|
BW OPINION
Global Crisis Revisited
IMF’s global estimates show that other than unemployment, most economic indicators have stopped wor-sening, but the end of the crisis is still not clear
14 Aug 2009
.jpg) |
| (Bloomberg) |
The US defied and insulted the United Nations under George W. Bush’s disastrous leadership; today the UN is capable of little beyond feeding refugees in Darfur. The vacuum left by its eclipse is being filled by the Group of 20 (G20). The International Monetary Fund was luckier than the UN. It too went into an eclipse under Bush’s Presidency. The Bush administration ran huge payments deficits; they unleashed a flood of dollars into the reserves of other countries. All the major developing countries acquired generous foreign exchange reserves, and left their payments problems behind. The Fund and the Bank lost their big clients. But G20 has adopted the IMF as its economic secretariat. Its forecasts for the world are no longer stacked away in unread issues of the World Economic Outlook. It now prepares colourful briefs for world leaders.
The latest report shows how bad the current world crisis has been. Quarterly world exports were an incredible 65 per cent down in May compared to exports of a year before. Industrial production was 25 per cent lower. World domestic product was 7 per cent lower. Developing countries suffered smaller falls than industrial countries; but they too were affected. Their foreign trade suffered just as badly; but their industrial production fell 20 per cent, against industrial countries’ 29 per cent. Their equity indices lost over a half of their value. Their corporate bond spreads over sovereign bonds doubled from 400 to 800 basis points.
The conventional wisdom on how to deal with crisis is shared by policymakers in all countries; they all cut interest rates and released liquidity. Despite the numerous bank failures in the US, the authorities have managed to restore confidence in the banking system; interbank rates have returned to normal everywhere. But confidence in the corporate sector is not nearly so robust. At the height of the boom two years ago, corporates were borrowing at rates close to public authorities; today they are paying at least 200 basis points more. Rescuing banks is not all there is to anticyclical policy. It is producers whose performance determines the fate of an economy; they are still far from gaining the confidence of investors.
Exchange rate policy was actively used in the 1930s to gain competitiveness; competitive depreciation seriously disrupted the global trade and finance. Though such beggar-my-neighbour policies have not been conspicuous in this slump, there have been significant changes in exchange rates. Most currencies tended to strengthen against the dollar, since the US economy was the epicentre of the crisis. The British pound gained almost 30 per cent against the dollar; the British financial markets were seen to be better regulated than the American, and money in search of a safe haven moved to London. The Japanese yen was the only major currency that lost heavily against the dollar. Because of its chronic payments surplus, Japan has for long had very low interest rates. As other countries raised their rates, money moved out of Japan, and the yen depreciated.
All the above and many other indices show a reversal in trend in the past three months; it is this change of direction that has led to the chorus claiming that the worst is over, and that the world economy is recovering. The logic behind this argument is that now that the indices are pointing upwards, they will go on rising. The same logic would have led to the conclusion six months ago that everything would keep declining. There is no inevitability to trends, especially trends that are no more than a few months long.
The major dissenting statistic is the unemployment rate, which continues to climb in industrial countries. It has moved little in developing countries; but their statistics are incomplete and poor, and nothing much can be read into them. The rising unemployment in industrial countries should be read together with what was said above on the productive sector — that whilst governments have restored banking systems to a semblance of health, corporates continue to suffer from a loss of confidence and consequently high cost of finance. This is why GDP growth has shown no significant reversal of its downward trend.
This is surprising in view of the billions and trillions that the advanced country governments are reported to have pumped into their economies. There is a chorus of optimists that says that public expenditure takes time to work itself through the economy, and that long lags are inevitable. They will go on saying that, however long the downturn proves to be.
(Businessworld Issue Dated 18-24 Aug 2009) |
Sensex rises 61 points in opening trade 
