Staring at a spectre

TESTING TIMES AWAIT the economies of the world. As shock painfully gives way to rational economic reactions from individuals and states, the economic consequences of Tuesday's ghastly terrorist strikes on the World Trade Center and the Pentagon in the U.S will begin to emerge. By attempting to subjugate individual minds to the power of terror, the perpetrators of destruction across the world are aiming to systematically vaporise public confidence and thereby trigger social, economic and political collapses. Given the fragile nature of the present global economy - with slowdowns and job- cuts becoming the order of the day - it is imperative that collective action is taken by the world's leadership to ensure that there is no further collapse in the confidence levels. Immediate reactions have been two-fold: the expected panic by individual players and prompt confidence boosting measures by the central banks of the advanced economies. Yet, the months ahead could turn out to be the most challenging as the horrendous attacks have played a distressing tune for a weak global economy, which is already battling to avert a recession.

The rubble of the World Trade Center signifies an important moment in contemporary economics. If the reactions since Tuesday are to be taken as indicators - the re-assurance given to international financial liquidity by the central banks that have pumped in $ 118 billion; the reasonable guarantees, in the immediate sense, about oil supplies; and the relative containment of a drastic spill-over into economic fundamentals - there still remains the tall challenge of rebuilding shattered confidence. Yet the key task ahead for national economic managers is not just to build up collective confidence, but to also sustain it. The hardest hit in physical terms will be the world's financial services that are now moving into a phase of increased global integration. It is against this backdrop that the measures by the central banks of the developed countries come as an important signal. The ability to bolster business confidence and chart out the future economic path will be dependent on the political decisions to be taken by the U.S. Whether the soaring oil prices and the slumping stock markets will be a short-term reaction or will metamorphose into a long-term malaise will largely depend on the pattern of military response to be adopted by the U.S. - either as a single player or as a part of a larger alliance.

Notwithstanding the relative insulation of economies such as India from immediate adversities, the changed dynamics of international economic relations and the bleak internal prognosis for the future provide no cause for comfort. It is imperative that the nation's policy-makers prepare to face economic adversities: a possibility recognised by the Prime Minister, Mr. A. B. Vajpayee. In any case there is no place for complacency on the balance of payments front given the strong linkages to the fluctuations in oil prices and exports. The statements of caution against panic expressed by managers of national economies are welcome as they go a long way in calming market and individual sentiments. It is also important to note that, more by default of being a relatively smaller player, economies such as India would stand to lose less. However, the seemingly comforting prognosis will be proved wrong in the event of a global economic downturn. In the more immediate sense, it is important that India joins other major developing economies and the advanced nations to evolve a concerted approach to counter the consequences of what could become in the worst-case scenario, an extremely harsh economic winter of recession.

Send this article to Friends by E-Mail

Section  : Opinion
Previous : Seeking an active role
Next     : Pakistan, Taliban and Osama