Opinion - Interviews   

Of a crisis and an opportunity

— Photo: Vivek Bendre

Dr. Vinod Thomas advocates the need to pursue a progressive growth path to tackle the triple dangers of economic, social and environmental crisis.

Vinod Thomas, Director-General and Senior Vice President, Independent Evaluation Group at the World Bank, spoke to The Hindu, during a recent visit to India, of the dangers of returning to a business-as-usual mode after the global economic crisis has settled down. He looks at the crisis as an opportunity to pursue a more progressive growth path for the world to tackle the triple dangers of an economic, social and environmental crisis. Dr. Thomas reports directly to the Board of Executive Directors of the World Bank Group. He was Country Director for Brazil from October 2001 to July 2005. Prior to 2001, he was Vice President of the World Bank Institute, and Chief Economist in the East Asia and Pacific Region at the World Bank. In this interview he gives his personal views, as an international development expert, of the time-frame of the global economic slowdown and measures to reach a more sustainable growth pattern.

This is about the biggest economic crisis the world has seen in 75 years. It has its roots in the United States’ mortgage crisis and the financial meltdown, but it has quickly spread to other OECD countries and to emerging economies including the so-called BRICs [Brazil, Russia, India and China] and eventually to the low-income countries. As you look at the last quarter of 2008, the writing on the wall is clear. In the U.S. it is likely that output in the fourth quarter over the third would have shrunk by at least 3 per cent by some estimates. Large developing economies like China and India are not seeing a decline in output but they are experiencing a serious slowdown in their growth rate. It’s the first time in memory that all global growth centres are deeply affected. So when you put all that together, 2008 will turn out to have a much smaller economic expansion than projected, and 2009 will perhaps see little growth in global output. But as is typical, developing countries as a group will grow faster than industrial countries that have reached high income levels, so China and India will have some growth — the question is, what it will be?

The duration of most recessions ranges from six months to three years, with an average span of around 18 months. In the case of the U.S., some people suggest that the recession had already kicked in by December 2007, and if you take an 18-month period, by the middle of 2009 you would be seeing a turnaround. That may be an excessively optimistic scenario, as in the U.S. the fourth quarter returns are weak. Some 1.5 million jobs have been lost in the last three months. With this decline in growth, employment creation and investment, and most fundamentally in consumer confidence, the recession could continue through 2009 and 2010. The coming two years would be difficult. Just as countries like China and India were beneficiaries of a robust global economic growth in the first half of this decade, equally the downturn of the next two years will affect them, because it’s the two sides of the same coin.

But certainly these large economies have a number of options to partially decouple from the global scene. For one thing, there are vital opportunities for domestic and fiscal reform that allow greater mobility and effectiveness of resource use within the country. The reduction of unproductive subsidies, for instance. Also, large economies like India and China have a greater capacity for domestic response than a small economy that is more dependent on a global setting.

What is significant is that this is a financial crisis that turned into an economic crisis, which is developing into an employment crisis and could soon turn out to be a social and human crisis unless urgent action is taken. The action is not just to return India and others to a high growth path but is equally for them to take measures that will protect the vulnerable sections of society during the transition. And also to use this opportunity to inject those elements of social inclusion and employment generation that are desperately needed across the world. So when you think of actions, it’s about opportunities on both the economic side and the social side.

Let me add a third area. Aside from the economic and social aspects there is a quiet crisis in the making which is a bit hidden right now because of the urgency of the financial crisis; but if allowed to brew, it could be the biggest danger. That crisis is global warming and climate change. The reason that I put this up there along with the other two is that today we have already reached a level of 385 parts per million of carbon concentration in the air. Even conservative experts say when it reaches 450 ppm, it could be a show-stopper. We already see the mounting devastation from climate-related natural disasters.

Indeed there is serious concern about the kind of policy leadership in recent years that has worked against a more sustainable economic as well as social and environmental scenario. It is a challenge for all. It is remarkable that while different countries have different degrees of responsibility for the current crisis, or the triple danger, the impact is felt across all countries. From Bangladesh and Mozambique, India and Thailand, to Germany and the U.S. — all have a stake in a new paradigm. The tough question is how to prioritise when faced with a number of problems, but without the time or the resources to deal with all of them. But the three problems are so interlinked it could be self-defeating only to deal with one and not the others.

Turning now to actions, countries are finding a degree of consensus that something like an additional 2 per cent of GDP needs to be spent to revive the economy and provide a stimulus. It’s an extraordinary moment. Fiscal spending or expansionism was rightly viewed with fear and caution because of the history of the damage from expansion and inflation. But today, because of the unprecedented recession there is support for having fiscal expansion to revive the economy. The vital questions are: can all the major economies, say the G20, participate in the fiscal programme, and can that spending be directed in the most productive and effective ways?

Infrastructure, education, social programmes and green technologies — these are three or four areas where you may see important benefits. So you can take up infrastructure projects that are fairly advanced, or secondary education and skills investments with high payoffs, or green technologies that were previously unprofitable but now are beginning to be more viable. So rather than spending in old ways, spend them differently and do so also to the extent possible in a coordinated way so that it’s not just one country changing direction, but all countries.

The policies at the centre of the global economy in recent years have not been supportive of a sound financial system, they have also not been inclusive and they have not been sustainable — as Nobel laureates Paul Krugman and Joe Stiglitz have noted. On the financial system there is a great deal of focus now because that is the meltdown that has sparked all else. Innovations in financial instruments are good because they bring greater intermediation, greater access to credit and more diversity of players in credit markets. But equally, when you have instruments that people are not familiar with, when you have a group of opaque players you don’t even know who they are, it’s extremely important to have a sound regulatory framework.

On the financial side, the Reserve Bank of India has done a good job in matching risk management with fiduciary and regulatory actions; and the government in pursuing the opening of the economy and globalisation in a way that blends the market and the state in a more judicious way than some of the other economies. While the financial sector has strengths, it can go further in its capacity to provide for greater access to credit, including to the poor.

Having said that, when the global growth rate comes to a standstill, countries such as China and India will be affected by the slowdown in OECD imports or trade. Evidence is clear around the world, with shipyards with backup of goods that are not going anywhere, and trade expansion is coming to a halt this year. India is not immune to these developments. Different countries have different capacities to deal with this, but all need to act. Those countries with surpluses in their current account and fiscal account can use that surplus to expand investments. India, like others, needs a bold investment programme — even as we note that an increase in spending will expand the deficit, whereas some others who have a surplus will just reduce the surplus.

So a combination of monetary and fiscal policies can help, plus domestic reforms of the productive sectors, reforms of the subsidy regime whether it is for energy, water or fertilizer and chemicals, much of these favouring the relatively rich. If these do not benefit the poor, then there is an opportunity to take action — the crisis might allow that opportunity to be captured. Also, the bureaucracy can be streamlined to make the domestic economy function much more effectively. Capitalising on these opportunities would help India to continue on a high growth trajectory.

On the social side, employment generation is the key link. In India, nearly 60 per cent of the people rely on agriculture and the rural economy. That side of the economy generates less than 20 per cent of the income or output. Greater employment opportunity for this sizeable population in productive ways in rural areas and in the urban economy would clearly be a priority going forward. Here again the size and strength of the domestic economy provide advantages for investments in education and appropriate skill formation. With half the population under the age 25, there is also a huge upside for employment.

But when you have a financial crisis and the growth rate is down, all of those options have greater limits and that’s why social safety nets or social programmes to withstand the problems of the poor are a priority.

India has been pursuing a high growth path, without which it’s hard to achieve the key objectives. Equally, along with high growth the high rural population and the large numbers that are close to poverty call for inclusiveness as a deliberate part of the agenda. Only growth without inclusiveness, or just inclusiveness without growth, will not do the trick. That’s why in looking at the current crisis all eyes are on the question of how long it would last, how much of an effect it has on growth rates. I would simply add along with the concerns about the growth rate, inclusiveness and sustainability, to come out of this in a way that augments India’s long term competitiveness. If you go by the growth rates of the past five years before the crisis, and if India were to grow at 8 or 9 per cent for quite some time, then by per capita measures India would reach high income status over a generation. The sheer size of the economy would put India in the top two or three countries, and so along with China, Brazil and Russia, India could be one of the six largest economies of the world.

But then there is a critical question — is the current financial setback a blip, or is it one that signals a deeper concern over the long haul? On the financial front many of the problems were created because of lack of oversight and supervision, spilled over from the industrial countries. There have been fairly sound policies in the Indian context in macroeconomics reforms. So one could imagine that within 18 months or two years, the financial problems would be dealt with and we come out of the crisis.

Alternatively, could this be a signal of an inflection or turning point on how much growth can be sustained on the planet with the old policies and inefficient resource use patterns? It’s easy to focus entirely on the financial sector and also imagine that since misguided policies led to this situation, improved policies on that score will get you out of this and get us back to business as usual. But if you go back to business as usual, all bets are off. You need to put in place more inclusive and sustainable policies, recognising the triple danger. If we do, with new leadership in the U.S., and noting the enormous talent and potential of India, this could be an opportunity to turn this crisis around into a path in which projections like India’s high income status could become real and meaningful.

Printer friendly page  
Send this article to Friends by E-Mail

Stories in this Section

Voices of reason
Falling short of expectations
Future of Medvedev-Putin tandem
Gaza: this is no way to advance peace
Corrections and clarifications
Kilinochchi & after
On the dossier
Dilemma
Heartening
Of a crisis and an opportunity

Copyright © 2009, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu