Speeches and Remarks 2006

As prepared for delivery

Remarks by
David C. Mulford
U.S. Ambassador to India

At the 2006 Annual Membership Meeting
Institute of International Finance
Sunday, September 17, 2006
Shangri-La Hotel, Singapore

I am extremely pleased to have been invited here today by my old friend and colleague, Charles Dallara, who probably hopes my remarks today live up to his expectations for something less than Ambassadorial on the subject "India-China, and The Realignment of the Global Economy".

Charles knows that in my long career in international finance I have been fortunate to be engaged at the cutting edge of each major wave of change in global markets.   These include:

 -- the forming years of the Euro market;
 -- Saudi Arabia in the petro-dollar recycling phase;
 -- the U.S. Treasury Undersecretary during the debt crisis, and dare I say it, "economic policy coordination days;"
 -- the vast expansion of global financial markets and the global privatization industry of the 1990's;
 -- and now, the rise of Asia on the world's center stage.

The one lesson I learned from this experience is that markets realign and governments follow.

Now Asia has advanced onto center stage, and governments and their international institutions once again are "well behind the curve."  At some points in the past, this has been something of a blessing.  Think what would not have happened if governments had successfully extended their controls of the day to the early Euro market, or think what petro dollar recycling did for the expansion of global financial markets in the late 70's and early 80's.

Today's situation, however, is far more problematic, because of the speed and dimensions of Asia's rise, the enormous risks present daily in the system, the emergence and persistence of huge global imbalances and the fact that we do not have effective arrangements in place among governments or their international institutions that recognize and enable us to deal with these new realities.

What are these new realities as seen through the prism of India and China?  We all know both countries have high growth rates, but we've seen that before.  What are the new realities then that will realign the global economy?

One is that India and China will not only move markets with their growth, their large trade and investment flows and their growing foreign exchange reserves, but they will make markets with their vast consumer and energy needs.  Between them, with 40% of the world's population, their large land size, large militaries, young age structures, and with their desire for leadership in the knowledge economy, they are joining the U.S. as major power players in the world at large, not to mention the global economy - and this is a situation that will endure well into the 21st century.

The remarkable character of this change is perhaps more evident when you consider that China and India already have the second and fourth largest economies in the world in terms of purchasing power parity, reflecting their dynamics - like the U.S. - as producers and consumers.

The process is young.  India's median age is 25 years (nearly 600 million Indians are under the age of 25), and China's is 33.  But, their strong commitment to education in both countries and their young people and rising middle classes virtually guarantee their dominance as savers, consumers and highly-skilled, lower cost labor over the coming decades.

A few more facts which many of you know, and if you don't, your analysts do:

 -- The data cited above have already given India more than 100 million mobile phone subscribers, and Indians are presently buying nearly 6 million handsets a month - the fastest mobile phone growth in the world.  China comes second at 5 million per month, and together, they account for one-quarter of all new mobile phone users in the world;
 -- The change in India has been so sudden that its relative lack of fiber optic infrastructure is pushing  exponential growth in wireless broadband (such as internet over mobile phones), which some project will make India one of the world's top three markets in such services;
 -- Taken together, India's and China's consumer markets and production capacity are also manifest in a recent UNCTAD survey where multi-national companies ranked China and India as the first and second most attractive global business locations in the world;
 -- Global FDI figures already confirm this for China, but India, which began opening later, is also emerging as a compelling destination for FDI;
 -- However, that is only part of the story.  China and India are also expected to be the 4th and 8th largest sources of FDI in 2006, and they will continue to move up the ranks and join the U.S. as their home grown firms become increasingly confident and competitive global players;
-- Consider the mushrooming energy needs for India and China.  These have the potential to overrun - or redefine - global energy markets.  China and India have the largest coal-dominated energy systems in the world today. 
-- Coal provides more than two-thirds of China's energy, and half of India's, and yet, both countries are acknowledged major importers of petroleum and gas from offshore.  If both implement clean coal technology on a large scale, enabling substitutes for imported oil, they could significantly alter the global geo-political and economic pressures shaped by the current demand and supply of petroleum;
 -- Beyond this, if the U.S. and India successfully implement our new Civil-Nuclear Agreement, India will embark on a massive civil-nuclear development program that will contribute importantly to its energy independence and form the basis of a major expansion in the world's civil-nuclear industry.

At the same time, China's and India's pressing energy needs have changed their cost calculus for alternative and renewable energy.  China has developed a world-leading solar industry that already provides water heating for 35 million buildings -- about 60 percent of the word's installed base of solar water heaters.  In comparison, solar energy heats roughly one million buildings in the U.S.  India too is moving rapidly in a number of cities to substitute CNG for diesel in public and private transportation.

The investment needed for this and other huge energy infrastructure is fueled partly by these countries' impressive savings rates -- nearly 32 percent of GDP for China -- and 28 percent for India, and India is rapidly closing the gap.

Trade flows have also accelerated for both countries -- both with the world at large, and with each other.  China is emerging as the world's third largest exporter and India's second largest trading partner after the U.S.  India, slower than China to open to external trade, has nevertheless seen improved growth; 34 percent in goods and more than twice this growth in services trade just last year.

We all know that in quantitative comparisons such as GDP, trade and foreign investment, China currently exceeds India, and that gap is not narrowing -- yet.  However, given qualitative differences between the two countries that demonstrate some of India's less tangible strengths, I believe this trend could eventually be reversed.

For India these could be significant.  For example, India has a sophisticated financial market, well regulated and supervised, and a government that has shown flexibility on exchange rates and is pushing forward plans for full convertibility.  India's growing savings are likely to be mobilized much more effectively in future financial markets which incidentally are not plagued with a large overhang of non-performing loans.

India's financial system is well positioned for comfortable interface with global markets, and India's pool of young English-speaking talent gives it an important asset on the international stage.

Finally, India is a full-fledged democracy which has national consensus on governance, through largely transparent institutions and processes.  India is a democracy with all of the key freedoms, including rule of law.  This may mean, as it has in the past, that the reform process is somewhat slower and sometimes difficult, but because of the focus on consensus and the regular check of free elections, policy outcomes are much less prone to stark reversal, meaning that the way forward on reform, while more hesitant, is also more certain.

Turning back to realignment in the global economy, it is happening.  I've been watching from close quarters in India for nearly 3 years.  The speed of the change is breathtaking, both from an inhaling and exhaling standpoint.

There are widespread worries about global imbalances, changing rates of growth, and a breakdown in our global trade system.  Frankly, what worries me is the absence of any mechanism among leading governments to engage seriously in understanding the realignment that has already taken place, and how it affects both the dialogue and the policies to deal with the new reality. 

If you believe a minor adjustment of quotas for a small group of countries in the world's premier monetary institution even begins to address this new reality, I would urge you to think again.

There is reasonable stability in world financial markets for the time being, present imbalances notwithstanding, and good reasons why imbalances exist.  There are also good reasons for hoping we avoid a sudden and destructive adjustment.  In short, we have some time.

My conclusion is that we urgently need engagement by the world's major players.  We know who they are and who increasingly they will be.  Seven major players could get together for as long as it takes, or as often as required, to understand our new realities and work to agree on the policy steps necessary to begin a credible adjustment process.  The mechanism needs to be outside bureaucracy, which cannot solve the problems of this new reality.

That is the limit of what I can say today.  I am out of both time and space.