In the aftermath of the global economic crisis, the yearning for returning to normalcy has been strong. Yet that normalcy, which in the broadest sense means reverting to the legal, institutional, and policy framework that existed prior to the crisis, may never be realised. The crisis may have ended, but there has been an irreversible transformation that has changed the nature of what is normal. The new normal state has very little resemblance to the past. While prior to the crisis the global economy had robust growth and employment benefiting from an interconnected world with flourishing trade, investment, and consumption, the new equilibrium after the meltdown features more regulation, higher taxes, less leverage, lower growth, and higher unemployment in the developed countries. The emerging policy framework is broadly uniform, though it may be fine-tuned in specific countries and regions to address some special concerns. The crisis, though global in sweep, had its origins in the financial sector of the developed world. Economic recovery in the developed world remains fragile. Asian countries with China and India in the forefront are leading the recovery. For policy makers in the developed countries, adjusting to the new normal state has proved daunting. For instance, attempts to fix their financial sectors, so obviously broken, have met with resistance, especially in the U.S. The role of the state, which expanded dramatically during the crisis, will remain significant in the new financial architecture.
For developing countries, especially those in Asia, a deep study of the crisis has been immensely beneficial because it has provided a vindication of their policies. For instance, India's measured approach to capital account convertibility and its system of 'managed float' for the rupee helped check the contagion during the crisis. In fact, India's external sector policies have been commended by, among others, the G20 countries. Even the IMF, for long a votary of unfettered capital flows, has conceded that it might be appropriate in certain cases to restrain cross-border flows! For India and a few other countries, coming to terms with the new normalcy ought not to be as traumatic as it has been in the West. However, as the ongoing Euro debt crisis shows, the threat to the global economy can come from unexpected quarters. Asian economies, though with limited financial linkages to the euro, might still face major funding problems besides diminished trade prospects. New normalcy has therefore to be understood in a dynamic sense; it will endure only if it is the outcome of a collaborative effort at both the regional and global levels.