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Globalization
and liberalization, undoubtedly, brought benefits of advancement.
Globalization compressed the world, intensified the consciousness of
the world as a whole, and deepened the worldwide social relations
which link distinct localities in such a way that local happenings
are shaped by events occurring many miles away and vise versa. But
globalization and liberalization, especially in the financial sector,
were also responsible for increasing instability. The international
financial crisis that erupted in the US has started spreading ripples
of troubles worldwide. The world saw the abject failure of the US
Government to find a solution. The solution must be consistent with
justice and social solidarity for all countries, reflect an
understanding of the necessary balance between Government and
markets, more global cooperation in setting macroeconomic policies,
rebuilding trust in the financial markets and respect the principles
of democratic due process, including full transparency.
The
Bretton Woods institutions remained a mute spectator. The crisis bore
a “Made in the United States” label; but it needs a global
solution, necessitating UN intervention, ‘involving ‘G-192’ and
Not Quick-Fix Half-Measures Agreed ‘Behind Closed Doors’ of the
US or few advanced nations, says Stiglitz, the Nobel Laureate and
Professor at Columbia University. The solution must be consistent
with justice and social solidarity for all countries, reflect an
understanding of the necessary balance between government and
markets, more global cooperation in setting macroeconomic policies,
rebuilding trust in the financial markets and respect the principles
of democratic due process, including full transparency.
America's
housing collapse is often cited as having caused the crisis but the
financial system was vulnerable due to the intricate and
overleveraged financial contracts and operations. But the crisis was
not confined to the banking and credit
system. It had
a domino effect on financial markets (stock
exchanges and derivative markets notably),
equity
funds, hedge funds, insurance activities, pension
funds,
public finance, Forex, etc.
Beginning
with bankruptcy of Lehman Brothers in September 2008, the financial
crisis entered an acute phase marked by failures of prominent
American and European banks and efforts by the American and European
governments to rescue distressed financial institutions, in the
United States by passage of the Emergency Economic
Stabilization
Act of 2008 and in European countries by infusion of capital
into major banks. Afterwards, Iceland almost claimed to go bankrupt.
Many financial institutions in Europe also faced the liquidity
problem that they needed to raise their capital adequacy ratio. As
the crisis developed, stock markets fell worldwide, and global
financial regulators attempted to coordinate efforts to contain the
crisis.
The
US government threw the $700 billion plan which was attempted to
purchase the unperforming collaterals and assets. However, the plan
was criticized by the US Congress members and they rejected the idea
that the tax payers’ money is used to bail out the Wall Street's
investment bankers. This bailout package was controversial because it
was unpopular with the public, seen as a bailout for the culprits
while the ordinary person would be left to pay for their folly;
“socialising the costs while privatising the profits.” The
bail-outs appear to help the financial institutions that got into
trouble (many of whom pushed for the kind of lax policies that
allowed this to happen in the first place).
The
initial rejection at the US House of Representatives, because of
this, sent shock waves around the world. It took a second attempt to
pass the plan, but with add-ons to the bill to get the additional
congressmen and women to accept the plan. The stock market plunged as
a result, the US Congress amended the $700 billion bailout plan and
finally passed the legislation. Unfortunately, the market sentiment
continuously deteriorated and the global financial system almost
collapsed. While the market turned extremely pessimistic, the British
government launched a 500 billion pound bailout plan aimed to
injecting capital into the financial system. The British government
nationalized most of the financial institutions in trouble. Many
European governments followed as well as the US government. Stock
markets appeared to have stabilized as October ended. In addition,
the falling prices due to reduced demand for oil, coupled with
projections of a global recession, brought the 2000s energy
crisis to temporary resolution. In the Eastern
European
economies of Poland, Hungary, Romania, and Ukraine the economic
crisis has been characterised by difficulties with loans made in hard
currencies such as the Swiss franc. As local currencies in those
countries lost value, making payment on such loans became
progressively difficult.
As
the financial panic developed during September and October, 2008
there was a "flight to quality" as investors sought safety
in U.S. treasury bonds, gold, and strong currencies such as the
dollar and the yen. This currency crisis threatened to disrupt
international trade and produced strong pressure on all world
currencies. The International Monetary Fund had
limited
resources relative to the needs of the many nations with currency
under pressure or near collapse. Investment
bank UBS stated
on October 6 that the year 2009 would see a clear global recession,
with recovery unlikely for at least two years. UBS quantified their
expected recession durations on October 16: the Eurozone's would last
two quarters, the United States' would last three quarters, and the
United Kingdom's would last four quarters. Nouriel Roubini, professor
of economics at New York University and chairman of RGE
Monitor,
predicted a recession of up to 2 years, unemployment of up to 9
percent, and another 15 percent drop in home prices. Given the nature
of the global meltdown, it is widely feared that the crisis would
deepen and threaten the economies of the Third World countries.
Obviously, the implications for India will be far-reaching and
reverse the process of reforms.
It
is against this backdrop that the Centad along with School of
International Relations and Politics, Mahatma Gandhi University, and
Indira Gandhi Open University hosted a two-day Seminar, on 12 and 13
January 2009. The seminar made an effort to mainstream the
development dimension of the current recession through intellectual
discussions with scholars, policy-makers and grass root and state
entities. There were 26 resources persons and 200 participants in the
seminar.
Dr.
Rajan Gurukkal, Vice Chancellor, Mahatma Gandhi University
inaugurated the seminar. K.M.Seethi, Director, SIRP, presided. A.M.
Thomas welcomed the audience and Linu Mathew Philip (Centre
for Trade and Development)
proposed the vote of thanks. Dr. Prabhat Patnaik, Vice Chairman,
Kerala State Planning Board who is also a Professor of Economics,
Jawaharlal Nehru University (JNU) delivered the keynote address. He
said that as recession has come to be reckoned the world over, the
prospects of crisis-prevention through the usual monetary
instruments, including liquidity injection, appear distinctly dim.
According to him the
current scenario was an outcome of the demand for increased liquidity
preference on part of private individuals and institutions and
consequently a downward slide in the real economy mutually reinforced
one another, and has already started unfolding itself and would
continue for a prolonged period, unless governments now act to inject
demand into the economy directly, apart from injecting liquidity.
Food
Grain led Growth: The way out from the crisis
According
to Patnaik, “the need of the hour is
not just the injection of liquidity into the world economy but also in
addition the injection of demand. This can occur only through direct
fiscal action by governments across the world. The sectors where
government spending will go up will, of course, vary from country to
country, but the general objective of such spending must be the
reversal of the squeeze on the living standards of the ordinary people
everywhere in the world that has been a feature of the world economy in
the last several years.” He said that “the new paradigm must entail a
food grain-led growth strategy, sustained through larger government
spending towards this end, which simultaneously rids the world of both
depression and financial and food crises.” The trade and financial
arrangements of the world economy have to be oriented towards achieving
this rather than being made to conform to some a priori free market principles that
have the effect of pushing the world economy into financial crises and
slumps, and the peasantry and small producers of the world into
destitution both during the booms and also, additionally, during the
slumps.
Presenting
a paper, Dr. C.P. Chandrasekhar (Professor of Economics, JNU) said that
“the lessons from the ongoing financial crisis make clear that the
accumulation of risk and the manufacture of crisis are inevitable in a
private-led, deregulated financial system that makes short term profits
the prime objective.” Limited intervention cannot fundamentally alter
financial behaviour to avoid such an outcome. When financial markets
are left unfettered, the system goes through a sequence of events that
inevitably generate a financial and real economy boom that soon goes
bust. He said that setting up “Chinese Walls separating various
segments of the financial sector may not be the best option. Nor could
investment banks and hedge funds be abolished. “What could however be
done is to monitor investment banks and hedge funds and subject them to
regulation, while seeking an institutional solution that would protect
the core of the financial structure: the banking system. Fortunately,
the current bail-out has provided the basis for such a transformation
by opting for state ownership and influence over decision making,”
Chandrasekhar said.
Dr.
Vamsi Vakulabharanam (Department of Economics, University of Hyderabad)
argued that the twentieth century capitalist experience has been one of
oscillations between state-capitalism and market-oriented capitalism,
with neither solution achieving long-term systemic stability. He said
that Marxian prescriptions would, therefore, go beyond the market
vis-à-vis state debate to focus on the very institutional structures
that perpetuate capitalism of one kind or the other.
Dr.
Jayati Ghosh (Professor of Economics, JNU) said that the financial
crisis has so many ramifications mainly because it is occurring in the
very core of capitalism, and originated in the US, the country that had
the global power and influence to impose its own economic model on
almost all of the rest of the world. And the depth and severity of the
crisis are likely to signal global political economy changes that will
shape the world for the next few decades. She said that “geopolitical
shifts are likely to result from such glaring exposure of economic
vulnerability in the global hegemon. Large bailouts and the planned
Obama fiscal stimulus in the US will lead to a big increase in the US
public debt. It will also make it harder for the US to maintain its
military dominance, which has been a major source of the strength of
the US dollar.” Jayati said that the changes in the world, in the next
decade, “will not be linear or unidirectional, and there are bound to
be savage conflicts over resources and much else, but the recent
pattern of global imperialism has been severely disturbed.” But even
more than the geopolitical or economic shift, a bigger shift may come
about from the clear failure of the economic model of neoliberalism.
“The notions that markets know best, and that self-regulation is the
best form of financial regulation, have now been completely exposed as
fraudulent,” she said.
Need for an
Inclusive Regional Integration Policy
Drawing
upon some of the recent research at the United Nations Development
Programme (UNDP), Biplove Choudhary (Programme Specialist, Asia Pacific
Trade and Investment Initiative, UNDP), highlighted the current pattern
and trends in intra-regional trade within Asian economies and the
extent of vulnerability which may be affected by the ongoing recession.
Biplove shed some light on the fact that the pattern of intra-regional
trade also has bred some external dependence and has led to
vulnerabilities on account of a rapid transmission of any external
shock. While there has been a lot of discussion on the strong trade
dynamic in the Asian region, the low income countries have hardly
benefited and have largely been excluded from the gains, Biplove said.
Fig 1 Slide of Biplove Choudhary on Vulnerabilities and the level of Trade
Dr.
M.S. John (Professor and Gandhi-Luthuli Chair in Peace Studies,
University of Kwazulu-Natal, South Africa) said that with the developed
countries focusing more on the domestic economic front, the commitment
of the Western countries to provide additional aid to meet the
Millennium Development Goals or even to sustain existing levels of aid
can no longer be taken for granted. Private foundations are already
scaling down their budget allocations to projects in the developing
world including Africa, he observed. Dr. Biju Paul Abraham, Professor
of Public Policy, Indian Institute of Management, Kolkata noted that
the current global financial crisis and its long-term implications have
once again focused international attention on reform of the
institutions of global economic governance and on the creation of new
institutions. These reform efforts have also recognized the critical
role of major developing countries, in particular China, India and
Brazil, in such efforts. He said that this is reflected in the
important role assigned to the Group of Twenty (G20) in current reform
efforts, as opposed to the Group of Eight (G8) that dominated reform
efforts earlier. Saurabh
Kumar (JNU), Sebastian
N. (Sikkim Central University), Roshan Kishore (JNU) also presented
papers in the sessions held on 12 January 2009.
Financial
Crisis and Rural
Credit
There were 12
presentations in
the sessions held on 13 January 2009. Dr. Arindam Banerjee (Centre
for Development Studies)
felt that the financial crisis is deepening at a fast pace and
spreading into the developing economies has multiple implications for
the Indian economy. He
said that the
impact of
the crisis, however, will be significantly different for the Indian
economy as opposed to the western developed nations and many other
countries whose banking sectors have run into considerable stress as
fallout of the Wall Street debacle. The onset of a global economic
crisis will deepen the income deflation that the primary sector in
the country has witnessed in the recent past. The other direct impact
of the world financial crisis will occur in the arena of credit
availability to the small-scale agriculture and other rural
livelihoods in the near future. The possibility that a regime of
credit-rationing by banks will be triggered by the crisis implies
that small and petty producers in the rural economy will be excluded
from credit coverage. The indirect consequences of the recession will
the non-farm unemployment due to a slowdown in the secondary and
tertiary sectors will lead to a greater pressure of the labour force
on the already stagnated agricultural sector. He illustrated the
declining trend of agricultural commodities This will further worsen
the already low returns to economic activities in the rural areas.
The simulation exercise carried out by this study suggested that
there is going to be decline in the income of workers in agriculture
and further reduction in growth of agricultural sector if the trend
of displacement and migration continues from other sectors into the
primary sector. As a quick strategy he recommended enhanced public
expenditure policies to compensate the demand compression in world
markets and minimize loss of employment in export-oriented sectors;
policy shift from export-oriented cultivation to greater food crop
cultivation as the latter will be relatively more profitable;
strengthen the Cooperative Credit Societies to meet the credit
requirements for agriculture and other rural livelihoods; vigorous
implementation of employment-generating programmes like NREGA with
higher budgetary allocations to prevent the purchasing power in rural
areas from sinking.
Table 1
Arindam Banerjee
Slide on Worsening Credit Availability
Linu
Mathew Philip (Centad) in his presentation hinted at the cyclical
pattern of prices and speculative markets to be the prime cause of
the global financial crisis. He cautioned that the current crisis not
only has implications for the prudential regulation of financial
institutions at the national level, but also for macroeconomic
policies, especially monetary and exchange-rate policies, at both the
national and global levels. The last 25 years have been characterized
by limited macroeconomic volatility and low inflation in the
developed world. The recent bailout of economies to the tune of three
trillion dollars may have saved the credibility of the select
companies and their assets but the consequence on the international
trade flow is clearly visible. Stressing the need for more
regulatory financial Mr Mathew said that there is a cloud of
uncertainty on the foreign exchange and credit stability for enhanced
trade flow and there is very less likely that such engagements will
usher in any change from the current position. Thus it becomes very
important that a new global exchange system needs to take shape that
would usher in a new era of participatory exchange system which can
stabilize the global instability and give a regional fillip to trade,
he observed.
According to Dr.
Jaya V.S.,
Research Professor, Indian Law Institute, New Delhi, the new rounds
of capital concentration could mean that there is a danger of
capitalism returning to an authoritarian way of functioning as has
been witnessed by the countries in Asia due to an increase in
discrimination and racism towards immigrants which is something
extremely regressive. If the current restructuring of the capitalist
system continues down the line, there will be huge productive and
social costs and the already fragile sustainability of the
environment may suffer even more damage. The international financial
crisis has revealed the complicity of the IMF, the World Bank etc who
have caused the current collapse with its horrific social
consequences. The loss of prestige of these bodies is obvious, Jaya
said.
Dr.
D. Sambandhan, Professor of Economics, Pondicherry University argued
that the ongoing agonizing banking and financial crisis is a systemic
meltdown triggered largely by cumulative gross financial
irresponsibility on the part of the majority of the affluent
countries, which had chosen to live with lax supervisory mechanism
seduced by the belief that the enlightened self interest would take
care of the public interest. The million dollar question before the
Asian economic giants is how to get along with US for some time and
move away further from dollar in the medium run and safely get into
any alternative asset (which is of course scarce, as the credibility
of Euro is suspect) with least economic injury, Sambandhan said. V.
Dhanya, Research Officer, Reserve Bank of India said that the crisis
can affect India’s exports directly as well as indirectly. The
direct effect can be of two ways, i.e., affecting the demand for
India’s products, in the form of major markets; affecting certain
product groups which are mainly exported to the crisis hit countries.
Indirectly, India’s exports can suffer from the general slowdown in
the world economy and the effect on commodity prices and the
availability of credit.
Dr.
P.J.James, from Kerala Padana Vedi, said that lack of inter-sector
linkages or disarticulation between various sectors of the economy as
is well exemplified in the lack of correlation between production and
consumption together with the complex interaction of speculative and
parasitic financial capital with all spheres make Kerala most
vulnerable to the current global capitalist crisis engineered by
unhindered financial speculation. The extreme dependence of Kerala on
external markets for its sustenance through the export of primary
products and labour power together with the preponderance of
speculative capital whose role in the global melt down is self
evident and it automatically exposes the state to the harmful
consequences of this crisis. Compared to other regions in India, the
impact of global economic meltdown becomes particularly significant
in Kerala due to the specific pattern of the so called development
pursued by the State over the years. It must strive to pursue an
inward looking development path oriented to the domestic market with
its logical emphasis on productive sectors so that the harmful
effects from such shocks can be minimized, he said.
Dr.
S. Mohanakumar, Associate Professor, Institute of Development
Studies, Jaipur, said that the price instability has significantly
increased in the post-market integration phase. As more than 70
percent of farmers belonged to marginal or small category, the
staying power of Natural Rubber (NR) farmers depend crucially on a
stable price with a positive price expectation coefficient which the
present market environment is unlikely to provide. The market
protection offered to the NR farmers from supply sides through strong
state intervention coupled with tariff and non-tariff barriers
enabled the sector to expand the area under the crop during the last
half a century. On the other side, the protection enjoyed by the
rubber goods manufacturing sector provided a stable domestic market
for NR in the economy making the crop least export dependent. Unless
the protection from both supply as well as demand sides are resumed
to its pre-market integration level and continued further, the
economic impasse would destroy not the petty producers in the farm
front but throw the petty rubber goods manufactures out the sphere of
production. C.P. John, former Member, Kerala State Planning Board
said that we have to turn the threat of the crisis into an
opportunity. He noted that Kerala cannot make a retreat from the way
that it has already travelled in the last three decades. Instead, we
have to closely monitor the new trends in global economy for
finding new avenues of migration, trade, finance and tourism.
The Valedictory
Address was
delivered by Dr. K. Ramachandran Nair, eminent economist and member,
Kerala State Planning Board. Dr. Rajan Varughese, Pro Vice
Chancellor, Mahatma Gandhi University chaired the session. Dr.
Biplove Choudhary, Dr.
K. Mathew, member of the Syndicate also spoke. Dr. Girish Kumar R.
Welcomed the meeting and Dr. C. Vinodan proposed vote of thanks.
Seminar Programme
Presentations
THE US SUBPRIME MORTGAGE LENDING
CRISIS AND ITS GLOBAL IMPACT : A STUDY WITH SPECIAL REFERENCE TO INDIA - V. Mathew Kurian
Global Crisis and the Kerala
Economy: A Macroeconomic Perspective - G.Visakha Varma
INDIA'S TRADEIN DRUGS AND PHARMACEUTICAL PRODUCTS - Reji K Joseph
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