Wednesday, February 11, 2009

New Balance between state and market needed

The ongoing financial crisis became prominent since September 2008 after the failure of few big financial American firms due to subprime mortgage crisis in the US, although its signs were visible early that year. A negative aspect of Globalisation was soon visible when the US financial crunch hit other markets as well and it rapidly evolved into a global credit crisis and deflation. That resulted in a number of European bank failures and declines in various stock indexes. This led to reductions in the market value of equities and commodities worldwide. The crumbling figure in Wall Street is affecting markets from Tasmania to Tanzania.
The mess that began due to fast, unregulated mortgage lending in the US has now become a perilous crisis and markets worldwide have lost the confidence of the investors. There is fear amongst investors and depositors, bankers as well as regulators since no easy solution seems to be in sight. United Kingdom’s Prime Minister acknowledges this when he says, “This is not a time for conventional thinking or outdated dogma but for fresh and innovative intervention that gets to the heart of the problem.”
Federal banks have tried all possible options. Most Reserve Banks have cut down on interest rates. On January 8 the Bank of England cut down base rate to 1.5%, the lowest in the Central Bank’s history since its inception in 1694. The economy is also being affected by cuts in capital spending.
Finance is one of the most international of industries. All major banks have their networks spread wide across seas and continents. Thus when banks run into trouble, it’s not clear who should actually help. Generally the favoured practice has been the direct government intervention. The US Congress announced a $700 billion rescue package, referred by many as ‘socialism for the rich’. But this is not always a viable option. US itself is not in a position to announce similar package for the automobile industry. And then there are many small or third world countries where these big banks have their balance sheet far exceeding their gross domestic products.
Industry watchers predict a ‘bleak 2009’ for the Global Economy. According to International Monetary Fund (IMF) US economy will grow only 0.1% in 2009. Europe, China or India is also expected to have very slow growth rates. Thus nobody will be able to take over the US as the world economy, but that everyone will drag down everyone else. Dennis Snower, president of Germany’s Kiel Institute for the World Economy, believes, “Governments are making the same mistake….They’re trying to deal with the crisis on a piecemeal basis.” Robert Zoellick, president of the World Bank, too agree that the problem has now become a global phenomenon and so only a multinational solution can work. “While American eyes are on the intersection of the Wall and Main Streets, there is much more to the story,” he says. “The response to these crises will have to be larger and global.”
Ideological differences, as also other hostilities, however are proving great impediments in tackling this global problem. Governments are fast realizing this and so a sense of ‘intimate cooperation’ has developed among nations. Economists worldwide are stressing on the need to reexamine the free-market system. French president Nicholas Sarkozy has even spoken of the ‘new balance’ in market economy between the market and the state. American President George Bush, however, still supports the free market system. He has reiterated that “capitalism is not perfect, it can subject to excess to excesses and abuse, but it’s the most efficient way of structuring the economy.” China, which still calls its economy ‘socialism with market characteristics’ has welcomed America’s bailout plans and emphasize that greater market check is necessary for regulation.
Indian Prime Minister (and current Finance Minister as well) hinted as early as in September itself that India can’t remain unaffected by the global financial crisis for long. But looking back at the year passed, the year has not been as bad as it could have got and certainly the Indian economy has not been as affected as many feared. India has often been described as an elephant who does not know its potentials. The year 2008 has not been as bad for the economy. Yes markets are at ebb. Even Reliance Industries had to cut down on its expenditure and postpone future adventures. But with inflation now coming to below 6 mark and slash in petroleum price, costs of most commodities are now in control. But if India wants to play major role in the world economy, then it needs to take some bold steps and cut down on subsidies. But with the Left becoming a formidable force in recent years and the general election ahead the government here is taking every step cautiously.
No doubt the financial crisis has affected those maximum that seemed to have the soundest economy-USA, Germany, Japan. In last two years more than a million home have been lost to foreclosure in US alone and experts believe that another 1.5 million is on the verge of foreclosure. The third world countries have suffered so miserably that it’s becoming difficult for them to come back on its own. The IMF is already lending money to Hungary, Iceland and Pakistan and several other are pleading for aids. World leaders thus need to augment at least $500 billion to IMF. China has offered about $200 billion and one expects similar goodwill gestures from countries with huge reserves, like Japan, Saudi Arabia.
No country, as of now, appears to take over America as the leader of the world economy. But one thing is sure, the ongoing crisis will give rise to a slightly ‘balance’ system with many players coming to foreground. Dollar thus will lose its initial monopolistic credence. Euros and Yen too will grow in value and that will have political implications as well.

No comments: