As the U.S. and eurozone crises prevented a global recovery in 2011, countries such as India now need to focus on domestic demand.
“We are entering an Age of Unreason … a time when the only prediction that will hold true is that no prediction will hold true.”
Charles Handy, Age of Unreason
The aftermath of the global financial crisis of 2008 keeps reminding one of Handy's words. Economists, policy makers and newspaper columnists make wise predictions only to retract quickly as events prove them wrong. At the beginning of 2011, there was cautious optimism about recovery. The International Monetary Fund (IMF) had ventured to suggest that recovery was delayed but on its way. In the United States, growth was described as “still wobbly.” Federal Reserve chairman Ben Bernanke warned that some of the weaknesses could linger. The Institute of International Finance (IIF) in Washington, DC, commented global recovery had entered “a soft patch.” According to the Bank of Japan, the economy, reeling from the pressure of slowdown and natural calamities, would see moderate rebound by the “year-end.”
And now, when the world is past that “year-end,” Mr. Bernanke calls the recovery “faltering” and President Barack Obama terms it “fragile”! It is perceived as weaker than it was at the beginning of the year.
Many would find the situation oddly reminiscent of the Great Depression. In 1929, as John Kenneth Galbraith beautifully describes, daily the worst seemed to worsen: “What looked one day like the end proved on the next day to have been only the beginning.” Public perception of government assurances was so low that every time officials made an optimistic statement the market dropped.
In 2011, whether at the Fund-Bank meeting in September or the G-20 summit in November, there were many leaders putting their heads together. But there was no leadership. After the 1929 experience, the world had Franklin Roosevelt to provide leadership for recovery. In 2008 Americans elected Mr. Obama, perhaps with overwhelming expectations of leading America and the world the FDR way.
Three years into his presidency the assessment has been mixed. A recent, controversial book — Confidence Men by Ron Suskind — has documented his difficulties in treading a path between economic compulsions and political expediency. The Federal Reserve chairman admits apologetically that monetary policy is not the “panacea” for economic problems. In any case, with interest rates almost close to zero and the Federal Reserve deciding to keep it that way for the next two years, there is not much margin for it to play with monetary policy.
On the other hand, the White House's fiscal policy initiatives are stuck in the U.S. Congress. $2.3 trillion in housing and government debt purchases since 2008 have failed to push growth and employment. Unemployment remains above the nine-per-cent level. And with U.S. presidential elections round the corner, economic resolve will be increasingly subjected to political needs.
The news is worse in Europe. With 44 million unemployed in the advanced countries, the world faces serious threats of recession. The eurozone nevertheless is the flashpoint. What started as a bailout for debt-ridden Greece has now escalated to complex problems for which there are no easy solutions.
In 2010 only five per cent of Europe's debt was considered highly risky. By late 2011, this had grown to 46 per cent. And it had spread to Ireland, Portugal, Spain, Italy and Belgium — some of them with public debt ranging from 110 per cent of GDP to 166 per cent. Even the better placed economies are not in the pink of health. Germany and France, for instance, are reported to have a debt in the 80-90 per cent of GDP range. The IMF has assessed that for all of Europe, growth will dip from 3.4 per cent in 2010 to 1.8 per cent in 2012.
So far the eurozone affairs and the American downturn have not greatly affected Asia. Yet the fear looms. If the economic downturn in the West does not reverse, weakening global demand for Asian exports will set off the recession process in Asia. For example, the European Union is China's strongest single export market. However, optimists point out that the fear may be exaggerated. In aggregate only about 14 per cent of Asian export is to the U.S. and the EU. In the case of China, exports account for 30 per cent of GDP. But the import content of Chinese export is quite high and therefore the net effect of a fall in exports will be limited.
Tourism is a prominent component of the GDP for many Asian countries. The source market is largely the U.S. and the EU. In India, 48 per cent of foreign tourists come from western Europe and the U.S. Tourism is highly income elastic and continued recession in these countries can affect tourism revenues and economic parameters of many Asian countries.
Creating domestic demand is therefore the best protective weapon. There is a compelling case for internal trade liberalisation and greater economic cooperation among Asian countries.
The overriding sense of gloom had a parallel in 1930. Then, too, there was despair and widespread anger against the banking system. The Occupy Wall Street (OWS) protesters would find in Galbraith's description a great endorsement. “Wall Street” he had written, “… is like a lovely and accomplished woman who must wear black cotton stockings, heavy woollen underwear, and parade her knowledge as a cook because, unhappily, her supreme accomplishment is as a harlot.”
The OWS protest is symbolic in its objection to corporate greed and to the bailout of 2008, which left banks with huge profits but common Americans without jobs and with bad mortgage debts. The anger has spilled over to a widespread movement propelled by nothing except hard sentiments, great resentment, Facebook and Twitter.
Lurking behind this unrest is a deeper malaise — growing inequality. In the U.S., this has been stark. The Congressional Budget Office reported that the top one per cent earners had more than doubled their share of the national wealth in the past three decades. The world's 500 richest individuals have a combined income greater than that of the poorest 416 million. On the other hand, 2.5 billion people — 40 per cent of the world — live on $2 a day and account for only five per cent of the global income.
India has not been immune to this phenomenon. GDP growth rates have touched eight and nine per cent in recent times. But a survey by the National Council of Applied Economic Research (NCAER) shows in 2009-10 the top 20 per cent of India's population had a share of 50 per cent of the national income — against 37 per cent in 1993-94. Another study by NCAER shows that in the same period the share of the bottom 60 per cent of India's people in the total income declined from 39 to 28 per cent.
A recent Organisation for Economic Cooperation and Development (OECD) report confirms that India's income inequality has doubled in 20 years. It is clear that policy interventions to improve the lot of the poor and to meaningfully alleviate poverty must look beyond just GDP growth and income growth at the macro level.
Against this depressing scenario comes a new United Nations report that says the world is on the brink of one more recession. Indeed ‘World Economic Situation and Prospects 2012' predicts 2012 will be a “make or break” year for the global economy. Well, 2012 is just round the corner. Dare we believe this prediction?
(The author retired from the IAS as Secretary, Ministry of Tourism. He can be reached at email@example.com)