Averting world recession
By Shahid Javed Burki
Monday, 04 July, 2011
A GREAT deal of excitement that resulted from the fast recovery of China and India from the Great Recession of 2008-09 has begun to dissipate. Both countries raced forward while much of the industrial world continued to languish.
There is now some talk of the possibility of a double-dip recession in both America and Europe and some weakening in the large emerging world economies. The global economy is not proceeding in the direction in which it was supposed to go.
As the rates of GDP growth diverged in the West and in the large emerging markets there was talk of a faster-than-expected realignment of the global economy. There was expectation that the centre of gravity of the global economy would move from the Atlantic to the Pacific within a decade or two. Now both parts of the world economy are hurting but in different ways. The West is worried about the burden of debt carried by a number of economies that is not sustainable over the medium-term; the emerging economies are concerned with rising levels of prices.
According to the Bank of International Settlements (BIS), Germany’s gross public debt is 87 of its GDP; Japan’s 213; Britain’s 89; and the United States’, 101 per cent. The levels of debt in Greece, Ireland, and Portugal are much higher – high enough to trouble the bond markets and hence the ability of these countries to borrow in order to meet their obligations. But in the West, inflation is not a problem. In fact the Federal Reserve Bank, the American central bank, launched a programme called “quantitative easing” aimed at preventing deflation from further hurting the economy.
The situation in the emerging world is very different. While Pakistan has lagged behind other large emerging countries in terms of rate of growth of its economy, there is no reason why it should not attain the rates of growth that seem structurally possible in the South Asian mainland.
This means that its economy should be able to grow at rates between 6--8 per cent a year. However, for that to happen its political structure must develop further, it should be able to hold its leaders and other functionaries of the state accountable for their actions while they hold office, and it should be able to resolve the unsettled relations between the military and the civilian authority.
At the same time, it must develop closer economic relations with its two giant neighbours. Both China and India are now among the fastest growing economies of the world. They are also very large. How their economies evolve in the future will matter for Pakistan.
Both China and India are finding it hard to manage rapidly growing economies without igniting inflation. Both have decided to focus on monetary management as the way for taming price increases. And both are finding that this cure may not deliver the results they seek.They need deep structural changes in order to ensure that the momentum of growth is not lost.
For political reasons, both China and India need to have their economies grow at or near 10 per cent a year. China needs a high growth rate to contain discontent among its workers. The regime has allowed some expression of unhappiness on the part of the working population.This has had the result of increasing wages by significant amounts and would change in quite a dramatic way the contours of the model of growth the country has followed for several decades. It is unlikely that future growth can come from investments that produce cheap goods for western markets by low paid labour.
In India, coalition politics has delayed actions on a number of fronts without which the potential of the economy would not be realised. If the economy softens, it will have political implications for the governing coalition. India needs growth to address the problem of poverty as well as inter-state and inter-personal income distribution disparities.
While China passed the 10 per cent growth target on several occasions, India remains below that threshold. The recent changes in interest rates ordered by the Reserve Bank of India, India’s central bank, has had the effect of reducing the rate of investment and hence the rate of future growth in its domestic product. But it has not succeeded in controlling inflation. Both food and core inflation rates have passed the levels regarded as economically and politically sustainable. China has used a combination of monetary tightening as well as administrative controls to tame inflation. Both China and India are not succeeding in these endeavours.
What is needed in both countries is a combination of short-term adjustments and longterm structural changes. China needs to prepare itself for the time when it will no longer be an export powerhouse exploiting its low wage workforce.The assumption that the presence of hundreds of millions of workers in the countryside who will be prepared to move to the relatively high productivity sectors of the economy and thus continue to contribute to growth proved not to be realistic.
The spread of new information technologies has meant that the aspirations of the workers in the modern sectors could not be separated from that of people who remained in the countryside.There is now a widespread demand for improvements in the living standards of all workers which even a tightly controlled political system cannot ignore. This means a significant restructuring of both the sources of supply and demand in the country.
China must begin to refashion its economy in order to satisfy meeting rapidly rising domestic demand and not just continuing to provide for the western markets that are now less hungry for cheap Chinese products.
There are somewhat different demands being placed on the Indian economy and the political system. Perhaps taking their cue from the explosion in the Arab streets that produced what is called the Arab Spring, citizens in India are also prepared to come out in large numbers and ask for higher quality of governance.
Over time India has developed a political system that has shown that democracy in the developing world need not retard economic progress. It must now move this system forward so that it becomes more accountable to the people. The country cannot afford to wait for periodic elections to cleanse the system. It must also have the institutional wherewithal to hold those placed in office by elections to satisfy the public demand for cleaner governance.
There is also the need in India to further open its economy. It was the dramatic opening in 1991 that produced the Indian miracle of the last two decades. But further opening is required for India to take advantage of the rapid changes in the structure of the global economy. Foreign capital inflows must not be deterred by populist demands that have made it difficult for large retail firms to set up shops in the country and for manufacturing enterprises to acquire land for building new, green-field plants.
What the world needs now is a new way of handling the problems being confronted by its different parts. Unfortunately for different reasons, the political establishments in almost all the major world economies don’t seem equal to the task of managing the needed structural change.
China and India pursued to different political models to achieve the same economic results: high rates of GDP growth. Now that their economies have matured they will need to pursue different policies to smoothen out the wrinkles that have appeared.
Averting world recession