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'In a recession, governments have to spend'
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March 16, 2009

Justin Yifu Lin is the first person from an emerging country to become the World Bank's Chief Economist. Now on leave from Peking University, he spent 15 years as founding director of its China Centre for Economic Research before taking the WB job in June 2008. In Mumbai to deliver Exim Bank's commencement day lecture, he took time off to speak to Sidhartha.

Given the uncertain times, does your job as an economist get tougher?

Ever since I joined the World Bank, the global economy has been in one crisis after another. These are challenging times and as an economist it requires a lot of thinking.

In the past, multilateral institutions such as the World Bank and the International Monetary Fund have looked down on high government deficits. But you are talking about forgetting the deficit and focusing on spending. Has the change got to do with your developing country background or because of the new reality?

These things have to be seen in a dynamic context. If money is spent on good projects, then it is explainable, especially in deflationary circumstances. To boost demand, there is a need to increase spending.

In the past, there were reservations because we encountered V-shaped crises. Governments wanted to spend, but it took time to implement projects. Often, by the time spending took place, the economy would recover and this would result in overheating. There was an impact of overheating that had to be dealt with.

Also, in the past, projects may not have been chosen well. You need to focus on bottleneck-removing ones. Investing in such projects generate high returns.

There is a possibility of the (present) crisis being protracted. So, if you put the two together, it is advisable for the government to invest in bottleneck-removing projects. In a recession, governments have to spend to create jobs and for the economy to grow. So government debt will go up, but it is important to use the money in a wise manner.

Given the need to spend more, are rating agencies justified in their actions, citing higher deficit levels? And, how much more fiscal and monetary space is available to the Indian government and the central bank to take further steps?

If we encounter protracted recession, fiscal intervention will increase. For instance, the job guarantee scheme will see more people, as unemployment will rise during a recession. There is no problem as long as money is spent on growth-enhancing, bottleneck-removing projects.

How long do you see the recession in developed countries and the slowdown in developing countries lasting?

It may go into 2010. It is avoidable and it calls for efforts from all governments to pull us out of it. If the crisis persists, there will be pressure on developing countries. Export markets will be hit, private capital flows will decline, so growth will be affected. As a result, there will be job losses and poverty will rise.

In terms of regions across the world, where do you see the maximum impact?

Emerging Asia is in much better shape. Europe has been hit hard. In Africa, countries have high poverty levels and many do not have the cushion of foreign exchange reserves. So, many of them face the prospect of a balance of payment crisis. Emerging Asia has much larger room for governments to initiate counter-cyclical measures.

Will China be hurt more by the crisis or will it be India?

In a sense, India is less integrated with the rest of the world, because the share of exports in the gross domestic product is lower. The impact on exports will not be as much as on China. But India has seen more migration of workers to the rest of the world. It has a larger number of expatriates and a higher level of remittance. So, remittance will be affected to a greater degree.

There has been an impact on the poor in China, as there is a lot of internal migration to coastal areas to the export processing zones. Estimates suggest that 20 million jobs have been lost in the past few months. In India, 500,000 to one million jobs have been lost. On employment, the impact in China is 20 to 40 times higher.

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