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.
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