The fog that has enveloped much of north India over the past weeks, seems to have a counterpart in the fog that is currently surrounding the international economy. While the past year was both turbulent and depressing for the world economy as a whole, and especially for some regions such as Latin America, the indications are that things are not going to get much better for some time.

The latest annual report from the United Nations, World Economic Situation and Prospects 2003, confirms both the depressing recent trend as well as the uncertain chances of recovery. Total world output in 2002 is estimated to have grown by only 1.7 per cent in real terms, which is one of the lowest annual rates recorded since the Second World War.

The developed market economies showed the lowest rates of growth, with continuing GDP decline in Japan and only 1 per cent growth in the European Union. The United States economy has been the engine of growth for the rest of the world for more than a decade now: the last year showed clear signs of that engine flagging, with the growth of real GDP at 2.4 per cent for the whole year, but with evidence of deceleration especially in the last quarter.

The much-touted reflation packages announced by the Bush administration appear to have been less than successful in terms of setting on course a sustainable recovery. US stock markets continued to be feeble, and the revulsion of small investors contributed to the overall lassitude, which fed into a slowdown in real business investment as well.

Most developing countries were not all that much better off, with an aggregate annual growth rate of less than 3 per cent. Latin America suffered a decline in real output, led by the dramatic and continuing collapse of the Argentine economy. The fragility of its Mercosur trading partners Brazil, Paraguay and Uruguay, which were also hammered by financial markets (for mostly wrong reasons) further contributed to the economic problems of the region.

The Latin American region as a whole was hit by declining export prices and saturation of the North American market, and even more by the vagaries of international capital markets, operating with erratic but punishing intensity to create instability and economic havoc in many countries. The overt interference of the United States government in the politics of the region, especially in countries like Venezuela, Peru and Colombia, did not help either.

While the South Asian and Southeast Asian regions continued to expand at around 5 per cent, this was mainly due to domestic demand and particularly service sector expansion. External stimuli were extremely weak, since world trade in volume terms grew at only 2.3 per cent, the weakest such increase since the Southeast Asian crisis of 1997-98.

Indeed, the stagnation in world trade was a major depressant for most developing countries. In value terms, world trade increased by less than 2 per cent in 2002, after an actual decline in 2001. This has been associated with declines in the prices of non-oil commodities exported by developing countries, thereby worsening their terms of trade.

Meanwhile, FDI and other capital flows into developing countries did not increase (and in fact declined compared to earlier levels), belying the expectations of those who have seen this as the great salvation for developing countries in the age of globalisation. It turns out that 2002 was the sixth consecutive year in which developing countries made a net outward transfer of financial resources, in effect sending out more capital resources than they received.

The only exception to the overall slowdown was the economy of the People’s Republic of China, which grew at more than 7 per cent over the past year, defying the international trend. Most of this reflects the implications and effects of the massive infrastructure investments made in that economy over the past decade, which have amounted to nearly one-fifth of GDP for a prolonged period. However, prospects even for this apparent powerhouse of an economy are currently uncertain, since agriculture has been stagnant and the full impact of Chinese entry into the WTO, and the associated trade liberalisation which is required, have yet to be felt in the domestic economy.

All this may sound as if it is bad enough, but it is likely that the trough in terms of economic activity has not yet been reached. This is because, while none of the important indicators shows any signs of quick recovery, there are worse storm clouds on the horizon. The prospect of an imperialist war being waged by the United States in Iraq, which grows every day more likely, would inevitably throw up further sources of not just geo-political tension but also substantial economic instability.
 
Even the UN Report recognises that this is a source of major concern.
 
The current geopolitical tensions have already pushed up oil prices and dampened consumer and business confidence in the developed capitalist world in particular. But, as the UN Report says, “If military action were to take place in West Asia, it would be a further brake on world economic growth".
 
This is all the more the case because a potential war in Iraq is likely to be quite different from and possibly more prolonged than the war in Afghanistan, which was fought with less direct impact on the US in terms of its own casualties and the resources involved. Even an apparent “victory” would leave the geo-politics of the region and the world much more muddy and uncertain, with corresponding effects on capitalist investor expectations. While the long-term objective of US imperialism - in terms of gaining control over crucial world oil resources - may be closer to being met, the medium term implications are far from being so clear and positive even for the US economy.
 
What does all this mean for the Indian economy? Once again, the picture is not clear. A lot depends upon how our own policy makers react to the current context. At many levels, the situation cries out for a domestic demand revival, led by increased public expenditure. External demand stimuli are weak and are likely to deteriorate further, while oil prices will certainly be pushed up by a war in Iraq. On the domestic front, we have a situation of excess capacity, unemployment of labour and other resources, excess food grain stocks, and even excess foreign exchange reserves. This is therefore a time of immense opportunity in terms of the potential for public investment and generating positive linkage and multiplier effects. This would enable the Indian economy to grow despite the international context.
 
Of course, for this to happen, a major change is required in the mindset of our policy makers, who have to stop looking for succour from outside (whether in the form of foreign resources or help from Non-Resident Indians) and who have to be willing to use and mobilise our domestic resources for economic expansion. Unfortunately, nothing suggests that our government is able to make such a change in its own strategy. This means that we may be condemned to another year of indifferent growth and missed opportunities in the economics.