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Assessing Global Policy Advice

Ashima Goyal ("Avoiding Handicaps: Assessing Global Policy Advice for India", epw, 2 May 2009) in response to two papers "India and Bretton Woods II", and "Preventing and Responding to the Crisis of 2018" asserts that the arguments therein are inconsistent because the advice for international policy is in contradiction with the guidance for Indian domestic policy. No doubt there is a tension between both the articles, but there is no contradiction in the arguments and the policy proposals.

DISCUSSION
Assessing Global Policy Advice Aaditya Mattoo, Arvind Subramanian and collective good. Apart from the tactical issue, is there a contradiction in substantive terms? This is an issue which we addressed in more detail in our paper where we elaborated on the proposal on multilat-

Ashima Goyal (“Avoiding Handicaps: Assessing Global Policy Advice for India”, epw, 2 May 2009) in response to two papers “India and Bretton Woods II”, and “Preventing and Responding to the Crisis of 2018” asserts that the arguments therein are inconsistent because the advice for international policy is in contradiction with the guidance for Indian domestic policy. No doubt there is a tension between both the articles, but there is no contradiction in the arguments and the policy proposals.

Aaditya Mattoo (amattoo@worldbank.org) is with the World Bank in Washington DC and Arvind Subramanian (asubramanian@ petersoninstitute.org) is with the Peterson Institute for International Economics, Washington DC.

A
shima Goyal provides a very thoughtful response to the two pieces, “India and Bretton Woods II” (EPW, 8 November 2008 – hereafter “S1”) by us, and “Preventing and Responding to the Crisis of 2018” (EPW, 10 January 2009 – hereafter “S2”) by Arvind Subramanian. She claims that the arguments of the two sets of proposals are inconsistent in one key respect: S1 argues for multilateral rules on undervalued exchange rates while S2 argues for self-insurance and competitive exchange rates for India. To put it starkly, the advice for international policy is in contradiction with a dvice for Indian domestic policy.

To be sure, there is a tension between S1 and S2 but there is no contradiction. Start first with what S2, the piece aimed at I ndian policy, said about the internationally desirable outcome:

So, one lesson seems to be that self-insurance is a prudent and even necessary strategy to limit the impact of financial crises. This would, of course, have to be qualified if international collective arrangements

– regional and multilateral – can provide liquidity during crises... India should as a responsible member of the international community work hard towards building these arrangements, but for the foreseeable future, liquidity provision under them is unlikely to become a full or adequate substitute for domestic self-insurance.

Thus, self-insurance and competitive exchange rates at the national level are clearly inferior if collective liquidity/ insurance is available at the multilateral level. But if it is not, or in the interim to such arrangements being designed, national policymakers will have to be prudent and design policies taking as given the absence of such arrangements.

The second and perhaps more important tension that Goyal raises is whether it is inconsistent to call for India to pursue a competitive exchange rate strategy even while calling for multilateral rules against undervalued exchange rates. First, there is the same tension between the individual good

Economic & Political Weekly

EPW
june 13, 2009 vol xliv no 24

eral rules on undervalued exchange rates (Mattoo and Subramanian, forthcoming). The tension is even greater than what Goyal suggests because the o ther research which one of us has co- authored shows that undervalued exchange rates can have positive long-run growth effects (Rodrik and Subramanian 2008). The key point is that multilateral rules are needed when a country’s actions have systemic implications or what one might call negative spillovers for trading partners. This is how we phrase it in our forthcoming paper:

Our proposal (to regulate undervalued exchange rates) raises an important concern: Is it desirable to outlaw undervalued exchange rates in every situation? Increasingly, economic research suggests that the exchange rate can be a tool for economic development – at least, ruling it out as a tool would be d ifficult to justify on economic grounds... Equally, though, u ndervalued exchange rates should not be used to inflict negative spillovers on trading partners. Thus, exchange rates i nvolve a tradeoff – they may confer dome stic growth benefits while at the same time inflict costs on other countries. The benefits are potentially greater for poor countries while the costs to trading partners are likely to be related to the size of a country’s trade. It should therefore be possible to define – through negotiations – a threshold level of development and of country size beyond which the costs to trading partners could be thought to overwhelm domestic benefits.

So, as long as India remains relatively poor or small in trade terms, there would be no contradiction between the policy advice in S1 and S2. However, as these characteristics change, India would have to start taking the international consequences of its domestic policy actions more seriously. Noblesse oblige is a good principle for international rule-making.

References

Mattoo, Aaditya and Arvind Subramanian (forthcoming): “Currency Undervaluation and Sovereign Wealth Funds: A New Role for the World Trade O rganisation”, World Economy, working paper version available at http://www.petersoninstitute. org/publications/interstitial.cfm?ResearchID=871

Rodrik, Dani and Arvind Subramanian (2008) “Why Did Financial Globalisation Disappoint?” (available at http://www.petersoninstitute.org/publications/papers/subramanian0308.pdf)

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LP_Dis_Aaditya_Mattoo_2Jun09_PC1.indd 101 06/15/2009 9:38:50 AM

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