In the Swiss Ski resort of Davos recently, around 3000 important and famous men and women came together to discuss the world’s economic problems. In this annual ritual held by the Swiss think tank, World Economic Forum, prominent politicians, economists, bankers, and CEOs gather to discuss the global situation. The global economic scene was reviewed there and it was seen by many to be ‘hanging in the balance’. There is no doubt that there is trouble ahead for the global economy and the IMF chief Christine Lagarde herself has lowered the forecast for the growth of the world economy to 3.4 per cent. A global slowdown is thus official.
Big honchos and political leaders agreed that there was economic recovery, especially in the US, but there were also the remnants of the 2008 Financial crisis with recession threatening some of the big Emerging Market (EMs) Economies.
As was expected, there was a doomsday scenario as well an optimistic one but by and large the main instigator of the global crisis facing the world today was seen to be China’s slowdown.
Apart from blaming China, there was talk about the US economic recovery and the Federal Reserve’s interest rate hike in December 2015. Actually the reason why there has been such an exodus from the Emerging markets is due to the raising of US interest rates. Emerging markets, specially the BRICS countries, were once the favourite of FIIs but today the scene is very different. Brazil is already in recession because of falling commodity prices and escalating public debt, Russia is also on the brink of a recession because of falling oil prices and China is in trouble as well with a first ever lowest GDP growth of 6.9 per cent in 2015, in 25 years.
The stock market crash around the world has been due to FIIs returning home, pulling out of EMs and causing a vacuum in countries like India leading to stock market upheavals. As Raghuram Rajan, the RBI chief, said there has been too much pumping of liquidity in the world economy by US, EU and Japan through Quantitative Easing (QE) and FIIs went to world markets in search of highest returns. Fed by the excess liquidity many FIIs increased the asset values of Emerging Markets by flooding into them. Now that they have gone, the much needed correction will take place. As Nobel Laureate Joseph Stiglitz said “ There was a kind of excessive euphoria, undoubtedly the QE monetary policy pumped up asset prices but didn’t do much for pumping up the real economy. Where was all the liquidity going? Some of it went just into the balance sheets and wasn’t lent out but some of it went to increasing asset prices’. As Chief economist of IMF said at Davos “ there is a difficult adjustment ahead in Emerging Markets.”
US has probably started to recover from a slowdown and its inflation rate is down due to fall in oil prices and the dollar has become stronger. All currencies including the rupee have depreciated against the dollar.
On the whole this crisis that the world is facing may not be as severe as the economic crisis of 2008 because there has not been that much leveraging and derivative trading. But this time protectionism and trade wars are taking place like in the 1930s. For example, after devaluation of the Yuan, the US hiked tariffs on Chinese steel imports by 256 per cent.
Another crisis which is waiting to happen is the digitization revolution which will wipe out jobs not only in rich countries but also in China and India. Low skilled labour is very easily replicated by robots and hence jobs will be affected in developing countries also.
The global crisis will also be exacerbated by inequality which has been much in news due to the important book by Thomas Picketty. The latest Oxfam report says that there is a huge global crisis ahead due to the rising inequality of income. According to the report only 62 people own as much as 3.5 billion poorest people-- half of humanity. And this inequality has been increasing rapidly, because in 2010 this number was 288 ; last year it was 80 and in a few years it could be just 10! This is a dangerous trend because it slows economic growth and it sparks social unrest.
If the people in the troubled areas of the world had high income and prosperity, peace would have ruled in those regions. Thus governments and business leaders should do something to tackle rising inequality.
According to the Oxfam chief Winnie Byanyima all this is the result of 30 years of deregulation, privatization, financial secrecy and globalization. The refugee crisis faced by the western countries, particularly Europe is partly also the result of such inequalities of income and now the EU has no option but to accept them and offer them asylum. If neighbouring countries have big differences in income it will inevitably lead to migration and problems of managing such people in the host country. Even before the current refugee crisis, there was a regular inflow of people from poorer neighbouring countries of the EU which remained a fortress for a long time. Scores of people died every year trying to cross the Mediterranean from North Africa.
Taking the case of India, there was much optimism in Davos and India was showcased as a rising star. With its 7.4 per cent rate of growth, India seems to be buckling up but the fact remains that India is facing many problems on many fronts. There is a crisis in agriculture, rising inequality, a banking crisis as well as inadequate infrastructure. When billionaires owe Indian banks huge sums of money and remain Scot free indulging in spectacular displays of wealth, naturally it will create widespread animosity and resentment. In this context, Raghuram Rajan must be congratulated for telling off some Indian rich debtors that they should not flaunt their wealth. India like China has a big problem of income inequality and the government must take action now and recover money from debt defaulters rather than write their debt off.
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