← The CGD Podcast
The CGD Podcast
Can MDBs Help End Poverty? – Montek Ahluwalia
00:18:35
On this week’s CGD podcast, economist Montek Singh Ahluwalia, who also serves as Co-Chair of CGD’s new High Level Panel on the Future of Multilateral Development Banks (MDBs), shares his experiences of and hopes for combating poverty in...
Loading summary
Transcript37 lines
- [00:05]
A
Hello and welcome to the CGD podcast with me, Rajesh Merchandani. Now, in economic policy circles, he is known only by his first name, Montek. But for several years under India's last prime minister, Montek Aluwalia, to use the full nomenclature, had the job of deciding the direction of India's economy. No small task. But then years of experience at the World bank, the IMF and various Indian ministries probably gave him the necessary skills and experience that he needed for that job. Now we welcome him to the podcast as the co chair of CGD's new high level panel on the future of Multilateral Development Banking. Montek Alewale, it's great to have you here. Thank you very much for joining us.
- [00:45]
B
Nice to be here.
- [00:47]
A
Now, 20 or 30 years ago, both India and China were kind of similar, poor, populous, and they both started liberalizing their economies. Today, given that you spent many years working in India's economy, why isn't India doing as well as China?
- [01:01]
B
Well, it depends on what you mean by India doing as well as China. If you mean by that growth rates actually right now, for the last several years, we've been growing reasonably well, not as fast as China, but pretty good. China started its economic reforms much earlier than India. I mean, China's economic reforms are usually dated from 1978. India is usually dated around 1990. So something of the order of 12 to maybe even 15 years difference. Because in India, the reform process, partly because it's a democratic environment, has been sort of stretched out over time, much more gradualist and so on. And during this period, China's growth rate has been phenomenal. So basically. Well, not since. I'm saying China's growth rate since 1980 has been phenomenal. India's growth rate has been pretty good from about 2003 onwards. But during the 80s and the 90s and maybe even the early part of the 2000s, China was typically growing 3 to 4 percentage points faster than India.
- [02:07]
A
Is it fair to say that India is underperforming at the moment?
- [02:11]
B
I mean, yeah, we should have been doing the same as China much earlier. I agree with that.
- [02:16]
A
So why is it underperforming now?
- [02:17]
B
I think it took much longer to get reforms going. You know, I think China had some distinct advantages even when it started its reforms because I think it had done a lot of investment, particularly in education. You know, levels of literacy and primary education in China were much higher in 1978 than they are or were in India, even 1990. So I think China had that advantage. They did very Strong reforms, much higher rates of investment, which is a reflection of the way their product is appropriated by various producing enterprises and not necessarily going into consumption. You know, Chinese consumption ratio to GDP, something of the order of actually less than 50%.
- [03:09]
A
One thing that they're trying to investment.
- [03:10]
B
Rates about 45, 48%. India's investment rate in the last five or six years has just gone above 30. So, you know, if you use any conventional notion of what causes growth, if you're able to invest as much as the Chinese have been able to do, you'd expect them to grow faster. And we're trying to improve our investment rate, but we haven't been able to get anywhere near what the Chinese have.
- [03:35]
A
And when you were working in the government of Manmohan Singh, the previous prime minister, you come from a tradition of kind of liberalizing, market driven. That's your kind of, that's your side of the fence, really.
- [03:48]
B
Yes, no, I have been in favor of liberalizing the economy in India for quite some time and I think we did manage to get liberalization started. But you know, it is a very open polity. It's not enough for the three or four people at the top who think this is what we should do. To assume then that'll happen. I mean, you need to persuade people, you need to overcome resistances, you need to build public support. And in a democratic environment, that just takes a lot of time. You know, it takes time because in a democratic environment, opposition to the government is an integral part of the democratic process. So very often you'll find people who, deep down know that this is the way to go, define their job as opposing whatever the government does. And that does mean that the rate of change slows down. I mean, a positive is that there's more consensus, there's more public participation in decision making and so forth.
- [04:55]
A
Now, in terms of development speak, we talk of concentrations of people who are poor in the world rather than just poor countries. India has one of the biggest economies in the world. It also has the largest number of the global poor, several hundred million people. That seems a bit strange to reconcile, doesn't it? You have this huge economy, yet you have so many people living in unending, grinding poverty. How is that possible?
- [05:20]
B
Well, it's still a low income economy. I mean, I think, look, the level of poverty is not entirely determined by per capita income. But clearly if you have a country at a certain level of per capita income with very large population size, then whatever percentage of the population is going to be poor, the absolute number is going to be quite large, what we've seen as a result of the faster growth that was achieved between, let's say, the poverty numbers that we have, the most recent, allow you to compare 2004 with 2011. In that period, it's quite unambiguously established that the rate of decline of poverty has been the fastest of any previous period. So the new economic policies which generated the faster growth have been associated with a fall in poverty. Now we need to continue that for another 10, 20 years with rising income, particularly if the development strategy is inclusive. And that has been the signature tune, if you like, of the planning methodology that we want an inclusive growth process. So if we are able to continue in that direction, I would expect to see a further decline, a continuing strong decline in poverty in coming years. Right now, I think the percentage of the population in poverty down to about 21% or so. And I think in the Indian debate, there's now much greater acknowledgement that it's not just who's poor. There's a sort of several percentage points in terms of population above the poverty line who actually may not be technically poor, but they are pretty low income, they're vulnerable, they very often don't have access to all kinds of amenities, strugglers. So, yeah, so you're really Talking about maybe 30, 30, 40% of the population which needs to be brought up to a minimum standard of level of income and a minimum standard of access to essential services. I mean, these two things are really quite different. It's perfectly possible to have rising income of the kind that enables you to purchase the sort of commodities that you want to have to get out of poverty, but you may still not have access to clean drinking water, you may not have access to good education, and those are now rightly, in my view, regarded as essential criteria.
- [07:51]
A
This is what the global goals, this is what's included in the SDGs.
- [07:55]
B
Well, it's all been included in our goals for the last 10 years. But yes, the SDGs are now saying the same thing.
- [08:02]
A
But if India doesn't do better, then the world is not going to reach goal number one, eradicating poverty.
- [08:09]
B
No, no, absolutely clear. But look, India's already, during the Millennium Development Goal period, we have achieved the objective of halving poverty. So that's got done. I agree entirely that, you know, eradicating poverty depends very crucially on India continuing to make progress in this area between now and whatever, 20, 30 or something.
- [08:34]
A
What does India need to do to ensure that it does continue to reduce poverty in order to help meet that.
- [08:43]
B
SDG well, you know, our strategy has always been one set of policies has to do with making growth rapid and also growth inclusive. I mean, growth inclusive is still operating on the growth side. It's just making sure that the growth takes place in sectors which would filter down to the poor.
- [09:03]
A
And that's a real problem in India?
- [09:05]
B
No, not really. I mean, I think in India, in my view, seven and a half percent growth with a lot of emphasis on labor, absorbing both services and manufacturing. 4% growth in agriculture, which is entirely feasible, would do the trick.
- [09:23]
A
And is that going to be paid for just domestically or are you, you.
- [09:26]
B
Know, India's growth has been largely paid for domestically. I mean, put it very roughly. If the gross domestic capital formation has been something of the order of 34 or 35% of GDP, the gross domestic savings have been 33% of GDP. So foreign investment is between 1 and a half and 2% of GDP. It's very important because it creates linkages, gives you access to global supply chain technology, et cetera. But the financing of investment in India, as indeed in China, is entirely the result of domestic savings and we need to keep that going. We also need to make sure that the savings are properly channeled into the most productive sectors.
- [10:08]
A
Is there enough money domestically to pay for the kind of infrastructure investment that you're saying India needs to really take off? Well, I mean, where's that money going to come from? I know the World bank has a big lending program in India now, doesn't it?
- [10:20]
B
No, the World bank money for India is almost negligible. I mean, we're glad that they're there and they're doing some lending, but the actual volume of lending they're doing is very small compared to the total investment in the economy.
- [10:32]
A
So where's that money for infrastructure going to come from? Domestic savings, but all enough?
- [10:37]
B
Well, I mean, first domestic savings could go up. I mean, after the Eurozone crisis there was a decline of about 2 or 3 percentage points in domestic savings. Now I think that with the economy, once the economy recovers, it had bottomed out about a year ago, it's now going up. We could get domestic savings back to say something of the order of 35% of GDP. Now that extra 2% of domestic savings, if all of it were to go into infrastructure, I think we'd be much better off.
- [11:07]
A
Let's talk about the work that you're doing here at CGD as part of the High Level co chair of the High Level Panel on the future of Multilateral Development Banking. What Are the issues that the multilateral development banks face, do you think that needs to be addressed?
- [11:22]
B
Well, there's lots of issues. I mean, you know, the multilateral development banks were set up in the aftermath of the war a long time ago. The world's changed quite a bit. The relative economic size of the emerging markets, their needs have changed. There's a view that there's a huge amount of private capital, so why do you need multilateral development banks? On the other hand, there are altogether new needs that have come up. I mean, for example, financing of infrastructure, which is not just an Indian issue, but it's an essential part of whatever any developing emerging market country does if it wants to get itself ready to compete and be efficient and productive in a global economy. There are the new demands of sustainability, the environment, climate. So there are some projections that would suggest that developing countries need a huge amount of capital. And there is one view which says there's a lot of capital sloshing around in the global capital markets, but you don't need the multilateral development banks. On the other hand, there's also a view that the fact that there is easy short term liquidity doesn't mean that poorer countries or emerging market countries can get liquidity or get finance on the terms and length of terms that they need. And that's the gap which the multilateral development banks can fill. So what we've been doing is we've been looking at a number of different people who have commented on the multilateral development banks. We've only had our first meeting so far, so a number of issues have been raised. But I hope that what comes out of it is a clear, clearer vision that given where the world is now and given what the MDBs have been doing and given how much emerging markets have changed and what their new needs are, is there a case for a new mandate for the multilateral development banks? There is a view out there in the private sector which says they've outlived their usefulness and that basically a credit worthy country can get all the money it needs from the market. I mean, we also borrow externally, not from the MDBs alone. But that's the question. Is there a role that the MDBs have to play? Is it different from what it was 20 years ago? And if it is different, what is it about the structure of the ndbs, mdbs and the way they operate that needs to change in order to enable them to place. So there are a lot of issues here.
- [13:54]
A
What was your gut telling you? What do you think?
- [13:56]
B
Oh my Gut, definitely there's a role, definitely they've got to be doing different things from what they were doing earlier. How to restructure their mandate is a controversial issue because it's not a question, just what my views are. Ultimately the mandate is given to them by donor organizations, which is also actually a political decision. And I think right now it's unfortunate, but in many, many industrialized countries there's probably not enough support, maybe not enough, in my view, understanding of the importance of the role of the multilateral development banks. So I think if the report can draw attention to that and to carry credibility, it could make a difference.
- [14:40]
A
Now the World bank meetings are taking place. What should its priorities be in coming years?
- [14:46]
B
I think the World bank does need to think about two or three things. One is that we've got a large number of regional development banks. The Asian Development Bank, African Development Bank, Inter American Development bank. And you know, the relative size of the World bank has been constrained. The lending from these other banks has actually gone up. There have been demands, including from India, that the World bank lending should be expanded. This has not been agreed to by major donors. One consequence of that is that new institutions have got set up. I mean, the BRICS countries have set up the BRICS Bank. The Chinese have now set up the Asian Infrastructure Bank. So like, it's one of those situations that, you know, if you, if you don't allow the World bank to play the role which corresponds to the demand for investment, you're only encouraging a new institution. Nothing wrong with that. I'm in favor of competition, but the bank and its shareholders need to think, are we missing something? And I think that at least my view and the view of many others is that there is a case for some serious rethinking and refashioning the mandate. I mean, that's one point. If you talk about what directions of refashioning, there are altogether new things that are now coming up. I mean, global public goods is one. Anything connected with mitigation is a global public good. I mean, countries are constantly talking about reducing their carbon footprint. But you know, the cost of reducing your carbon footprint is borne by the country. The benefits, or rather the damage avoided is not entirely that of the country. It's of the whole world. So you need some global support mechanisms to make sure that countries do enough. That would be one clear mandate for some kind of an institution. Now the existing international discussions, they're talking about some kind of a fund in the UN framework. The bank could also play a role. And what this group is discussing is, given all that's going on, what do we think should be the mandate for the ibrd? You know, my view is that while there's always room to set up new institutions, if you have a development institution with a good track record, which has been there for a long time, it's much better to refashion it to play a substantive role which is needed, than to simply let it die out. And if we don't do anything, I think that's what's going to happen. Because if you do not expand bank lending, I mean, the bank can only sustain its activity from the earnings that it gets from the bank side of the lending, not from the either side. And therefore, if the lending of the bank is constrained, then it will actually slowly wither away, if you like. Question is, is that the right thing to do? I don't think so.
- [17:54]
A
Nancy Birdsall will be very happy to hear you talk about the importance of global public goods in the future of the World bank, something that she's written about quite a lot and she advocates a lot about. But for now, Montek Singh Alawale, it's been a pleasure to talk to you. Thank you very much for joining us on the CGD podcast.
- [18:09]
B
Thank you. Pleasure to be here.
- [18:11]
A
Want to know more about the high level panel on the future of multilateral development banking, go to our website, cgdev.org all the rest of our work is there as well. And again, thanks for joining me, Rajesh Merchandani. And join me again for the next podcast from the Centre for Global Development.