Don`t repeat past mistakes: PM tells leaders on protectionism

V S Chandrasekar

London, Apr 2 (PTI) As world leaders grapple with
differences on how to overcome the economic crisis, Indian
Prime Minister Manmohan Singh has asked the industrialised
nations not to "repeat past mistakes" of resorting to
protectionism and favoured sharing information and bringing
tax havens and non-cooperating jurisdictions under close
scrutiny.

"An issue of vital concern to developing countries is
the rise of protectionist sentiment in the industrialised
world. This phenomenon is not surprising, given the downturn
in economic activity and the rise in unemployment," Singh said
in his remarks at the official dinner hosted by British Prime
Minister Gordon Brown to leaders of the G-20 summit here
Wednesday night.

"However, it will be a test of leadership whether we
can persuade the public that we must not repeat past mistakes.
We know that the Great Depression was as deep and prolonged as
it was because countries resorted to protectionism which
triggered protectionary responses, leading to a downward
spiral," the Prime Minister said.

Asserting that the leaders of the developing countries
have struggled to overcome the doubts and fears of their
public to persuade them on the merits of integrating with the
global economy, Singh said "these hard won gains will be
destroyed if industrial country markets are not not kept open
in these difficult times."

"I must emphasise that this is an area where
leadership must come from the industrialised countries. I hope
the Summit communique will contain firm commitment of our
intentions to keep our markets open," the Prime Minister said.

Singh said the current economic crisis was the worst
in 60 years and is generating negative expectations which
threaten a downward spiral if not corrected. The pain is being
felt both in industralised countries and in developing
countries.

"A global crisis requires global solutions. In
Washington DC (in November last) we pledged to take action to
revive the world economy and also to bring about basic reform
of the financial sector to reduce the likelihood of similar
crises in future and to build institutions that can intervene
more effectively if we do.

"We have made considerable progress in several areas,
but I believe much more needs to be done," he said.

Turning to issues of longer term reform of the global
financial system, the Prime Minister said the current crisis
has drawn attention to some basic flaws in the functioning of
the banks and other parts of the financial system which
enabled a dangerous build up of risks.

"This experience shows that it is not not enough to
rely on light regulation of the financial system, combined
with market enforced discipline and enlightened managements
using in-house risk management techniques," Singh said.

"We have to move to stronger regulation and improved
supervision if we are to prevent a repeat of the crisis.
Valuable work has been done by the working groups set up to
chart the broad directions of reform in this area," Singh
said.

"We should endorse the recommendations emerging from
this work and entrust the recently-expanded Financial
Stability Forum and the expanded Basel Committee on Banking
Supervision to prepare detailed proposals which can then be
used by national regulators to align our national regulations
with the new global standards," the Prime Minister said.

Singh expressed confidence that leaders attending the
summit would agree on the need to expand the perimeter of
regulation to cover the non-banking sector, the need to
redefine capital requirements to avoid pro-cyclicality, the
need to avoid a build-up of excessive leverage and the need to
subjet systemically important institutions to supervision by a
college of supervisors.

"We should also endorse sharing information and
bringing tax havens and non-cooperating jurisdictions under
close scrutiny," the Prime Minister said on the issue, which
has also generated considerable political interest back home
where certain parties are demanding that the government take
up with the West the need to repatriate money stashed away in
Swiss banks and other havens.

The Prime Minister said in addition to improving
regulation in individual countries, there was also need to
develop an effective early warning system which can spot a
build up of risks which would threaten global financial
stability.

"This task must be assigned to the IMF in consultation
with the expanded Financial Stability Forum. The IMF is the
logical institution to deal with this task but I must add that
its capacity to undertake even-handed surveillance needs to be
greatly strengthened if it is to perform the task well.

"This is ultimately connected with the governance and
accountability of the institution," Singh said.

He said the world has changed greatly since the
multilateral institutions were established and their role
needs to be redefined and mandate suitably revised.

The representation of the developing and emerging
market countries in the decision-making levels of these
institutions also needed to be improved.

"Better representation is essential if the
institutions are to have the legitimacy they need to play
their role in an increasingly integrated world in which
actions taken in one country affect many other countries," he
said.

The Prime Minister said these were longer term issues
of institutional reform which must be addressed once the
immediate priorities of crisis management were handled. PTI