The 1st IISS-Citi India Global Forum
India as a Rising Great Power:
Challenges and Opportunities
New Delhi, 18–20 April 2008
First Plenary Session:
Economic and Financial Outlook
Jeffrey Shafer, Former Undersecretary of the US Treasury for International Affairs;
Vice Chairman, Global Banking, Citi, US
(Provisional transcript as delivered)
It is a pleasure for me to be here as a part of Citi’s sponsorship of this event. It is a hallmark for an event that is focused on international relations and security issues to recognise that economics is part of that picture. I am pleased to provide some of that context.
Almost everyone in this room knows more about the Indian economy than I do so I am not going to focus on that. I am going to focus on the global context in which India is seeking to grow and sustain its strong growth, and its status as a rising economy and a rising power.
There are both short‑term and long‑term aspects of this. Normally one would think of this as a medium‑term issue, but at the moment we are facing a situation where one cannot avoid discussing what is going on in the US in the financial system that does have some global implications. Since I have a lot to say and very little time, I will give you 10 bullet points. I will then amplify several of them, in so far as I have some time.
Starting with the short term, we are nine or 10 months into what has become the most challenging period of financial distress in the US since the 1980s. It may well prove to be the most challenging period since the 1930s. Banks have constrained capital, there is a loss of confidence in securitised finance, and these are at the epicentre of what is a de‑leveraging process in the US right now. Aggressive policy action seems to be helping financial markets to find the floor, but the process of de‑leveraging will certainly continue. How soon we have an upturn is quite uncertain.
The economic consequences of this are only beginning, although the financial distress has been quite acute for the past nine months. The US is in recession now. That is probably something that began early this year and will continue to deepen as the year goes on, with perhaps some alleviation when the fiscal stimulus that was recently passed by Congress and signed by the President goes into effect probably in the third quarter. However, we are in for a year of recession in the US, and hopefully there will be an upturn by the end of the year or early next year.
There are close links in the world economy which means that there will be some spill over from the US weakness. The net effects will vary, however, and they are unlikely to derail growth in the rest of the world. In fact, until now, the principal impact of the US financial problems has been to stimulate growth in the rest of the world. As the Federal Reserve System has pumped up liquidity in order to try to fill the hole created by the collapse of securitised finance in the US, much of that liquidity has gone abroad. It has been seen in India in the form of capital inflows and the pressures on interest rates. That has been seen in China and other countries as well, such as the Middle East. The result of this has actually been to stimulate growth in the rest of the world. That is going to begin to be counterbalanced as the weakness in the US economy begins to have a bigger impact on US imports. However, that is not likely to be an overwhelming negative for the rest of the world.
There is a second problem in the background which possibly needs more attention. It may be more of a challenge for growth in the short and longer term. This is the fact that the global economy is creating demand that is outstripping the supply of commodities across the board, from oil to agricultural commodities to copper, aluminium, and almost any commodity one can imagine. This is the result of a number of years of very strong, sustained global growth, and inadequate response in terms of further investment. Almost every country in the world is facing rising inflation, centred on commodity prices. This is not simply something in the commodity markets; this is a reflection of strong global demand. It may reflect the fact that there is a constraint on how fast we can go, certainly if we cannot mobilise more resources to increase supply, and if growth is not more oriented on economising on the use of these commodities.
Looking at the longer term, the emerging markets are the most dynamic economic activity. They have been throughout this decade and they will continue to be, even when the US recovers from its current difficulties. You will see an economy that is growing at 2.5% for a year, possibly at 3%, whereas you have India growing at close to 10%. Our longer term forecasts see India getting to that 10% level. China is growing at over 10%. It may recede back to 10%, but will not collapse. Latin American economies are growing faster than they have for many decades. Even Africa is showing the best growth that we have seen in a long time. We believe this will continue and it is the centre of opportunity in the world. This means that the pressure on commodity prices will likely remain high. Commodity markets will be a recurring constraint and concern in the global economy. This is not a one‑off short‑term situation that we face.
The global labour force growth that we will see is in the emerging markets. India will be the single largest source of additions to the labour force in the global economy between now and 2030. Other emerging markets make up all of the rest. Europe, the US and Japan put together have negative growth in our labour forces. The US is a slight plus, but the other two are at minuses.
Consumption will follow the income created by that labour force. This is where the dynamic markets are going to be for people in almost any business. Power also follows wealth. That is why it is so important to put the economic questions central to this. We can see that happening. The strong activity in emerging markets is accelerating changes in the international, political and security relations. It is reducing the influence of the G7 nations. The illustration of the financial vulnerability of the US is going to add to this process, at least in the short term. This changing geometry is increasing uncertainty and it is going to be very important for the new rising powers and the old established powers to work together to try to find a way to bring about this shift in a way that minimises that uncertainty. How India fits into this is the theme of this conference. Clearly India has a very central role to play in this process. It is one of the two largest of the new emerging economic powers, and therefore political powers.
In the background of all of this, we are looking at an economic environment that is going to be increasingly politicised. We can see it almost everywhere in the world following 25 years of market integration and globalisation. People in the US tend to date it from 1981 when Ronald Reagan took office. People in the UK tend to date it from 1979 when Margaret Thatcher took office. I said this one to Bob Rubin, but he argued that we should date it from 1978 when the economic reforms were launched in China. Somewhere in that time period, there was a change that took place in the direction of philosophy of economic management around the world that has run from then until recently. It is increasingly challenged. Whether we move backwards or not - I hope that we do not - I think further forward progress is going to be more and more difficult to take. You can see it in the rising protectionist sentiment in the US; you can see it in the concerns about cross‑border investment in almost any country in the world, including India; you can see it in the shift in financial power back towards state actors in the growth of sovereign wealth funds, with more wealth in public hands rather than in private hands. All of these forces are going to change the nature of the economic world that we operate in.
Those are my highlight points. It is important, especially, to say more about the global growth picture. We are seeing a US economy that is in recession now, a European area that is growing slowly but is continuing to surprise on the upside, and a Japanese economy that is sagging slightly but will continue to growth. The emerging markets will slow down. Our forecasts see the total growth in the emerging markets slowing this year from 7.2% to 6.1%. That is still a very impressive performance. That is even with the recession in the US. In that, we see China slowing from 11.4 to 9.8%. One really cannot complain about that. India will slow probably to the high 7s this year. One sees that more as a reflection of the domestic pressures and constraints in the Indian economy than what is going on internationally.
If you look at the longer term, we see a return in 2009 in the Indian economy and in the emerging markets. There will be a holding up at the general level. As I said, the more important constraint on that is less about what happens in the US, but how tightly the commodity constraints and price pressures blight.
In this changing economic power structure, it is important to look at the role of two newly important actors in the world. One, as I mentioned, is the sovereign wealth funds. They are reflecting a new force. They are not as big as people sometimes believe. Sovereign wealth funds and aggregates are not nearly as big as other asset managers, but they are an increasing force. They have shown how important they can be when there is a round of recapitalisation of the US banking system, including Citi, that rely very heavily on the investment commitments from the sovereign wealth funds. It shows the very important and constructive role that they can and do play in the global economy.
There is a second force out there. It is very important and will change the nature of the world going forward. That is the emerging champions of the emerging markets in multinational enterprises. It is no longer the case that the leading multinational enterprises all have their roots in the US and Western Europe. We of course know about Emphasis, Tata, Reliance, Mittal, and others from India. Semex from Mexico. There are many from China. There is Samsung from Korea. There are many important emerging markets in which there are companies that are now important global players. That is changing the competitive environment from the old established people, but it also means that the new competitive environment among the new players is going to be a very important dynamic. It will have to live in a world where the Indian company that goes abroad is going to face competition from a much broader set of potential competitors than they might have thought in just looking at the US and Western Europe.
Finally, I want to amplify on the demographic trends and where the labour force of the future will come from. The current high income countries will have a reduction in their labour forces in the first three decades of this century. According to the estimates of the World Bank, 22.4% of the growth in the world’s labour force in these three decades is going to come from India. That is a tremendous power. China is going to be important, but less important, at 9.1%. That is happening for two reasons. One reason is that of population growth, although that will become less and less important over time. The other reason is the migration of people from marginal subsistence farming, as the education is put in place, to the mainstream developed labour force. For the next several generations, we are going to find the workers of the world in the same place that they were found in the 19th Century as people move from the farms to the cities and take new jobs. To do that, you have to put in place very strong and powerful educational infrastructure in order to sustain that flow. The hope of the world for the labour force of the future is going to come from India. The World Bank’s estimates suggest that there will be sufficient success in the educational process. 13.8% of the world’s increase in skilled workers over the same 30 years is going to come from India. Clearly one could even exceed that if the kinds of educational processes were put in place that accelerated the transformation.
When I give presentations as to what the world will look like in the future to companies in the US, the single fact that gets their attention more than anything is where the labour force of the future is going to come from. They also know that where the labour force is, that is where the consumers are going to be and the economic activity. That is the world that we are going to be living in going forward. It is an economic setting that justifies the focus we have on India as a rising political and security power as well.
