--- On Sat, 3/1/09, Sukla Sen <[email protected]> wrote:
[The sub-prime crisis in the US rather unobtrusively graduated into full-scale
national financial meltdown. Then the financial institutions elsewhere,
particularly in the Europe, got affected. That triggered off the credit crisis
in turn inaugurating an economic slowdown/recession, threatening to turn into a
"depression" with nightmarish visions of unending queues leading to soup
kitchens associated with it, all over the globe, even if with intensities
significantly varying across continents and nations.
A system, fairly complex to begin with, became far more so, with the level of
global integrations radically rising over the last quarter century in
particular. The evolution of the financial market into more and more complex
further added to the overall opacity.
Consequently, even today, there is no adequate understanding of the dynamics of
the crisis - on the Right, Left and Centre. Never mind the pompous claims of
Nostradamus- like foresight.
Consequently, apart from specific interests and ideological predilections, the
solutions suggested, and actual responses, are mostly of the nature of trial
and error.
Two broad trends have emerged.
One, tinker with the fiscal policies. Give more tax incentives and
easier/softer credit to private capital to boost production and economy and
also provide similar palliatives to the consumer and boost consumption/ economy.
The other one is more direct government intervention.
In the US, the government initially intervened to rescue the banking and
non-banking financial institutions while maintaining a sort of hands off policy
as regards the management of these failed institutions. The UK, in a rather
surprising divergent move away from the path trodden by the US, intervened more
vigorously to rescue the banking institutions by injecting capital into the
banking industry by way of taking over shares (and thereby part ownership),
instead of picking up "toxic assets" as in the US.
Another sub-trend is to raise the level of state intervention much further -
state directly making huge investments, and allocating resources for social
welfare, to boost the economy, and regulate popular discontent, almost
overnight throwing overboard the considerations of "fiscal prudence" and
avoiding deficit financing at any cost - raised to the level of a sacred
concept under the neo-liberal regime since early eighties.
China is the major example. But Barack Obama, the President-elect of the US, is
intent upon hitting this path in an even bigger way despite the formidable
legislative hurdles anticipated.
India, rather coyly, is still toying with the most timid alternatives trying to
stick to the neo-liberal dogma as closely as possible. The fact that its
ideological mentors have already strayed from the path straight and narrow is
yet to properly register with the slow-witted Indian rulers. The fact that a
general election is just round the corner otherwise demands a very different
response though.]
2008: a difficult year
Relief not in sight soon
by Arun Kumar
The Tribune, January 1, 2009.
THE year 2008 started on a high with the economy doing well, stock markets at a
historic high, the real estate sector booming, industrial growth running at
upwards of 10 per cent and inflation at a low level. The Finance Minister
boasted that the macro-economic fundamentals were good and the Eleventh Plan
target of 9 per cent average growth rate viable. There was little inkling that
policy making circles understood that a deep economic downturn had set in India
and the entire world.
Contrasting this rosy picture, the year has ended with widespread reports of
declining employment, stock markets down by 50 per cent to the levels of 2006,
declining real estate markets, poor industrial growth and exports showing
negative growth and many components of the services sector declining rather
than rising. This has happened despite the unprecedented interventions by the
government and the Reserve Bank — the infusion of massive liquidity, a huge
supplementary budget and the announcement of the first package of fiscal
stimulus soon to be followed by a second one. The FRBM has been given a quiet
burial.
The year also saw much turmoil due to a rapid acceleration of inflation from
its lows in January to the highs in the middle and to a rapid decline at the
end. It seemed that the government had lost control because at one point it
admitted that it could do little to keep inflation in check by pleading that it
was stable and not rising further.
Internationally, the crude oil prices, which had reached a peak of around $150
per barrel, have sharply fallen to around $40 in spite of the threatened cut in
production by oil producers. In fact, many like Goldman Sachs had predicted
that the price of crude would be around $200 by the end of 2008. Similarly,
given the blistering pace of the rise in the BSE, experts predicted that it
would touch 30,000 — three times the level ruling currently. All this calls
into question the expertise of the so-called experts and policy makers.
The year began with policy makers and experts suggesting a decoupling between
the Asian and the US and European economies. They suggested that the rapidly
growing economies of Asia will provide the boost to the advanced economies so
that there would be a soft landing for the world. This was based more on hope
and hype rather than on analysis (As argued in these columns on February 6,
2008).
These economies were already at their peak growth rates and could not double
them which was required to compensate for a decline in the rates of growth in
the OECD economies. Further, since China is heavily dependent on exports to
these economies and India is much more open than earlier, if anything, their
rates of growth were bound to fall. These two economies could not move in a
direction opposite to that of the bigger economies, as events have borne out.
Clearly, all along, the policy makers and experts have been hoodwinking by
denying the reality. They also fooled themselves and did not take timely steps
so that the situation became worse than it should have, and now everyone is
paying for it.
The rich have lost a lot of paper wealth on their financial assets where much
of their savings were invested. These people also had a substantial amount of
their black wealth stashed away abroad because this was invested in financial
instruments. These people were also operating real, nuts and bolts companies or
offices and due to the slowdown, these are in trouble. The contagion has spread
from the financial markets to the real economy.
All this has impacted the middle classes who have linkages in the organised
sectors. Many of them are in the process of losing jobs and their children are
not getting the good jobs they expected. Further, a large part of their savings
in financial assets — stocks, real estate, mutual funds, etc. — have been wiped
out. In recent times they were lured by stories of high returns, and greed won
over caution. Many NRIs will possibly return as they lose jobs abroad and add
to the employment pressures. Remittances that supported many families are
likely to dry up, leaving families in trouble. Public sector employees with
safe employment will have a good time as prices fall.
Some argue that the poor will not be hit by the current crisis because they are
marginal to the market and especially the financial markets. This is fallacious
because the marginal are coercively linked to the markets in a one-way
relationship. While they derived little benefits from the high but
marginalising growth, they will suffer from the decline. Even if they lose a
few rupees a day of income, it will be calamitous for them since they are at
the edge of survival.
As unemployment builds up the world over, wages will fall and disguised
unemployment will rise. The price fall will help but not enough. Employers in
the unorganised sectors and the rich farmers, who will be squeezed by the
crisis, will put the squeeze downwards and affect adversely the incomes of the
poor. Government programmes like rural employment schemes can help the poor but
corruption moderates its effect.
Agriculture in India has been increasingly export-oriented, and there has been
a shift towards commercial crops and high-cost agriculture. The markets for
these commodities have declined sharply and the slide can continue unless
prices are sharply lowered, but then the surplus farmers will lose out. The
traders will put the squeeze downwards and the farmers will do the same to the
landless workers.
In India, big and medium-sized firms buy from the smaller units in the
unorganised sectors. As these units face a decline in demand, they will be
forced to shut partially or wholly, reduce shifts and cut prices which is
possible only if they squeeze either the wages or the smaller ancillary
suppliers (possibly both) who in turn will squeeze their workers. Thus, wages
of workers are likely to decline all around and their employment curtailed.
Governments all over the world have put together huge packages of interventions
to prevent their financial sectors from collapsing but done relatively little
for the real economy and the poor. This has certainly slowed the decline but it
is still continuing. The problem this time is different than in 1929 and much
deeper, linked to the basics of the world economic system. Merely trying to
reflate the economies without any basic change will not work.
In India, the NEP, launched in 1991, depended on the proper functioning of the
global financial system. But because this is now collapsing, the success of NEP
is in doubt. While the marginalised sections were suffering and continue to
suffer, now the beneficiaries of the NEP are being grievously hurt. In the
changed global scenario, the NEP need a rethink.
Many companies are close to bankruptcy if not bankrupt; the public does not
trust the present financial system. So it has ground to a halt and due to
extreme uncertainty, everyone wishes to remain liquid rather than invest. The
crisis has been building since 2006 without our recognising it and we are still
groping for solutions because these have to be out of box and this will take
time.
If the social and political situation deteriorates with rising unemployment and
destitution, then even big economic interventions will not succeed and
governments will become helpless. While 2008 has closed on a difficult note,
2009 appears to be heading for deeper trouble.
The writer teaches at JNU, New Delhi.
arunkumar1000@
hotmail.com
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