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Global Economic Slowdown and Emerging Economies
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DiversityBusiness.com Magazine Article/- Prof. Paul Krugman, the winner of Nobel Prize for Economics, 2008 warned the world on current economic crisis more than a year back. Today the world is melting down and experiencing the reality of the housing bust, the credit crunch, higher fuel and food cost and a weakening labour market. The International Monetary Fund (IMF) anticipates sharply lower world growth because of the financial crisis rippling across the globe. However there is a hope which comes from the upcoming economies which is giving optimism for the world. The economic reforms pushed the growth rate of these countries around 7 percent. Economists predict in the current financial year the emerging economies will contribute half of the globe's Gross Domestic Product (GDP). The major reasons behind the optimism are the correction in the commodity prices and crude oil price in the international market. However, the financial crisis will create some indirect impact on the world economy as it will force the countries to apply liquidity tightening and other inflation controlling measures. It also will impact on interest rates, the inflow of Foreign Direct Investment (FDI), Foreign Institutional Investment (FII) and export of goods and services.
The Recession and the World Economy
A recession generaly affects overall economic activity such as employment, investment and corporate profits. Recession can associated with inflation in a process known as stagflation. Infact, presently, most of the countries are fighing hard to bring down the inflation rate. The current financial crisis, which erupted in the United States in mid of 2007, has quickly spread around the globe. The economists believe that America will face a zero percent growth in next financial year. Slowing U.S. growth is impacting world market in two ways: directly, through lower demand for products, and indirectly through weaker liquidity. It is causing a series of bankruptcies, forced mergers and radical government interventions. Economists are of the opinion that Germany’s growth will slow to 1.8 percent this year, down from 2.5 percent last year. They predict that France's growth will weaken to just 0.8 percent, compared with 2.2 percent in 2007 and Britain's economy will see a thinner growth of 1 percent from 3 percent last year. The situation is much worse for Canada as the growth will come down to 0.7 percent from 2.7 percent last year. Mexico, Central America, Venezuela, Chile and Ecuador would be affected by it.
Acording to the World Bank the financial crisis could badly affect some developing countries. For instance Sub-Saharan Africa, one of the hardest hit regions from rising food and fuel prices, could suffer more if foreign direct investment and aid flows to Africa drop off as a result of the financial crisis. The financial contagion has already reached countries in Latin America and the Caribbean and is beginning to affect exports, tourism and remittances. This region has witnessed large declines in stock price indices and significant currency adjustments. Slowing world growth could slow Latin American growth from 5.6 percent in 2007 to 4.6 percent in 2008 and to between 2.5 and 3.5 percent in 2009. Falling oil prices will also slow growth in the Middle East and North Africa from 5.7 percent to 4 percent this year. World Bank has warned that most of the countries in Eastern Europe and Central Asia would also experience slower growth.
Focus on Emerging Nations: The Hope
The world's emerging nations are no longer as dependent as they used to be on rich nations. Much of the Middle East is secure in oil money while China has built up its own position. It is the fact that India’s economic fundamentals are strong than any other countries in the region. Similarly Brazil has a high chance of decoupling from the U.S. Russia's economy should grow by at least 7 percent this year. These countries are spending billions for building new infrastructure including power plants, oil excavation projects, power grids, roads and ports. High spending on infrastructure, goods and services by emerging countries is leading the world resources. That includes attracting trade and investment. FDI and FII are flowing to the Indian continent. In fact, consumer spending and real capital spending are rising in developing world. It is also important to note that emerging economies intra regional trade is increasing faster than their trade with richer nations. Regional Trade Agreements and Free Trade Agreements are playing crucial role in international trade.
The independent position of the emerging economies is the good news for rich nations as well. The developing nations will continue to demand their products and generate healthy returns for rich nations’ investors who put money into them. Global powerhouses, China and India, will see growth clock in the current year at a robust 8 percent. Japan appears to be in a better position to overcome the world slowdown than any other country. The country’s financial system is flush with capital and their export markets are far less reliant on the west than they were in the 1990s. Around 78 percent of its goods and services directed towards China and the rest of Asia. In addition, Japanese are reinvesting in their businesses for growth. At the same time, Japanese companies are investing heavily in their workforce as well.
India: A Unique Nation with High Potential
India’s growing relationship with USA will help both the nations to strategically manage the current situation. Interestingly India has become the member of world space club and nuclear club and these avenues will lead India to a better position. The economists also believe that current financial crisis will have a minimal direct impact on Indian economy. As fundamentals are strong India’s financial system will remain intact even in current crisis and it will give confidence to the foreign investors. The economic slowdown in the US and Europe has literally opened up a rewarding avenue for Indian manufacturers. Some economists argue that India is not much exposed to the global economy and so India will not get affected in the current crisis. At a certain level it can be considered as a valid point; however one of the major reasons for India’s intact position is the saving habit of Indian population. India has the traditional culture of saving the earning for the future and Indians are not too much in to the culture of consumerism. Secondly India’s majority of the population is dependant up on the agriculture sector. This sector will do better performance as the current climatic situation is infavour of the agricultural crops. Thirdly, most importantly, India’s manufacturing sector based on superior quality is contributing to the India’s unbroken position. Small and medium scale industries in India are performing much better than previous years. Fourthly India’s governing system and policies (which are capable tackle the on going crisis on a short term basis) are capable to meet any kind of emergencies. Also India has wide range of resources which are sufficient enough to keep India shining in terms of providing employment and creating opportunities. The world recognized that India’s biggest advantage is that its young population. Indians have the strong view of self sufficiency and entrepreneurial enthusiasm which are the motivational factors for an average Indian to seek self employed avenues. Self sufficiency through small industrial units and business centers are supporting the Indian economy in a large extent. Indeed SME sector is going to become the savior of the future meltdowns.
However it does not indicate that India will be completely immune from the on going economic slowdown. It is also a test to the countries sustainability. It is the fact that India will not face the bitterness of the present economic downfall on a short time basis but on a long term basis it may create an inverse effect. It may affect India’s share market and earning rate of companies. Investment trend will not go upward as it was in last four to five years. Finally the GDP growth rate will show a diminishing trend. It indicates that if India is to cope with the fallout of the present situation it needs to think of strengthening policies and strategies. For India the challenge is retaining the confidence of the investors and expansion of public investment in to the infrastructure sector.
Few Remedial Measures and Conclusion
The message is very clear that the current financial crisis will not affect the world economy as the Great Depression in 1930. Now the world is less prone to the poverty and colonialism as it was some decades before. Now the nations are more effectively advocating and practicing international trade and international cooperation in a globalized economy. G8 Leaders Statement on the Global Economy on October 15, 2008 says that open economies and well-regulated markets are essential to economic growth, employment and prosperity. It also underscore the importance of not turning inward and of continuing efforts to promote trade and investment liberalization, which over the past several decades has significantly raised the global standard of living and lifted millions out of poverty. In this regard it is essential to intensify efforts to bring about a successful conclusion of the WTO negotiations with an ambitious and balanced outcome. The focus now is on the immediate task of stabilizing markets and restoring confidence. Changes in the regulatory and institutional regimes for the world's financial sectors are needed to remedy deficiencies exposed by the current crisis.
Particularly for India, as mentioned above, it is important to undertake concrete policy changes on a long term assessment basis. India has to create a counter acting mechanism to protect from the ongoing economic slowdown which is going to last for a quite long lime. To prevail it private investment needs to be encouraged and it should be diverted to the areas like infrastructure like road transportation and energy sectors. Spending on infrastructure like roads and energy will help to keep the economic strength of the country and this will definitely encourage the international trade and bilateral cooperation. Also the public sector should invest more in to education and healthcare sectors. It also should invest to promote the cross boarder business. It is the high time for the government to think about encouraging the SMES in the nation.
International Monitory Fund (IMF) suggests that advanced economies should use "fiscal policy when they can." The most obvious use of fiscal policy is to ease pressures where they are greatest: in the financial and housing sectors. But governments that can afford it should also be ready to undertake a broader fiscal stimulus. Scope exists to use monetary policy to support growth, building on the collaborative easing of interest rates already implemented by central banks. Emerging economies have differing degrees of freedom to act. Some can afford to draw reserves down to finance a temporary and sudden shortfall in capital flows. Others need to bolster confidence in their currencies. Developing countries face reduced export demand and reduced access to trade credit. And many are already suffering from the other crisis—the food and fuel crisis that has strained budgets and balances of payments, and raised inflation and living costs.
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