The financial crisis and the European Union sovereign debt crisis
is the greatest economic crisis in recent times. Ordinary people still don’t
seem to understand the nuances of the ongoing economic crisis but all the
people around the world are affected by the crisis. No wonder even some great
economists and policymakers are as perplexed as us about the crisis. They are
scratching their head with ideas to bring the global economy on track. The
crisis has serious consequences and implications across the globe but the
degree to which each country is affected varies considering their respective
domestic and geopolitical factors. In the age of globalization no nation can
keep aloof from the world economic volatility. In this article I would like to
tell how some key economies in the world are performing post the global
financial crisis.
Now we know that the global financial crisis started in the
USA and reached across various countries and the sovereign debt crisis is because
of the huge amount of debt created by the European Union countries. Both USA
and countries in Europe are highly developed countries and hold the tag of
developed nations for a very long time now. Over the years both the United
States of America and some countries in Europe were developing robustly losing
track on their debt levels. Data shows that both the USA and Europe’s debt
level is always on the rise and the countries got well acquainted with the
industrial revolution. The capitalistic nature of these developed countries is
the main reason for the crisis to take place. The capitalism system of an
economy was carefully analyzed by three great economists who are pioneers in
introducing economic theories that stand out to be important in their own way. The
ideas proposed by these economists are unique in their own way and are still
relevant in present day. The three
economists I am talking about here are Adam Smith, Karl Marx and John Maynard
Keynes. Economics is a field that gives freedom of thought and expression to
its practitioners and so does there exists two groups namely conservative and
non-conservative group. Adam smith in his book ‘The wealth of nations’ (1766) explained
about capitalism and its functions. He introduced the concept of division of
labor which means specialization of individuals in performing specific tasks
and roles for efficient production. He viewed that the capitalistic economy
works on invisible hand i.e free market which means that the market is able to
achieve equilibrium on its own through demand and supply forces. Karl Marx
denied some of the views expressed by Adam smith and gave importance to the concept of
laissez faire which strongly opposed government intervention. Keynes is the
pioneer in bringing a whole new view to the capitalistic nature of an economy.
The great depression of 1930 that affected the US economy was saved from the
theories introduced by Keynes in his masterpiece book ‘The general theory of employment, interest and money’ (1936). Since then the world has been following his
theories and most of the present economists are post Keynesians. Thus John Maynard
Keynes came to be known as the “Father of modern macroeconomics”.
China is said to be the next superpower of the world after
the USA. Many experts believe that china’s exports will outgrow that of the USA
by 2016. The Chinese economy is the forerunner in the Asian market followed by India.
China has been showing good trend post the financial crisis with GDP growth
above 7 percent. This is mainly because of good policy reforms and monetary
transmission. The high growth that china witnessed in 2009 was because of
structural reforms. The Chinese government responded swiftly to the global
crisis by introducing 4 trillion Yuan stimulus package. The country’s central
bank cut interest rates deeply thus encouraging the growth of credit. Since the crisis in 2008 the Chinese
government has been faced with three major tasks which are crisis management,
structural adjustments and protecting its foreign exchange reserves. The
stimulus package is the result of expansionary fiscal policy where the
government increased its expenditure and reduced tax rate thus raising the real
disposable income of its people. Most of the money from the package was spent
on infrastructure. But many private investors especially small and medium sized
enterprises did not benefit much from the spending binge. Many local
governments are squeezing their small enterprises to compensate for the
reduction in their fiscal revenue resulting from the slowdown in economic
growth. The scope of the Chinese government to implement the fiscal stimulus
was very high because of the country’s strong fiscal position, vast domestic
market and strong external position. One of the important feature of the
china’s stimulus plan is the large amount of tax rebates for exports. In
contrast to many other developing countries, china has a strong point and is
sustainable to carry out a expansionary fiscal policy. This is because over the
past decade china has a very low budget deficit to GDP ratio. However, such expansionary
fiscal policy for a long time is dangerous and can even produce negative
results. This is evident from the sluggish economic growth from the beginning
of 2013. The growth in the beginning of the year was driven mainly by exports
and real estate. The housing bubble of the us financial crisis did have an
impact on the Chinese economy but their government encouraged domestic real
estate producers by making availability of credit easier. The current
trajectory can be sustained only by pumping more leverage into the system.
Though china boasts of its exports, it has a weak consumption demand. Almost
all the core sectors of the economy like clothes, auto and food is greatly
affected. Some economists in china warn that pumping in more money into the
system might help china to achieve its official growth target of 7.5 percent
but only at the expense of financial risk.
Initially the global financial crisis did not adversely
affect the Indian economy. But later it did take a toll on the economy. The
country registered a high growth rate of above 7 percent in 2009. The Indian
economy continues to grow because of ample demand. During 2008 India’s rural
consumption generated enough demand to substantially insulate India from global
trade shocks. India also witnessed high growth soon after
the economic crisis because of its expansionary fiscal policy. India, like china
introduced huge fiscal stimulus packages to revive the economy and protect the
economy from the global recession. Since the global crisis caused some of the
leading banks to go bankrupt, the entire financial system including India was
affected no matter how strong the country’s financial market was before the
crisis. However, the banks in India have managed quite well even after the
financial crisis and this is because of the strict monetary policy suit of the
Reserve Bank of India post the crisis. Though the stimulus package helped in
creating a high growth of 8 percent eventually it resulted in an inflationary
situation. The high government expenditure post the crisis resulted in a high
budget deficit. The country’s monetary transmission needs to really appreciated
as it has been stringent but effective. Of late the central bank of India have
been taking number of monetary easing and liquidity enhancing position to
facilitate flow of funds from the financial system to meet the needs of the
productive sectors. One serious problem most of the banks in India have been
facing after the financial crisis is the rise in Non Performing Assets (NPA)
which is because of weak economic growth and low capital investment. Unfortunately
it is the mismanagement in the fiscal policy that has resulted in various
serious problems like persistent high inflation, slow economic growth, low
consumption and investment demand and huge trade deficit and Current Account
Deficit (CAD). There is a constant battle between the central government and
the RBI in controlling the trade off between growth and inflation resulting in
ping pong economics. From the beginning of 2012 there has been a huge mismatch
between production, consumption, saving and investment which is the primary
cause for the current economic instability. The impact of the financial crisis
is great in portfolio equity flows and liquidity position of the country. At
present India is facing difficulties in fostering its regional and global
interests. The global financial turmoil
has widely affected the Indian service sector as it holds a significant
position in the global economy. Since the financial meltdown has affected the
country’s foreign exchange reserves due to outflow of short term capital, the
rupee value has been depreciating which is of a serious concern. RBI has decided to bring in more private
players in the banking sector which would help in financial inclusion and
better investment scenario.
Many other developing countries apart from India and china
have been growing strongly but forecasts have been negative in the past few
months. However, the world economic outlook released by the International
Monetary Fund (IMF) last month has projected a positive global economic growth.
The crisis is becoming severe and the magnitude of the crisis will depend on
the response of USA and EU. Many developed nations is already entering into a severe recessionary phase. The financial crisis has affected the developing
countries in two ways. First, there has been immense financial contagion in emerging
markets. Second, pressures on trade and foreign investments. Developing
countries because of the trade imbalances face huge current account deficit and
are feeling the pressures on exchange rates and interest rates. The developed
nations suffer serious fall in unemployment compared to developing nations.
Both the developing and developed countries not only suffer economic problems
but all also social problems like lower growth translating into poverty in
emerging nations and social unrest in the developed world and more crime,
weaker health systems and even more difficulties meeting the Millennium Development
Goals. Thus the current macroeconomic and social challenges posed by the global
financial crisis require a much better understanding of appropriate and
effective policy responses to save the world from another serious economic
collapse.
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