Thursday, July 29, 2010

Economc Crisis: Essay entry to the Frasier Institute


By Katherine. Abraham

As I peruse the alarming news that the newspapers convey each day about the catharsis of the Global Economic Crisis, I am forced to recall the words of the biologist Edward Wilson who observed that, ‘We are the first species in the history of life to go out of control on a global scale.’ Although the statement may seem astonishing it is painfully true.

Two significant periods of History that challenged the existence of and ensured the survival of the fittest in human civilization include the Great Depression of 1929 and the Economic Recession of 2009. Both these years became turning points in the economic History of the modern civilized world and challenged the major economic powers around the globe to re- think their policy statements especially to ensure that the economic status of the citizens would not and in fact should not spiral down further. With the US trade plummeting from a whopping 16 trillion dollar trade in the year 2008 to a meager 5.8 trillion dollar trade in the first half of 2009 and the fall of the Lehman Brothers, the country needed some serious re-assessment to be done in terms of Finance. To make matters worse the World Trade Organization predicted a nine per cent decline in global trade which could be the highest in sixty years.

Now, Economics essentially is said to be ‘a study of how individuals and groups make conscious decisions with limited resources as to best satisfy their wants, needs and desires.’ On another level, the study of this subject could also be defined as ‘the study of choice and decision making in a world with limited resources.’ But this choice and decision making can lead to a scarcity for individual and the society at large. With the decline of the economic position in the countries and the impending pressures on the numerous State Treasuries the world over, people began to re-think and
re- assess their needs. Suddenly many were forced to leave the lap of luxury and thrust into the miseries of an economic downturn. They were now left with no option but to reduce their expenditures on everything including the basic necessities of food, clothing, shelter and education. Routine purchases were soon unimaginable with their inflated prices. It became virtually impossible now to even live off loans. With the interest rates soaring mortgages and liquidity became the trend.

The financial nemesis that the governments around the world are facing today has culminated from the lack of fore- thought on the part of the governments leading to a moral and economic panic. According to the Mercy Corps, today's food prices are 60 percent higher than in 2006, the impact of which is felt at a maximum in the under- developed countries. In some countries a litre of oil which costed 1.66 dollars is today sold at 3.57 dollars. The unemployment rates are soaring. The inflation rates have reached an astounding 231 million percent in some countries like Zimbabwe.

The paramount question thus arises, ‘How do we untangle ourselves from the clutches of financial disparity?’

One of the less expected countries to grow frugally at the time when markets around the world were hitting an all time low was the emerging economy of India. While the world battled the Global meltdown, India has continued to grow in terms of the Gross Domestic Product (GDP) which is one of the primary indicators of a country’s overall financial health. The growth rate was recorded to have grown from 6.7% in 2008- 2009 to 7.9% in 2009-2010. A noteworthy achievement on the economic front was the Indian government’s initiative to be the first to adopt a ‘counter- cyclic package’ to avert an acute economic crisis in the country.

The Central Statistical Organisation (CSO) had forecasted that the economy is expected to grow at 7.2 per cent in 2009-10, with the industrial and the service sectors growing at 8.2 and 8.7 per cent respectively. Today in the first quarter of 2010 India has a GDP of 8.6%.

With the assistance of stalwart economists like the Prime Minister Dr.Manmohan Singh, Finance Minister Mr. Pranab Mukherjee and the Home Minister Mr. P. C Chidambaram the country stands a chance of harnessing economic growth to cross the ‘double- digit’ barrier in 2010.

This Financial year i.e 2010-2011 the Indian Budget included the following aims:

a. Review Public Spending and mobilize resources for increase in productivity.
b. For the very first time the Indian Government targeted the explicit reduction in domestic public debt.
c. A Nutrient Based Subsidy was announced to strengthen not only the Agricultural production which is also the backbone of the Indian Economy but also to increase the amount of returns for the farmers.
d. Other initiatives that the Government decided to utilize as effective measures included additional banking licenses, providing capital to Rural banks and strengthen transparency of the finances.

At this time it becomes necessary to show where India too faces major challenges. Thomas Malthus believed that ‘there is a tendency for human population to grow more rapidly than the food supply.’ Although there has been tremendous development in the technology related with Agricultural production it cannot be denied that thirty per cent of the world’s population is still living in abject poverty. With a population of 1.35 billion people India still has a lot to cope up with. However India is sorting out these issues by addressing the weakness of these institutions with a heavy hand.

Another country worthy of mention is the world’s biggest island-continent ‘Australia.’ It is the only developed country in the world to forestall the imminent global emergency from hitting the Australian soil. Australia avoided a technical recession in 2009, and had positive growth against the overall global economic downturn. Unemployment however is a constant reminder to the government that they too are trudging in unstability. On the flip side however the country recorded a growth rate of 2.5 per cent in the second half of 2009. The Australian growth was accelerated by Chinese interest in their Mineral Reserves and these investments have, to an extent allowed the Australians to keep their head above the water. Stability was regulated through public bank guarantees on deposits. Prime Minister Rudd has promised to allocate funds worth 52 billion dollars to sustain the industry.

Alongwith these countries another small but significant country which successfully avoided much harm to its economic health was the tiny island of Mauritius. After the trade of the country was eclipsed in 2005, the country employed some much needed economic reforms in 2006. The key reforms included: fiscal consolidation and public sector efficiency; trade competitiveness; an improved investment climate; and social inclusion. These policies were backed by the International Bank for Re-Construction and Development (IBRD) which shelled out a sum of 210 million dollars for the same. It is truly one of the ‘Transforming’ economies of the world.

The aim of citing the above examples are to show a glimpse of a comprehensive analysis of three less talked about countries as a ray of hope in this time of emergency that has affected the populace all over the globe. It now becomes vital to understand what the possible problems apart from unemployment, poverty and education could be that could hinder the countries on the path of what can be termed as a ‘Global Recovery.’

China, one of the Super- powers of the world has speculated after the Spanish collapse in the international markets, that the Recovery could be further supplemented by a ‘Debt- ridden’ crisis which could lead to further cut- backs in investments, cost- cutting which could lead to a rise in the unemployment rates. Other possibilities include reduction in fiscal surplus and repercussions of the failure of regulators and excess liquidity.

A few possible measures that could be used by affected governments include organizing the facts of the existent status of the nation’s financial potency. This could be followed by tax- cuts to reduce the burden of the common man, cutting interest rates so as to enable the consumer to spend without much worry, devaluing the dollar which seems difficult but if done it could avoid the hampering of the economy. The governments must include policies which could ensure the security of a substantial amount of money. Policy makers must include High Growth yielding policies along with High Growth investments. Moderate taxation could also help. There must be a stringent framework of policies to ensure the benefit of the society as a whole. Another measure could include reduction in the number of banks too. The Credit Card markets also could be effectively controlled to ensure the ability of repayments on the part of the borrower. Counter- cyclic packages could be adopted.

Above all the transparency in financial dealings on the part of the Government and the individual citizen could end up making a world of difference to the Economic Recovery rate.

REFERENCES EcoGlossary.html


The Economist

Article by Jan Stanford : The Globe and Mail September, 2009

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