Subbarao calls for mechanisms to enforce global financial discipline

The G20 should come up with enforcement mechanisms to discipline countries that create negative externalities for the global economy despite multilateral or peer assessment cautioning them about the spillover effects of their policies on other economies, Reserve Bank of India governor D Subbarao said today.

He said the forthcoming G20 report on country imbalances and their effects on other members will give an opportunity to exert peer pressure on countries whose policies may lead to dangerous spillovers.

However, progress towards a consensus on a global framework for the financial sector can only be achieved if we clearly understand the linkages amongst various economies, Subbarao told the SNB-IMF conference on the `International Monetary System' in Zurich.

The first step towards this is to develop a framework for understanding the linkages amongst economies. This, he said, is currently being done through the International Monetary Fund's (IMF) spillover reports.

Global financial discipline can be brought through incentives for erring countries rather than through sanctions. While countries could be persuaded to abandon policies that create negative spillovers for other countries, designing such deals and getting countries to agree to them, however, will remain a major challenge, he noted.

"We will need to put in place the building blocks. We need to identify linkages, assess spillovers, and establish norms of behaviour. Then, once these norms are established, we can proceed to a code of discipline, with rewards and eventually perhaps even sanctions," Subbarao said.