Dr Ashwani Mahajan
Global markets crashed after China devalued Yuan by 2 percent on August 10, 2015. This has worried the world that this may lead to chain reaction by other countries, in order to nullify the effect of Chinese action. If history is any guide, competitive devaluation would benefit none; but may definitely bring in a wave of recession.
Before this, RBI Governor Raghuram Rajan, while addressing London Business School Conference, said “I do worry that we are slowly slipping into the kind of problems that we had in the thirties in attempts to active growth”. He further said “The question is are we now moving into the territory in trying to produce growth out of nowhere we are in fact shifting growth from each other, rather than creating growth. Of course, there is past history of this during the Great Depression when we got into competitive devaluation”, Media almost got the feeling which was later contradicted by RBI; that Rajan is actually hinting towards the possibility of global recessions.
Today we see that Central Banks of world’s leading economies have been adopting measures to increase liquidity in their respective countries; especially policy of quantitative easing (QEs) adopted in the post recession period by Federal Reserve (central bank of USA). Though RBI, while refuting that Rajan has made any such prediction that world is heading towards recession, RBI Governor has definitely said that monetary policies being adopted by the central banks are not in right direction and needs to be mended. Although Raghu Ram Rajan has not directly predicted towards global recession, he has definitely hinted at the emerging trends towards the same.
Other Indicators of Depression
If we leave aside Raghu Rajan’s utterances, questions are definitely being raised about the efficiency of the policies adopted by US Administration and Federal Reserve to deal with post 2007-08 slowdown. Though some economists believe that US economy has been showing sign of revival and site employment and income data to prove their point; there are others who are not convinced with the same. Issue is not just of USA, many of European countries are also facing much more precarious situation.
Greece’s economic crisis is known to all. Almost all European countries are fighting to somehow save existence of Euro Zone. Nevertheless, emerging trends in different European countries indicate towards advent of recession. In the last 5 years, Greece’s GDP has come down by 25 percent and its youth unemployment has climbed to 60 percent.
As Greek’s crisis had deepened, USA’s and many of European countries’ financial institutions are entering into danger zone. Although, after Germany and other Euro Zone members agreeing to the bailout package, fall of Greek’s has been avoided for the time being, but crisis has definitely not ended.
China Too in Trouble
Once growth engine of the world; China, has started slowing down. First time, since 1990, Chinese GDP growth is down to below 7.4 percent. Chinese president while addressing World Economic Forum 2015, conceded that Chinese economy has been passing though severe crisis. Chinese foreign exchange reserves have started coming down, as its exports have started declining. In the last two and a half decades, China’s manufacturing sector could reach new heights, thanks to its huge exports. China was able to capture international market riding on its low prices of electronics, mobile phones and other telecom products, machinery, project goods and other engineering products. China became manufacturing hub of the world as enterprises from all around the world shifted their production base to China.
But, China which was challenging the world is now surrounded by its own economic problems. China which was most sought after destination for foreign capital has been facing the problems of flight of capital. Chinese share market came down by 25 percent in just one month, as foreign investors are taking their money out. Chinese government has been trying hard to save share market from falling further. Before a major devaluation of Yuan, recent large scale sale of gold by Chinese government has stunned the whole world and caused a dip in gold prices.
Greece and China are some glaring examples, though there are many more countries which are into red and are entering into danger zone. IMF has reduced its expectation about world’s economic growth from 3.5 percent in April, 2015 to 3.3 percent now. However, IMF is even more pessimistic about Canada and has now predicted only 1.5 percent growth in Canada, against 2.2 percent predicted in April 2015. USA’s GDP has shown 0.2 percent fall in February and March 2015; though bad weather has been said to the responsible for this decline.
Imperative to Change Policy
As Raghu Ram Rajan said that the competitive monetary policies have been pushing all countries towards deep recession, need of the hour is that the Government of these countries understand that excessive flow of money is not going to improve the situation. Government of these countries need to keep in check their budget deficits by avoiding wasteful (or even welfare) expenditure. Bailout packages can save these economies in short run, however, they cannot be stabilized and survive in the long-run, based on these bailout packages.
(The author is Associate Professor, PGDAV College, University of Delhi)
feedbackexcelsior@gmail.com
Trending Now
E-Paper
Follow our WhatsApp channel