We’ll ride over the storm, but not without casualties
There is a big amount of work to do to get the supply-side to re-invigorate our economy with new life and that does not come solely from undertaking public infrastructure projects. They also need to contribute their fair share who have benefited from economic development over the past decades, shouldn’t they?
— Anil Gujadhur It was believed that the injection of several hundreds of billions of dollars to recapitalize failing large financial institutions and key corporates in the wake of the international economic crisis of 2008 would be enough to set the world economy back on course. Four years down the road it is being realised that the crisis is still around.
There are predictions now that the fallout from the economic crisis, which began in 2008, could last for the rest of the decade in some form or other. Various uncertainties are springing up. The Euro zone is likely to go into recession if it is not there already. The US fiscal deficit and debt problem are far from being resolved with the attendant risk that the much needed boost up of demand will not come so soon; ahead of oncoming presidential elections later this year, political brinkmanship likely to thwart pick-up of growth and jobs is taking a toll on constructive policy-making.
There is an unsettled instability in the Middle East already. The current Iranian crisis is grafting on to it. The price of oil has risen from its already high $100 level and it may well pull up towards $150 a barrel shortly. The question is: has Israel’s security suddenly come so much under threat from Iran as to warrant the current added tension in the region spiralling up into higher inflation for all nations of the world and intensification of the prevailing economic downturn, on top of this?
Or, is Israel actively pushing forth its agenda to decide who should be its sympathetic America’s next president, even if that were to impose sharp economic distress upon vast swathes of impoverished populations the world over? In the scale of values of European and American leaders, the diktats of Israel appear to have greater importance than the economic distress gripping hundreds of millions of workers going destitute in their own countries as well as in the world. As a country that has not made it over in any significant manner to local renewable energy, Mauritius will have to face the music along with others.
On the other side, emerging economies such as China, India, Brazil and South Africa, were looked upon as having the potential to latch on to the global growth process despite the slowdown of the richer countries. There are signs now of the weakening of those economies due to internal structural imbalances. Internal demand is not strong enough to compensate for the depressed demand conditions wrought by increasing fiscal pressures in the developed countries. The weak uptake in the Euro zone and America will make it harder for the BRICS to take up the role assigned to them in a near future.
The fragility of the global economy is brought out by the fact that mounting government and private debt in key developed economies has reached the limit of manageability. It acts as a brake to curtail the flexibility with which the concerned governments could have pursued an effective recovery by sustaining internal demand and stimulating growth. Not to lose this flexibility, Britain has decided to be solely in charge of its fiscal policy, without having to stick to Brussels’ rulings. Rating agencies have spotted the underlying weaknesses of the highly indebted sovereigns and the banks which are involved in the risky lending. They have flagged that out by downgrading US bonds as well as a number of European countries, including France, a key player expected to send out positive signals for resolving the on-going Euro zone crisis. All this appears to be coming to a head at a time a stronger dose of optimism was required to get the world economy on a sounder footing.
It is customary for social leaders facing this kind of gloomy economic and social outlook to set the blame on scapegoats. This is what has been happening. Certain governments in the west have resorted to drastic cuts in welfare spending; it is assumed to have occasioned the budget deficits and high public debt even though statistics don’t support this view. Greece is an example. Britain is another. Even an ex-archbishop, Lord Carey, has qualified the welfare state as “an industry of gargantuan proportions, … impoverishing all” and a mechanism which “traps people into dependency and rewards fecklessness and irresponsibility”.
Such sweeping statements, unsupported by facts, are being used by political and other right-wing leaders of society, to persuade public opinion that it is the poor that are the problem and welfare spending the prime cause of the government debt crisis. However, when the substantial bonus to which the CEO of the Royal Bank of Scotland (approximately £1 million) became entitled came out in public last week, the British Prime Minister decided to lash out against exaggerated scales of pay in favour of fat cats.
Leaders elsewhere have equally now taken to making statements about obscene and immoral gaps between the earnings of those top executives and the mass of people lower down. This was given out as another reason why redress was not forthcoming. Here in Mauritius, we should not think that we are off the mark from these trends: when the CSO says that it is ‘financial intermediation’ with a monthly average earning per worker in the sector which is the highest paying sector, it would be naïve to assume that this is well distributed across the workforce in the sector. As in the other places there are big gaps between the take-away pay of those at the top and those lower down the ranks. We suffer from the same syndrome of maldistribution.
At the World Economic Forum held at Davos in the final days of January 2012, those world leaders who showed up this time came to acknowledge that global economic growth was continuing to slow down. Translated into understandable language such statements signal that those in the middle and lower down will have to pick up the bill from the resulting economic austerity in what are called “free market economies”, taking forward the prevailing big gap between the top and the bottom. Welfare spending will shrink. To ward off the further accumulation of public and private debts in the circumstances, people should accept dimming prospects of being able to keep up jobs and they should scale down their living standards as the world economy would come under even harder pressure. This is the true meaning behind the acknowledgement of slower economic growth the world over. You must condition the ones who will actually bear the brunt.
This situation means there’s going to be growing economic stress for those at the bottom. This is the price to pay for policy-makers having chosen, in the heyday of the pre-2008 economic greed, to run with the hare and hunt with the hounds. Sensing the coming social stress, many political leaders in the West have brought growing economic inequalities forward as a reason for global economic distress. The contradiction between advocated welfare cuts, on the one hand, and not getting the economic elite to contribute more effectively to get the economy out of the woods, on the other, is simply baffling. Shifting the blame left and right or simply passing the buck does not actually take us too far. It hasn’t. It is a good thing that here in Mauritius, we have not always allowed ourselves to be overwhelmed by the sweet praises showered on us by the IMF and the World Bank from time to time for efficient economic management of the country, accompanied by a parallel recommendation to trim down and target welfare spending in order to continue being well seen by them.
Growing unemployment among the less skilled and worsening prospects of them getting into gainful employment soon enough reflects in part the want of decisiveness on the part of the leadership to insulate this category before the crisis hit the economy. They have allowed the inefficient system to carry on as if it will balance itself out naturally. They might have become more proactive before it was too late. Faced with continuing uncertainty about the future path of the global economy, the global leadership has gyrated in so many contradicting postures that it appears to have lost the plot altogether.
Who gave a free hand to the dominant global players to twist rules for excessive personal over-enrichment of the few at the cost of the masses? Who gave ‘Wall Street’ the latitude to hijack the public policies the authorities made to regulate its behaviour against recklessness and to divert them, with political support, from serving the public interest to serving instead Wall Street’s narrow self-interest? Had policy-makers in those places acted circumspectly on time in the public interest, the crisis of 2008 would not have had as enduring adverse effects on the masses as it is having. Going by the size of the bonuses flying into the pockets of high profile bankers even now, nothing much appears to have changed in this culture of grabbing despite the world economy having plunged into a severe disaster with no clear outlook or timeframe of economic recovery today.
Equality is not all; providing opportunities is
While sterile concentration of economic power by a few must have accelerated the global economic downturn, inequality in itself is not at issue. There are stark realities which show that not doing enough for those in need is more important. In India, people are constantly migrating to overpopulated cities having the highest levels of inequality as measured by the Gini coefficient (a coefficient of zero means perfect equality of wealth and incomes in the population while a coefficient of one means perfect inequality) from rural areas having coefficients closer to zero. Why?
What matters more than inequality is economic opportunity. Highly equated but impoverished populations in a given milieu with very nicely distributed low incomes will not enable them to do much for each other. Unequal but more open economic spaces hold better opportunities for the “wretched of this earth” even where their own chosen leaders have failed them bitterly for having favoured too-far-too-long the self-seeking economic lobbies.
It is said that despite Mao’s very equal China, there were people who took the risk of life and death to swim across the shark-infested sea to Hong Kong, never to swim back again. Many others faced the danger of being gunned down while climbing the Berlin Wall for having the chance to move out from theoretically very equal East Germany to the highly unequal West Germany. Equality is not all; providing opportunities is.
Is there light at the end of the tunnel in the present global economic situation? Many see the light although the tunnel is yet to be discovered. Consumers should regain their lost confidence in the first place. Prospects of being able to get into jobs should improve through the right public policies. Governments in the severely affected countries should put more income into the hands of the public so that demand will help growth to pick up. Policies should help shift significant amounts of resources from too many customary unproductive areas which parasite over the rest of the economy (e.g., excessive rewarding of rent-seeking and financial intermediation) to other areas (e.g., improving the supply-side of the economy) which hold out a promise to increased productivity and competitiveness.
People will still feel left out without a more directed scheme of human capital formation geared towards areas of economic growth, old and new. The growing economic insecurity factor should not be allowed to increase. Uncertainties need to be removed wherever they start manifesting themselves. A prompt readiness to act decisively on issues such as this, which affects the people’s psychology at a deeper level than one can suspect, can be very productive. Decisive action creates more social mobility; it evolves education towards its more practical application on a day-to-day basis; it increases jobs and skills in society and raises the level of technology and innovation from less productive to more productive activities.
Concentration on the financial sector, housing and real estate – all of which thrive on a perpetual process of hiking up prices — has shown the messy finality of such pursuits at the global level. We need to shift towards more sustainable pursuits and cease being driven by the industry of greed that has brought the world economy to its knees.
We should be asking ourselves: what do we achieve if we keep saying that all depends on how Europe, our main market, will fare? This is an acknowledgement of failure. Progress is made only when constraints such as this one are overcome. We did that when we introduced textiles in Mauritius. We did that when we allowed the digital age to take a fuller expression in our economic culture. We need private sector initiatives to expand the economic horizon as it was done in the past. We need the private sector to turn its sight into areas that have potential despite lesser opportunities in traditional markets.
This cannot happen without enlightened policy support from a brilliant public sector. We need to tie the two of them up more effectively with a common purpose than it has been done so far, if only to overcome the decline in traditional markets. Like other countries, we can raise our activities by relying on imported technology with a closer job focus. We could reduce our dependence on imports for our energy needs: this means we need to implement such ideas and talk less about the promise they hold.
There is a big amount of work to do to get the supply-side to re-invigorate our economy with new life and that does not come solely from undertaking public infrastructure projects. It is small manufacturing units that at one time made our knitwear sector vie against the biggest producers of the world. This means we can get there when we want to be there forcefully. They also need to contribute their fair share who have benefited from economic development over the past decades, shouldn’t they?