The dilemma among economists and academics is: which way the global economy would move from now onwards? There is, perhaps, no single answer. The challenge to the central banks would, of course, be “accurately assessing and appropriately balancing the risks to the outlook for growth and inflation”.
It is now three and half years since the credit crisis borne from the sub-prime mortgage meltdown in the United States threw global financial markets into turmoil. With many economists predicting another year of volatility, the world’s major economies are grappling with a radically changed landscape full of risk and complexity. Besides, sharp volatility in international crude oil prices has been posing major threat to the stability of the global economy. US, the world’s largest national economy, is in distress, experiencing a wide variety of illnesses, from stagflation and possibly recession. Against the dollar’s sharp decline, the global economy is likely to remain seriously unbalanced between debt-heavy Americans and the America’s cash-rich trading partners. China is playing a more important role in the global economic development, thus becoming a model for the rest of the world.
In all this ‘uncertainty’, there is, of course, a ray of hope: growth in the emerging economies. Rising thrust on infrastructure development in India and China led to spurt in demand from all sorts of commodities from aluminum to zinc, iron to copper. A boom in real estate sector too added to the soaring demand for such commodities. Besides, some other factors like natural calamities (earthquake in China, drought in Australia that destroyed crops like wheat), strikes at mining plants in places like Venezuela and South Africa, and floods (in India) too played a role in pushing metal and food prices through the roof. However, the resulting inflation which is now in double-digits in many countries has been keeping central banks on the tenterhooks for some time. And now with the US along with other major advanced economies suffering the biggest ever credit crisis since the Great Depression of the 1930s and China too facing the threat of a real slowdown for the first time after having enjoyed many years of tear-away growth, it is all but obvious that the global economy is heading towards a full-blown recession which may extend for many quarters, if not years.
End of the Era of ‘Super Growth’
“The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s.” The global economy witnessed a period of rapid growth for the last four years before the US subprime crisis appeared on the horizon in July 2007. Post-9/11 (and also the tech bubble), in the US and elsewhere the central banks went into an overdrive to reduce interest rates to boost consumption and hence revive economic activities in their respective countries. This resulted into an era of benign interest rates. A combination of cheaper interest rates, soaring income levels, and low to moderate inflation, encouraged consumers to save less and spend lavishly.
The impact of this was felt across a number of sectors. Spurred by this, the global economic growth rate soon touched 5 percent and sustained it for the next four years, a level not seen since the 1970s. However, the growth was not uniform across the globe with the emerging nations like China and India accounting for a lion’s share. In fact, according to estimates by the IMF, China alone contributed almost a fourth of this growth, while the US’ share continued to slide. The US along with the other advanced economies share accounted for another one-fourth while the rest of the world accounted for the rest.
End of the Capitalism?
Every time a major crisis takes place, it gives critics an opportunity to write epitaph for the ‘free market economy’ model. So this time also it is not different. The voice of anti-capitalism is on the rise. However, this time there are some strong reasons that lend support to such demand. “The disintegration of Anglo-Saxon-inspired markets has come about largely because of the confluence of two tendencies of the ‘free market’: speculation and monopoly capitalism.” The critics of capitalism now say, and more rightly so, that the recent crisis exposes the failure of oversight, regulation (or lack of it) and more importantly, the inefficiency of it. “There is nothing inherently efficient about free markets – they do not of themselves promote sound investment or wise management,” writes Phillip Blond in The Independent. Even the legendary speculator George Soros agrees that too much leverage or what he calls “super leverage” is behind the present crisis. And this tendency went unchecked or rather was ignored (by the proponents of free market) who believed in the philosophy of ‘laissez faire.’ However, as it is evident that overdose of deregulation could be financially perilous.
However, it would be too immature to say that it is the end of capitalism. It is not. However, to preserve capitalism and make sure that its true benefits reach to a wider section of people (in the main street) and not just being enjoyed and exploited by just a handful of people in the financial sector. For that to happen, a concerted action by the governments, academicians and monetary authorities is required that could help bring about a radical overhaul in the structure of the financial industry, the way it operates. Remember: nothing substitutes transparency. Unfortunately, all along people in the financial markets and the broader financial sector thought otherwise. However, it’s time now to change that mindset.
N Janardhan Rao, Senior Economist.
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