Statement by Mr. Pranab Mukherjee Finance Minister of India Leader of the Indian Delegation to the Development Committee Washington DC, September 24, 2011
Representing the Constituency consisting of Bangladesh, Bhutan, India and Sri Lanka
We meet here at a time of transition for the global economy, when past prescriptions and beliefs do not seem to be a reliable guide for future action. On one side, we have important mega-trends which are rebalancing global economic weights and patterns, opening up new opportunities for growth and prosperity. On the other, while we are still recovering from the wake of the global financial and economic crisis of 2008, we have concerns that the world could be engulfed in another economic crisis. Financial markets are beset with doubts about developments in Europe and USA. There are worries about a double-dip recession in some countries. Monetary and fiscal actions do not seem to be leading to expected outcomes. In such circumstances, we are forced to think out of the box and also to reflect on what are the important issues the World Bank should be addressing today.
I would therefore like to first dwell on the immediate challenges for the World Bank Group and later comment on the themes which have been identified for the meeting, and some of the new thinking we need to do.
Global Economic Scenario – The Gathering Storm
Developing countries withstood the earlier crisis in a commendable way and showed considerable resilience. We responded through policies which were helped by the strong economic position we were in prior to the crisis – higher reserves, better fiscal positions and better external balances. Therefore, we could preserve core spending on development while responding to crisis needs. It was not that the crisis did not affect the poor. The Bank's own estimates suggest that an additional 64 million people were pushed into poverty by the crisis. We took steps to shelter the poor from the crisis.
Having recovered from the crisis, we were turning toward long-term issues such as productivity enhancements, managing inflationary pressures and rebuilding fiscal and monetary cushions. We were expecting that the developing world would grow strongly from 2011 onwards, in-line with our underlying potential growth rate. This would have helped us in addressing the core challenge of poverty eradication and improved standards of living for our people. Robust domestic demand growth in our countries would also have supported output in high income countries. Last year, low and middle income countries were responsible for half of global economic growth.
However, there are worrying clouds on the horizon. Some of the clouds have developed into significant storms and collectively, they could snowball into a crisis of significant proportions with dire consequences for the poor in all countries.
There is the problem arising out of the financial crisis in the Euro-zone. This crisis could take on global proportions through the massive scale of fiscal liabilities, banking sector interconnections, and in the event of severe fiscal correction, a reduction in aggregate demand and hence trade. Developing countries could once again be dragged into a crisis not of their making. The downgrading of US sovereign debt by one agency is the other potential crisis on the horizon. While this has not had any adverse effects so far, if U.S. Treasury interest rates rise in future, this would trigger higher interest rates for international borrowers. As concerns about fiscal sustainability in high-income countries persist, further financial stresses may emerge, as monetary policy in high-income countries begins to tighten. As interest rates rise, both banks and firms may find their balance sheets coming under renewed pressure. These are accompanied by continuing concerns that global growth remains uneven, sluggish and multi-speed. Capital flows to developing countries have recovered but are still below pre-crisis levels and in case of a new crisis, could go down sharply again.
At the same time, inflation has reared its head in many developing countries. Inflation rates are around 3% above long term averages. Further increases in food and fuel prices cannot be ruled out as supply conditions remain in a delicate balance with stocks at historically low levels. The diversion of food crops to energy uses is a concern. For developing countries, food prices are particularly important with their negative impact on the welfare of the poor and vulnerable. Lastly, there seems to be a more frequent recurrence of natural calamities and disasters with increasing intensity and effects. The earthquakes in Chile and Haiti and the floods in Pakistan are an example.
In this scenario, developing countries have legitimate concerns about their growth prospects and see the World Bank as an important partner to help them meet any foreseen and unforeseen challenges. They need the comfort that financial assistance would be at hand in case of a major crisis.
The Challenges for the World Bank Group
The response of the World Bank Group to the last crisis was exemplary. We have in the past appreciated the response of the Bank as the crisis unfolded. The speed and flexibility shown by the Bank was remarkable. Most importantly, the record lending by IBRD between 2008 and 2011 was what made the crucial difference in our response to the crisis. However, IFC itself suffered a contraction in its core equity and lending activities because it did not have the capacity to expand. This underlines the fact that the best and most effective crisis response is expanded lending and investment.
However, as we head into the current crisis, we are worried by the lack of financial capacity in the Bank to address any crisis needs. We already see a decline in the level of lending by IBRD. After going up from an average of $12-13 billion per annum between 2000 – 2008 to $44 billion in 2010, Bank lending has now come down to $26.7 billion in 2011 and is expected to decline further to $15 billion per annum from 2013. IFC plans a growth path of 6% per annum for the foreseeable future, a rate of growth which is completely inadequate for meeting developing country needs, particularly in Africa. We are faced with a situation where IBRD and IFC are unable to fulfill even normal client demand and are forced to be “selective” as a result of this resource constraint. The most alarming factor however is that IBRD has no headroom to expand lending rapidly in case there is a spike in demand resulting from another crisis or calamity. Our concern is that when a new crisis unfolds, IBRD will be a mute spectator in ramping up lending. So is the case with IFC. Apart from the inability to have a crisis response, the Bank, in its return to near pre- crisis levels of lending, will be unable to appropriately cater to the needs of long term development finance of developing countries.
While the financial performance of IBRD and IFC have improved and they have healthy profits, a significant portion of these surpluses are being transferred to IDA through transfers. These surpluses could be retained and used to back strategic lending capacity in case of future crises. While the needs of IDA are legitimate, starving IBRD and IFC is not the way to fulfill IDA needs. To understand the magnitude of the problem, IFC has a paid-in capital of $ 2.3 billion whereas it has committed $ 1 billion to IDA16 over the next three years. The WBG has developed a business model whereby developing country clients of IBRD and IFC finance a portion of what should legitimately be donor obligations to IDA. It is not true that donors have a resource constraint when it comes to IDA. The expansion in Trust Fund activities at the Bank is a clear example. While Trust Funds have a certain utility in some situations, we have a situation where Trust Fund disbursements last year exceeded IDA disbursements and they finance almost half of the budget of some key divisions of the Bank. Therefore, we feel that not only do donors prefer Trust Funds to IDA, but they also support a mechanism which subtly undermines the Governors’ mandate setting authority over the Bank. We need to put IDA on a more sustainable footing with donors giving IDA priority over Trust Funds while at the same time, addressing the financial capacity constraints at IBRD and IFC in a sustained manner rather than treating these as one-off issues which have been settled.
Implications of WDR 2012: Gender Equality & Development for the WBG
The principle of gender equality is enshrined in the Indian Constitution in its Preamble, Fundamental Rights, Fundamental Duties and Directive Principles. The Constitution not only grants equality to women, but also empowers the State to adopt measures of positive discrimination in favor of women. Within the framework of a democratic polity, our laws, development policies, Plans and programs have aimed at women’s advancement in different spheres. The National Commission for Women Act, The Protection of Women from Domestic Violence Act, The Pre-Conception and Pre-Natal Diagnostic Techniques (prevention of sex selection) Act, and a host of other legislations have been enacted in India in this regard. The 73rd and 74th Constitutional Amendment Act has provided for reservation for women to elected seats of local governments. Since the amendment in 1993, more than one million women have been able to participate in local governments as elected representatives. There are several schemes for women’s advancement and empowerment in India, both at the federal and provincial levels such as the Rajiv Gandhi Scheme for Empowerment of Adolescent Girls, Swarnajayanti Gram Swarazgar Yojna for self-employment, the Rashtriya Mahila Kosh for micro credit to SHGs of women (a national level credit fund), National Programme for Education of Girls at Elementary Level providing additional support like hostels, scholarships, bicycles for girl students and many more. Yet a lot needs to be done.
The National Policy for Empowerment of Women, 2001 lays down policy prescriptions for mainstreaming gender into the development process and provides for legal empowerment of women as well. The Government has also adopted Gender budgeting in 2005 to ensure the translation of Government’s policy commitments on gender equity into budgetary allocations. Recently on 8th March 2010, the National Mission for Empowerment of Women (NMEW) has been made functional with a view to improve convergence and better coordination to ensure that the benefits of Government budgetary allocations and programmes are effectively accessed by women.
We endorse the strategic directions proposed in the Development Committee paper. Gender is a complex issue and gender inequality has multiple dimensions. But these complexities must not become an excuse for inaction. The easier part is the inequality in endowments and access but the more difficult part is the inequality in outcomes, which persist even in developed countries. The World Development Report (WDR) on Gender, like all other WDRs, is a universally applicable piece of work and has important lessons globally across regions, countries and stakeholders. So as the Bank seeks to draw upon lessons from its findings, it must ensure that it does not remain narrow in its applicability and in its operationalization. Its wide dissemination through a well strategized communications strategy is extremely important. The Bank needs to mainstream the gender aspect in all its work across all its instruments, sector strategies and regional strategies, and vertically from project design to monitoring of project outcomes. The effectiveness of such communication would be seen in how effectively the Bank weaves its conclusions into its other analytical and knowledge products which inform policy decisions within governments.
We support the WDR’s “Global Agenda for Greater Gender Equality”. This requires financial support, innovation and learning, and leveraging effective partnerships. The Bank itself would have to re-engineer itself to be a part of the new partnerships to be forged with various stakeholders if its recommendations are to be taken seriously by the international development community. The Bank is doing this effectively in climate change and has the necessary tool-kit to do so in Gender.
We do agree that the rationale for economically empowering women is compelling. Research indicates that economic participation of women—their presence in the workforce in quantitative terms—is important not only for lowering the disproportionate levels of poverty among women, but also as an important step toward raising household income and encouraging economic development in countries as a whole. Amartya Sen makes a compelling case for the notion that societies need to see women less as passive recipients of help, and more as dynamic promoters of social transformation. However, participation alone is not enough, quality of women’s work is critical. A key challenge is to overcome a situation where women may gain employment with relative ease, but where their employment is either concentrated in poorly paid or unskilled job “ghettos,” characterized by the absence of upward mobility and opportunity. This is the challenge that we need to tackle at the domestic and global levels.
We feel that there is further work to be done in understanding some of the dimensions of gender inequality. The Bank could work on gaining a better understanding of the social, cultural and legal drivers of inequality, going beyond just the economics of inequality. This would help in gaining a better understanding of “stickiness” of inequality i.e. why equality of endowments has not always lead to equality of outcomes. Under the perceived equality in endowments are much deeper social, cultural and institutional impediments to outcomes. Lessons from developed countries would be useful for the future for middle income and other countries. The Bank could also work on the problems associated with demand side or the inclination to use available health and other services in a timely manner, in addition to the supply side of these services.
We support the thrust on data and evidence gathering in the Report. However, we emphasize the need for clear action in consultation and with ownership of governments for favorable results on the ground. There are several examples, from within developing countries, of measure that have succeeded. Only a few may have found a mention in the WDR. These examples need to be constantly searched, researched, catalogued and disseminated.
While there are some successes, several challenges remain in India and almost in the entire globe. Research and strategies must continue to focus on promoting the rights of women and gender equality, in a life cycle continuum. The international development community also needs to internalize gender into their own operations and into their institutional framework to ensure effective action and deliverables in the field.
The father of our nation, Mahatma Gandhi had said that “There is no occasion for women to consider themselves subordinate or inferior to men....Woman is the companion of man, gifted with equal mental capacity....If by strength is meant moral power, then woman is immeasurably man's superior....If nonviolence is the law of our being, the future is with women..” There is a need for new kinds of institutions, incorporating new norms and rules that support equal and just relations between women and men. And we need to collectively work towards this.
Moving Jobs Center Stage: WDR 2013
We welcome the focus of the WDR on jobs. This has immediate relevance to our efforts at poverty eradication. Further, given our large and youthful population, we look forward to the findings of this WDR with keen interest. The phenomenon of jobless growth needs to be understood better. The challenge of job creation affects all countries, developed and developing. Hence, this WDR should have useful lessons for policy makers in all our countries.
From a developing country perspective, jobs require a massive shift in employment from agriculture to manufacturing and services. One of the common features of the employment landscape in developing countries is the high dependence on agriculture as a source of gainful employment. This is true of India where a majority of the people are dependent on agriculture for sustenance and equally true of many other developing countries, particularly the LICs. The experience of countries in East Asia, a region where many countries have realized rapid economic growth and equally rapid poverty reduction, shows that the only meaningful way to tackle poverty is through a development process which emphasizes swift job creation. This job creation process has both demand side and supply side elements and both need to be addressed to realize the goal of poverty reduction.
On the demand side, there is a need to focus on the growth of the manufacturing sector which is the only sector which can absorb large numbers of workers from agriculture while providing them higher living standards. The growth of manufacturing has many dimensions:
• It needs to be led by the private sector with a focus on developing technologically sound, sustainable and highly productive Medium, Small & Micro Enterprises (MSMEs) that can create jobs dispersed over larger geographical areas.
• There has to be an equal emphasis on self-employment which would feed both directly into consumer demand and indirectly into other industrial processes. For this, strengthening of existing institutions and enabling creation of new institutions to provide credit to the self-employed also needs to be emphasized.
• While labour would be released from agriculture, there needs to be an emphasis on agro-industries which can immediately absorb surplus labour while bringing multiple benefits.
• There needs to be an appropriate policy framework to enable this to happen and countries would need advice and assistance in putting such frameworks in place. The frameworks would need to cover access to finance, basic infrastructure and access to technology, marketing and basic management know-how.
• Infrastructure investments can create both a facilitative environment for MSME growth which would create jobs and also be significant creators of jobs themselves.
• In developing countries, the bulk of new jobs are expected to be created in urban areas that would be emerging as centres of growth. Therefore there needs to be a strong focus on urban infrastructure, urban planning and housing construction and capacity building in local bodies.
The supply side of jobs is equally important. Often, labour demand in developing countries runs into a manpower and skills shortage. We therefore have a peculiar situation where there is high unemployment or under-employment on one side accompanied by labour shortages in skilled sectors on the other. This requires large scale investment in skill development so that the demographic employment shift from agriculture to industry and services can materialize smoothly.
India’s demographic dividend is as much of an opportunity as it is a challenge. Over 700 million Indians will be of working age in 2022. In this context, universalizing access to secondary education, increasing capacity in higher education and providing quality skill training is necessary. The National Policy on Skill development has set a target of imparting skills to 500 million people by 2022. This is a huge challenge. The National Skills Development Corporation, a non-profit company set up to for this task, has been allocated US $ 330 million from the Government. We expect to mobilise about US $ 3 billion from public sector entities, private sector, bilateral and multilateral sources. Till now, the NSDC has approved projects that will skill 57 million people in next 10 years. The NSDC is also setting up sector skill councils that are industry bodies responsible for defining the requirements of the industry on manpower and also quality of training.
Lastly, there is the issue of managing the transition. Even in the best of circumstances, the transition would still leave large numbers of people temporarily unemployed while they seek to adjust to the changes in employment patterns. During this transition, they need social safety nets and income support arrangements that sustain them while they re-skill themselves for the growth areas of the economy.
The WDR should cover all the three aspects of jobs – the demand side, the supply side and managing the transition. All three elements are integral to the job creation effort. The WDR should examine the role of the private sector, MSMEs, self-employment opportunities and agro-industries in job creation. It should also examine the enabling features that facilitate job creation, viz, infrastructure investment and a supportive policy framework. The WDR could also look at the experience of other countries that have successfully addressed the supply side of jobs through large scale skill development efforts while managing the transition smoothly.
We agree with the approach being adopted for the WDR and feel that an integrated approach will shed new light on how we can better create not just jobs but “good” jobs contextual to regions and countries. It would be useful for the Report to also focus on how protectionism hurts jobs globally,in both developing and developed countries. Continuing from the WDR 2012, the Report should also cover policies and institutional mechanisms that would encourage women’s participation in “good jobs”.
Corporate Scorecard & Internal Reforms
We fully support the overall direction of the modernization efforts as it will lead to a more effective, efficient and accountable organization. The Corporate Scorecard is a valuable tool as it brings in one place the various strands of reforms and places them in the development results context, thus enabling a holistic view of a very complex process. We look forward to see how this approach succeeds in improving performance in future. We are particularly keen to see the introduction and extended use of the new results based lending instrument and greater use of country systems. These will go a long way in achieving the goals of efficiency and effectiveness. We also feel that decentralization efforts have suffered a slowdown. IFC is doing a commendable job and has moved some Vice-Presidencies to the field. The Bank should do the same.
In the light of the above, I would like to lay down a few themes which the Bank should address as part of its regular agenda over the next year:
„Ä Lack of financial capacity: The Bank needs to work towards having a strong capital base through a capital increase and finding other creative ways of expanding its lending capacity through leverage, co-financing, mobilization or even relaxing its Equity to Loans ratio. This will also enable the Bank and IFC to move away from their “selectivity” approach to an approach based on client needs and priorities.
„Ä IFC needs to rebalance its portfolio away from its recent tilt towards short term trade finance to more long term investments in equity and loans. It also needs more financial capacity to play a more significant role, particularly in IDA countries and frontier markets. IFC should do more in IDA countries rather than transferring surpluses to IDA.
„Ä Development financing needs of the poorest countries through IDA require to be relooked with fresh thought given to making IDA a more sustainable arrangement with limited dependence on donor finances. IDA should take advantage of the imminent graduation of large IDA recipients over the next decade to chalk out a sustainability strategy.
„Ä Renewed focus on growth and poverty reduction so that the goal of eradicating poverty becomes feasible in a definite time frame. Resources – both physical and financial – should not be diverted to other peripheral goals and if these are essential, separate resources should be found for them.
„Ä Middle Income Countries, which are basically IBRD borrowers, somehow feel disconnected from many Bank activities. The stark reality is that a large number of World’s poor live in the MICs. Efforts should be made to address the needs of the poor wherever they are. The Bank should re-engage with MICs particularly through enhanced financing, more knowledge products and a focus on the poor in MICs.
„Ä Food price inflation needs to be tackled on a priority basis. This would require both short-term measures focusing on immediate food supply and safety nets and long-term measures to enhance agricultural productivity and output. The Bank could work towards creating globally accessible stocks of foodgrains to meet crisis needs. The Bank must also refocus on articulating a positive role for the state in agriculture. The importance of effective state institutions in raising investment in agriculture and in supporting social safety nets cannot be over-emphasized.
„Ä Climate change and its impact have a strong development dimension and the Bank should try to generate additional resources for developing countries through climate financing. It should also work towards more sustainable, cost-effective and low carbon development models. This would also require technology transfer to developing countries.
„Ä Meeting the energy access needs of the poor is going to be a severe test for the Bank. While climate concerns are legitimate, providing access to energy for the poor is a priority far more important than sustaining energy intensive lifestyles in developed countries.
The World Bank Group responded well during the last crisis. It needs the muscle to do so again if we are faced with another. It is multilateral buffer for developing countries. I am sure it can work on the above issues and come up with creative, out-of-the-box solutions. We look forward to the result of its work in future.