The slow revival process after the shock of global financial crisis that began from August-September 2008 suffered another major jolt with Standard & Poor’s (S&P) downgrading US economy last week
While President Barack Obama failed to revive the US economy, the lingering impact of tsunami, earthquake and the nuclear disaster is feared to create a contraction in the Japanese economy. China’s manufacturing sector has already slowed down.
The stimulus package in the Euro Zone did not result in faster revival, rather the situation deteriorated with conditions in PIGS (Portugal, Ireland, Greece and Spain) awfully pitiful.
Clearly, the winter of the global crisis is far from over. Rather the fresh impact of the crisis in the developed world is casting its shadow on the emerging economies and developing countries. The impact of the recent American crisis has caused a meltdown in the global stock exchanges. Investors are shifting their investments from equity markets to commodity markets, pushing up the prices. The rising crude oil and commodity prices have added to the sorrows.
The developed countries are likely to take more protectionist measures in trade and movement of natural persons. Job preferences in these countries will be given more to local residents. Already such right-wing movement is gaining momentum in the West.
India, reeling under rising prices, wage deflation and job contraction, has described the situation as “grave”. Indian industry fears that the recent American shock coupled with increase in interest rates, raw material prices and cost of petroleum and petro products at home would dampen the prospects for exports.
The Federation of Indian Chambers of Commerce and Industry (FICCI) has appealed to the government for a further revival package and not to close the DEPB scheme for exports by the end of September 2011. With the industry’s renewed demand, it is unlikely that the Indian government would be able to complete its process of fiscal consolidation.
Doubts over capitalism
On July 5, the S&P downgraded the long-term sovereign credit rating of USA, the world’s largest economy, for the first time since 1917 from its top AAA by one notch to AA+. In 1917 S&P granted top credit rating of AAA to US. The move came less than a week after a gridlocked Congress finally agreed to spending cuts that would reduce the US debt burden by more than $2 trillion.
According to S&P, the fiscal consolidation plan which the US Congress and the Obama administration agreed to fell short of necessary measures to stabilize medium-term debt dynamics. But other credit rating agencies like Moody’s Investors Service and Fitch Ratings have not yet downgraded US. They warned that if the US dose not cut its spending it would face the downgrade option.
According to estimates, US economy is expected to grow by about 2.5% in year 2011, slightly lower than the IMF projection of 2.8%. Moderation in government spending will affect growth momentum in US in the coming months.
The Euro Zone would register a growth of about 1.9%, slightly higher than the IMF projection of 1.6%. Analysts feel that within the Euro Zone, economies are expected to witness significant growth disparities. Western Europe is estimated to grow at a modest 1.5% in 2011, but with significant variability. Germany, the Nordic countries (Denmark, Finland, Iceland, Norway and Sweden) along with Benelux countries (Belgium, the Netherlands, and Luxembourg) are expected to perform at the higher end – above 2% – while UK and France are likely to see growth in the range of 1.5 to 2% due to budget cuts and less help from exports. Most of Southern Europe and Ireland are expected to see growth of less than 1% or may even contract.
Japan’s growth rate is projected to fall to a negative 0.5% in 2011. It may be noted that the estimates for the growth of Japan in the current year vary the most from the projections provided by IMF and which have pegged Japan to grow by 1.4%.
However, in China, the growth in 2011 would moderate only slightly to about 9.5% as the Chinese economy settles onto a gradually slowing growth trend. The growth moderation will be to a smaller extent only if there are no major negative impacts from inflation or overvalued assets.
The sluggish nature of growth in these major economies would contract consumer demand, shrink market, promote protectionism and adversely impact development prospects of emerging economies, developing world and poor countries.
Repeated economic crises have shown that current capitalist model of development is not going to work for long. A new model needs to be created based on “real economy”.
Attempts should be made to revive the decentralised smaller economic structures and revamp them with suitable modern technology. Jobless youth should be encouraged to set up small and micro enterprises in rural areas by offering them cheaper loans and extended period for repayment. Sustainability and employment creation should be made key criteria for economic progress. By discouraging huge monopolistic businesses and encouraging self-employment, economic disparities can be overcome. As long as role and value of labour, skills and technology vis-à-vis capital remain marginal, handful of people will continue to play havoc with the global economy and keeping billions poor, hungry and diseased. The crisis before capitalism offers an opportunity to the humanity to correct its path before it is too late.