The economic slowdown of 2008 was dealt with financial stimulus to banks that had led to the crisis in the first phase. Instead of letting them go down under they were rewarded for their financial recklessness and impropriety. It was thought that the financial stimulus would enhance their health and save them as well as those dependent on them from adverse financial exposure. However, banks didn’t learn their lessons and one of them took its top management for a hunting-cum-leisure trip to England the moment they got financial bailout package.
No government, least of all the US government initiated any determined efforts to reign in banks and launch a new structural reform in the banking sector. The crisis was a result of weak financial regulatory system. Stimulus created a false sense of well being and by 2010 things started looking up. Emerging economies performed well and demand picked up slightly in the biggest market in the world — the US. However, this year (2011) the charade of recovery was over. Policy paralysis in US, Earthquake and Tsunami in Japan, Euro zone crisis and floods in Thailand have made the economic atmosphere much more unstable. This is the beginning of what executive director of International Monetary Fund (IMF), Arvind Virmani says, 2008 part II.
It means the slowdown never went away it was merely masked for two and a half years. What began in 2008 was the first shock which should have jolted our policy makers and rulers out of their smug denials and initiate a strong medicine to cure the ailment. However, today in hindsight politicians, world over, look like those doctors who have pussy footed a grave medical situation by giving in to the whims and ranting of an ailing and insolent child.
If another immediate crisis happens there will be no money in either national systems or global financial systems to give another financial bailout. In such a precarious situation the only logical scenario looks like a financial collapse. The doomsayers are betting heavily on bearish trends and they aren’t misplaced in their enthusiasm. They site global connectivity of trade and commerce as well as financial markets as dominos where the fall of one will set in motion a chain of fall that will only stop once the entire system has collapsed in a big heap. This is a worst case scenario. Another less dramatic scenario is continued sluggishness around world for a decade before growth finally picks up if at all it does.
However, there is one more option that is equally dramatic and far more positive than the earlier two. The governments around the world can take this opportunity to start working on structural reforms within their own boundaries that will stimulate growth in their respective national economies. For long the interconnected global economy has resulted in making a small band of financial institutions, their workers as well as export firms rich. It is they who suffered the most in the aftermath of 2008. India and to some extent China were insulated from the financial carnage. As most of their working population was out of the international wealth creation loop when the crash came they were insulated from the suffering that befell the world elite created by financial trade and export generated money. But now that the second phase is looming on the horizon everyone is in danger of experiencing the pain.
To save majority of its electorate from suffering, the governments should resort to structural changes. Prime Minister Manmohan Singh, as finance minister in the year 1991, while presenting the landmark budget that ushered in liberalization had said, “We are opening up the democracy so that it benefits in time reach to the last man in the queue…” Today after two decades and as many financial collapse later the trickledown effect has failed to percolate down to the masses as intended by the policy makers. There is no space left for complacency and the carpet under which every uncomfortable decision has been shoved is now bulging and its seams are on the brink of giving way. The system and the economy are in need of second stage of reforms and re-prioritizing economic goals.
In last 20 years a new rich elite has been created on the strength of exports, financial services and Information Technology. Though big it is by no means inclusive and broad based. So the new structural initiatives can work to enhance agriculture sector that is stagnating at less than 2 percent growth rate or improving labour laws to safeguard the labour force and create immunity for the manufacturing sector from further industrial unrest as the one witnessed in Gurgaon and Manesar recently. Apart from this renewable energy should also be pursued with vigour.
These structural changes will generate wealth, ignite demand for new expertise and services and truly stimulate lasting and increasingly inclusive growth that would create broad based wealth where even “the last man in the queue” will have a reasonable chance to be benefitted.
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