Despite monetary policies designed to support large borrowers, many developed countries have failed to recoup from the 2007-2008 financial crisis. India must factor this into its economic planning
The global demand is shrinking. Public-private-partnerships are a drain on Government finances. Stagnation and global slowdown is triggered by rich countries. In this context, the foreign direct investment issue has to be looked at with caution, as it leads to high external outflows.
These are some of the warnings issued by the United Nations Conference on Trade and Development in its Trade and Development Report 2015. The report calls for a number of course corrections amid predictions that global growth may be unchanged at 2.5 percent. For India, the UN body agrees with the official figures of above seven per cent growth.
The UNCTAD calls the failure of growth in many developed countries, despite a large borrower oriented accommodative monetary policy, as the “new abnormal”. It says the economy of these countries is relies unduly on mounting debt and asset bubbles. “Eight years after the financial crisis, the world has clearly not found how to shift gears for global inclusive and sustainable economic development”, TDR notes. The ongoing financial instability due to malfunctioning of the international monetary system may hit the sustainable development goals. It is a pointer to a serious global situation, and TDR calls for fundamental monetary reforms.
It also points to the decreasing dependence of developing countries on the IMF for development assistance. Instead, since 1997-1998, these countries favour accumulating large foreign exchange reserves as a first line of defence against external shocks.
India may learn from the latin American experience. The region has been facing a slowdown since 2011, owing to a drop in external demand. Growth has fallen to less than one per cent in 2015. lower export prices have affected tax receipts — something that India is also witnessing, though not to that critical level.
Economic growth in Australia, Canada, Japan and in some African countries are in crisis. Oil exporting sub-Saharan countries like Nigeria and Angola are cutting public expenditure. The Eurozone crisis has emerged out of macro-economic imbalances because of excessive foreign capital inflows, as it surged private sector consumption and housing investment at historically low interest rates that added to financial fragilities.
India needs understand that the criticalities of high capital infusion and lowering of interest rates. The real estate bubble has already hit the banking sector. The high profit motives, higher prices and large unsold or incomplete housing units have created islands of uninhabited ‘cities’ like Noida, Greater Noida and other parts of the national capital region.
The TDR lists four waves of financial crisis: The 1980s latin American crisis, the 1994-95 Mexican crisis, the 1997-98 South East Asian crisis and the 2008 sub-prime mortgage crisis in the West. It observes each of these crises was preceded by large negative surges in the current account balance and domestic credit booms. Since the 1980s, crises in emerging economies have been preceded by a surge in capital inflows
It is a fragile situation. The global economy depends on debt. During the years of ‘great moderation’, that is between 1985 and 2005, global debt rose from $21 trillion in 1984 to $87 trillion in 2000, and to a staggering $142 trillion by 2007. The 2008 Euro-US crisis has added another $57 trillion to global debt figure. External corporate debt has tripled since 2008 to over $2.6 trillion. The entire debt situation, TDR warns, can turn sour, as markets are volatile and vulnerable. It calls for an international debt mechanism.
The impact of these issues is seen in stagnant world merchandise trade. It has grown only 0.3 per cent in 2014 against the annual rate of 7.2 per cent during 2003-2007. The trend for this year is not bright either.
To tide over the situation, TDR stresses on development banks. They can have long-term economic and social returns. It also wants greater South-South cooperation, which, it feels, is more equitable. Sovereign wealth funds, holding more than seven trillion dollars in assets, of which six trillion dollars is held by developing countries, are another source to boost long-term financing.
In its bid to change the international monetary system, the TDR says that though PPPs have garnered much attention for financing infrastructure projects, in many cases they have not actually created additional finance but increased obligations for the Government budgetary system. The lion’s share of investment in infrastructure in developing countries remains public, not private.
The global system needs institutional changes. New multilateral arrangements are required to resolves biases in terms of inequity and asymmetry. TDR suggests moving away from dollar standard as that creates excessive imbalances. It wants the International Monetary fund to be involved in meeting the needs of developing countries and in surveillance to reduce global volatility and increase demand so that the stagnation is over.