(Weekly Organ of the Communist Party of India (Marxist)
October 24, 2010
World Economy: The Elusive Recovery
C P Chandrasekhar
THE optimism that overcame global
governments when growth figures for the last quarter of 2009 were
fast receding. Growth has slowed sharply in the subsequent two quarters
unemployment rates are in danger of rising further. In the
Not surprisingly, on September 9, the OECD which had, like many other organisations, been upbeat about the recovery of the world economy from the Great Recession, issued an interim assessment that reflected a new scepticism. “The world economic recovery may be slowing faster than previously anticipated”, it argued, with growth in the Group of Seven countries in the second half of 2010 projected at around 1½ per cent on an annualised basis compared with its earlier estimate of around 2½ per cent in the Economic Outlook released in May.
This was of significance because 2009,
which was otherwise a depressing year, ended on an optimistic note.
the year as a whole, growth was negative in the leading economies and
However, as noted above, by the time full
year’s figures for 2009 were available there was cause for optimism.
quarter-on-quarter annual growth rates seemed to suggest that the
already bottoming out in the third quarter of 2009 and had touched
levels in the last quarter, especially in the
Unfortunately, that optimism has been
dashed by performance during the next two quarters, when growth has
quite sharply in the
It must be noted that the IMF has been more
optimistic in its World Economic Outlook
released in time for the annual meetings of the World Bank and the IMF
October. It projects world output to grow at 4.8 per cent during 2010,
compared with a contraction of 0.6 per cent in 2009. This, of course,
largely because of the optimism generated by the sharp recovery in the
markets of Asia and
The recognition of these differences is partly visible in the optimistic growth projections. The emerging and developing economies are expected to grow by 7.1 per cent in 2010, as compared with 2.5 per cent in 2009. On the other hand, the advanced economies are expected to grow by 2.7 per cent in 2010, as opposed to the contraction of 3.2 per cent they experienced in 2009. This modest recovery too is to an extent due to the significant turnaround in the newly industrialised Asian economies (included by the IMF among the advanced) from -0.9 per cent in 2009 to 7.8 per cent in 2010. In sum, the core of capitalism as we know it today is even in the optimistic projections of the IMF expected to grow rather slowly this year.
The fundamental problems remain the same.
Household balance sheets are under strain because of the legacy of debt
accumulated during the boom. Unemployment is curtailing current
credit is either unavailable to or being avoided by those who need to
consumption because of a collapse of net worth. In the event, private
consumption expenditure in much of the developed world, which stagnated
terms in 2008 and declined significantly in 2009, is unlikely to
substantially in 2010. On the other hand, governments across the
world, overcome by conservative fears of excess public debt, are
on public expenditure or resorting to severe austerity measures that
sparking public dissent as in parts of
In sum, the fear that an early retreat from
the stimulus would deliver a second dip is still with us, at least in
developed world. Even in the
This would imply that a major stimulus is in order. But when talk of the stimulus arises it takes the form only of a monetary stimulus or “quantitative easing”. This involves large doses or several billions of dollars of asset purchases by the Federal Reserve aimed at injecting liquidity into the economy and driving down interest rates. The problem with this approach is the belief that the desire or inducement to spend or invest exists and the problem is the lack of credit to fuel such spending. That is a belief that has been proved wrong many times over in recent history. Yet there are myriad ways in which liquidity is sought to be injected into the system. For example, the Treasury department has announced a $1.5billion programme aimed at small businesses and designed to trigger $15billion in additional private lending.
What the quantitative easing does is that it lowers UN interest rates, widens the differential between interest rates in that country and elsewhere in the world and encourages, therefore, the carry trade. When additional liquidity is injected, financial investors (rather than industrial firms) borrow dollars at low interest rates, convert those dollars to currencies of countries where interest rates or financial returns are high or just higher and make an investment to benefit from the differential in returns.
The consequence of encouraging movements of
this kind is that there is a surge of capital flows into emerging
It is in this light that we must view the IMF’s optimism that comes from the fact that the emerging markets are doing well enough to lift “global growth”. That unevenness is not the basis for combined growth but for conflict that demands responses that could undermine the competitiveness of the emerging market economies. Moreover, the capital inflow surge into some of these emerging markets results in real estate and stock market bubbles that are likely to burst and therefore render such growth fragile. What is needed is a return to an effort at having a globally synchronised fiscal push with measures to distribute the benefits of that push across continents and countries. It is that option that the IMF foregoes when it emphasises the need to “stabilise and subsequently reduce high public debt” and calls for “a strengthening of private demand in advanced economies” without explaining how that is to be ensured.