By Anil Gujadhur
The world economy had been going on with its ups and downs when some major financial institutions of America and Europe were hit by the financial crisis of mid-2007. This situation soon transformed itself into a major economic crisis in those places, despite several hundreds of billions of dollars poured into the financial institutions to recapitalize them.
Stimulus packages introduced by governments costing hundreds of billions of dollars proved to be mere palliatives. Growth rates plummeted. A whole host of households became bankrupt, unable to pay up hundreds of thousands of house mortgage loans they had been induced to contract by the self-same financial institutions in quest of ever higher amounts of profits. House prices crashed in America and Europe.
Since then, millions have lost or have been losing their jobs. Governments have trimmed down pension benefits and welfare expenditures. Having run large budget deficits in the past, those governments face an accumulation of public debt which, in certain cases like Greece, are clearly beyond the capacity of the governments to repay. In plain language, the concerned countries had technically gone bankrupt.
From 2007, when the economic catastrophe that had been brewing up all this time erupted, it has proved extremely arduous for governments, G20 and international financial institutions to come up at least with a collectively agreed direction to take to solve the problem. In a statement this week, the IMF declared that the economic recovery which had begun in the wake of various measures taken by governments and major central banks so far, has come to a standstill.
Economic growth rates are being revised down for the industrial countries. As if the man-made catastrophe was not enough, Japan, one of the pillars of global economic activity, was hit early this year by an earthquake and a tsunami of Olympian proportions. The massive task of restoring the situation ex ante is proceeding; obviously, all this will take time to cobble up.
While the industrialised economies were reeling under the thrust of all these negative factors, emerging economies, especially China and India, were careering with high growth rates of their own. Hopes were placed therefore that these emerging economies will pull up the global economy from the recession that had been threatening it. Now, even China and India have seen their growth rates coming down and signs of overheating emerging as seen in rising inflation rates. Thus, the price of oil has persistently remained above the $100 level despite the slowdown in global growth and has been feeding into the inflation. Chances are that emerging countries will have to play it down if they do not want to be drawn into deep structural problems of their own. In any event, emerging economies do not have the critical mass and necessary openness to play host to the world.
As if this was not enough, Europe has failed to get its act together during the past fortnight. Its leaders have been pulling in different directions, as accusations of profligacy have been flung across from the conservative northern countries against those on the southern rim. The risk of a break-up of the very Euro zone has come up as an issue against the backdrop of several key economies of the zone having accumulated public debt which it is beyond their individual capacity to honour as it falls due. Since those individual debts are denominated in the common currency of the Euro zone, notably the Euro, one would have thought that the bloc would have come up with a reassuring and credible plan to keep the lenders (investors such as pension funds, banks, sovereign and private funds, private equity and hedge funds, collectively referred to as the ‘financial markets’) comforted with the idea that they were not going to lose their money. Nothing solid yet. The financial markets are holding their breath.
This is the brink of uncertainty upon which the global economy is sitting at present. In the past, you used to have single respected voices, such as that of the IMF, which would give a general direction to take, in the quest of a solution to situations like this. The IMF has today lost much of this authority. It does not have adequate funds of its own in order to avert a catastrophe that threatened the global economy all at once. Its Managing Director was busy advising some African countries last week not to waste their resources but to keep for a rainy day just in case the unwinding of the global economic situation proved more brutal than one could anticipate.
Daunting as the entire situation may look, it need not spin into a prolonged period of stress. It is true that global leaders have not been able to drive a consensus around the issue so that we are actually in a situation almost of everybody fending for himself. This has impacted negatively on the confidence factor, something essential for getting on to a durable solution to the economic crisis. Too many elections are under way in different countries and leaders cannot afford time to look at the bigger picture, free from the devastating influence of perverse lobbies. A wholesale solution is thus not in view. However, the world has gone in the past through tough conditions like the present one. This was the case during the Great Depression of 1929. It took some time to get to unwinding it. This one is already 4 years’ old and it may take a year more for the world to regain a more sober balance.
The path to economic recovery may not be identical to what it was at that time. We may move faster towards a durable solution. We need not go for austerity measures as much as they did in those days; all we need is to stagger the adjustment process towards growth without shrinking the little amount of optimism that still remains. Communications and the transmission of information are much faster today. Technology has advanced a lot, so that gains in productivity will be more rapidly transmitted across the board in concrete terms today than it was the case in those days. All of these hold hope that the stress will not be too prolonged for countries like ours which depend on others picking up first so as to grow along with them.
The present crisis was nurtured by greed. The more you have the more you need to accumulate: this has been a big driver towards the catastrophe. The faster you get rich (or filthy rich), the better it is. It is the lopsided view of development arising from attitudes like this that have broken the world. The solution will come from moderating those exaggerated demands of the topmost minority in their futile quest for unlimited security for themselves from as many angles as possible.
We have lived in a world that has lost a sense of measure, a sense of sharing more fairly the fruits of labour with the different constituents of the planet. Had it not been so, what else could explain that hardly did the first green shoots of growth start appearing in 2009, bankers were back to their favourite game of hoarding huge bonuses for themselves by fielding out some 85% of total transactions for speculative activities? This frenetic pace of self-accumulation will need to be arrested for the world not to relapse into the same symptom of failure as appeared in 2007. The capitalist ideology needed to be tamed to serve a nobler cause than filling up to excess the pockets of a few to the point of breakdown of the entire system. Leaders did not arrest the surge towards excesses for reasons best known to them. We are paying the price for this failure to act.
Countries like Mauritius do not engage into the high drama that has brought the world to such a difficult pass today. They are at the receiving end. We are a mere victim of a system which has been trying to reconcile too many divergent stakes, unsuccessfully. Our role in particular should be to keep innovating, sustain the highest standards in all areas of our endeavour, and nurture a culture of pragmatic achievement and work-more-talk-less. The more we stick to the discipline that has been at the foundation of many of our past successes, the more we should be ready to take on the world when its economy turns around.
There are some pristine qualities of natural beauty, living in harmony with the environment and a strong sense of tolerance that makes Mauritius what it is. Herein lie the values that will ferry us across the worst storms that the greedy men of the world’s economy can raise from time to time.
* Published in print edition on 31 December 2011