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Use part of forex reserves for development of poor: Prof Summers

Written by: Staff

Mumbai, Mar 24 (UNI) There is a growing need for monetary authorities of the emerging markets like India to utilise a certain part of the excessive foreign exchange reserves to the basic development of people and improvement of economic infrastructure, Harvard University president Prof Lawrence Summers today said.

Delivering the ninth L K Jha memorial lecture on 'Reflection on emerging markets reserve accumulations' here, Prof Summers observed that there is a need to work on a revised international financial architecture whereby the central banks, international institutions like World Bank and IMF must facilitate the diversion of surplus foreign funds, in the emerging markets of Asia and Latin America towards development of the people at large.

''Just as India's remarkable development over the last 15 years comes with both great opportunities and challenges, so too the dramatic changes in the pattern of global capital flows come with remarkable challenges and opportunities,'' he said.

In fact, a future global economy would be increasingly defined by a large flow of official lending from developing nations to the world's largest and richest economy, he noted.

However, there would be a greater concern as per the risk composition of the assets in which reserves are invested.

When reserves were held at levels that represented self-insurance against possible financial crisis, the case for their investment in maximally liquid and maximally safe form was compelling, he said.

When reserves are far greater there would seem to be a case for more aggressive investment either in support of imports that have a high social return or in a much richer menu of international assets.

Citing the case of US, he said the institutions there have earned substantial real returns over the years and the average large higher education US endowment fund has earned a real return of about 10 per cent over the last decade or two.

''It is natural to ask whether the excess national reserves of emerging markets should not be invested with an aspiration in this direction,'' Prof Summers quipped.

If India were to follow this course, he said, the result would be extra returns that would amount to between one and one-and-a-half per cent of GDP each year.

This figure, which dwarfs the seigniorage considerations that traditionally played so large a role in monetary theory, represents an amount greater than Indian public sector spends on health care each year.

Annuitised and valued as a stock it is comparable to 40 per cent of the market value of all the traded stocks on the Bombay Stock Exchange, he said.

The foreign exchange reserve in India is in excess of 15 per cent of its safety requirements while the same as a share of GDP are actually substantially larger in China (41 per cent), in Taiwan (69 per cent), in Korea (18 per cent) and in Thailand (21 per cent) than in India.

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