effective and green, this partnership is creating opportunities that have potential well beyond India’s vast market,” said Brainard.
The world economy is on its firmest footing since the start of the crisis, Brainard added, but said the recovery is proceeding at different speeds, and that it requires careful monitoring of risks, and volatility in oil prices associated with events in the Middle East and North Africa.
Alongside continued projections of strong growth, she said many emerging market economies face inflationary pressures and associated risks of overheating. Europe also faces challenges stemming from economic divergence between countries recovering strongly and periphery nations such as Greece and Ireland with high public debt levels, large budget deficits, persistent external imbalances, and contingent liabilities in the banking sector.
“While the overall picture is encouraging, the three-speed recovery presents some policy challenges,” she said.
In the United States, Brainard said there are increasing signs of a self-sustaining recovery in consumer and business spending. Consumers and businesses are showing optimism with growth in spending and business investment at a solid pace since last fall.
“Of course, we still face substantial economic challenges,” she added. “Too many Americans are not yet back to work, and many are struggling due to losses in their savings and the value of their homes.”
Policy initiatives seek a balance between supporting growth and job-creation in the short term, and putting in place a credible medium-term framework for fiscal consolidation. She said the President’s Fiscal Year 2012 Budget delivers is consistent with the G-20 Toronto commitment to cut deficits in half by 2013 and stabilize debt-to-GDP ratios by 2016.
Brainard said the unfolding events in North Africa and the Middle East and the associated volatility in oil markets have underscored the important issue of rising global commodity prices. It is having an impact on commodity prices and inflation and the living standards of the lowest-income groups in emerging market economies, where fuel and food tend to comprise a larger share of consumption.
“This underscores the importance of expanding investments to enhance agricultural productivity in lower income countries, a high priority for the US and G-20,” she added. “In the United States, the impact of commodity prices on broader inflation is likely to remain muted due to the high level of slack in the labor market.”
Despite the unexpected events, Brainard said the world economy is in considerably better position to cope with higher prices than it was just a few months ago. She said there is sufficient domestic reserves and spare capacity among major producers in the Middle East to offset the impact of oil supply disruptions.
She said the disruptions leave hope that Egypt and Tunisia can manage a careful transition to more democratic and inclusive systems of governance, and hopefully will also undertake the economic reforms necessary to complement political reform and economic aspirations.
“We are also working together to build consensus on reforms that will make global growth more sustainable and the global financial system more stable,” she added.
The global capital flows to many emerging market economies are now in line with historical averages after rebounding from crisis lows. She said that working together on a better framework would help countries manage volatility in capital flows without imposing adjustment burdens on others, with growth and attractive rates of return in these economies.
Brainard noted that capital surges could also complicate macroeconomic management, and contribute to credit booms and busts, and risk sudden reversals. The challenge, she said, is to reduce the risk that capital flows contribute to excess growth in credit or asset prices, and leave domestic financial systems vulnerable – without undermining the real benefits they can bring or market signals they reflect.
She promoted a classic mix of monetary and fiscal restraint, with policies to promote external sustainability and reduce risk of trade imbalances – over the “three-speed” recovery alternative that produces undue risks especially in emerging economies.
“In the G-20, we are moving gradually to build consensus on ways to measure external imbalances and identify their causes,” she said. “The IMF will play a key role in this process, providing independent assessments of the impact of each country’s policies on global economic stability and growth. It is critical to develop stronger norms for exchange rate policies that will facilitate and not impede economic adjustment.”
Since June 2010, she said China’s authorities have allowed their currency to appreciate against the dollar at a pace of about six percent a year in nominal terms, and more than ten percent a year in real terms, given faster inflation in China than in the United States. The currency remains substantially undervalued, and she said its real effective exchange rate – the best measure to judge its currency against all of its trading partners – has not moved much.
“We will continue to engage bilaterally and multilaterally on this important issue,” she said. “And finally, we are working to ensure a stronger and more resilient financial system. The United States has moved quickly in this regard with the enactment of the Dodd-Frank Act.”
Brainard said a fundamental lesson of the crisis is that national efforts by themselves, while necessary, may not be sufficient. Globally synchronized financial markets require globally convergent financial standards.
She encouraged international coordination through the Financial Stability Board and G-20 is critical to ensure efforts to promote safety and soundness in one major financial jurisdiction are reinforced and not undermined elsewhere.
“We must move ahead on the agreed steps to increase capital and limit leverage, and put in place the mechanisms needed to wind down complex, globally active institutions, while recognizing that it is important to provide clarity so that market participants have time and opportunity to adjust,” she said.
“The prospects for stronger global growth and stability depend in large part on our ability to partner effectively, both bilaterally and multilaterally, to get right these key policy challenges and create a favorable environment for your firms to invest, hire, and excel,” she concluded. “We look forward to continued collaboration with the Indian government in this regard, and with all of our partners in the G-20.”