Since the current global recession is fundamentally different from run-of-the-mill recessions, the turnaround will not be simple. Nor will it be easy this time to fix supply and demand side problems of the global economy. Conventional approaches such as easy monetary policy and exchange rate depreciation will have to be used in conjunction with other policy measures for an extended period. In its latest report, the International Monetary Fund, which from the beginning has been less pessimistic than the World Bank and other global institutions, says that although the recovery has started, sustaining it will require “delicate rebalancing” acts both within and across countries. On the supply side, financial intermediation — the allocation of resources that is central to growth — will be impaired in many developed countries. Their financial systems have been rendered partly dysfunctional. In emerging economies, capital flows that have decreased sharply may not revive fully in the next few years. On the demand side, even though the global economy will very likely resume its trend growth rate, the growth will not be strong enough to reduce unemployment at least in the near-term. Besides, all recovery forecasts are predicated on a combination of fiscal stimulus and inventory restocking by firms rather than on strong private consumption and spending on fixed investments.
Sooner or later, fiscal stimulus will have to be phased out and inventory adjustment will come to an end. Global recovery can be sustained by two rebalancing acts. First, there has to be a shift from public to private spending. Secondly, aggregate demand across countries needs to be rebalanced, with a shift from domestic to foreign demand in the United States and a reverse shift from foreign to domestic demand in the rest of the world, especially Asia. In many countries, including India, there is a realisation that fiscal stimulus, and along with it high fiscal deficits, cannot continue indefinitely. The U.S. was not only at the centre of the crisis but is also central to world recovery. For recovery to take place, its net exports must increase, thereby reducing the current account deficit. That would automatically mean that several Asian countries led by China decrease their surpluses by, for instance, buying more from the U.S. However, the outlook, both economic and political, is beset with uncertainties. The rebalancing as visualised may not take place easily. Looking to the immediate future, there ought to be a reasonable degree of coordination among countries to sustain the nascent recovery.
