On the precipice

IN THE WEEKS since the terrorist attacks in the U.S., dark clouds have quickly formed over the global economy. This is not a sudden turn for the worse but an earlier deterioration that has accelerated after the events of September 11. No country looks likely to escape the effects of a global slowdown and no sector now looks likely to be unaffected by the spreading down-turn. But it need not be all gloom as co-ordinated and concerted action can make the recession short-lived and promote recovery in the developed and developing countries.

The International Monetary Fund in its biannual World Economic Outlook has forecast that global economic growth in 2001 is expected to be 2.6 per cent, just a shade over the IMF's benchmark for a recession. But this is a forecast prepared before September 11, which the IMF has not revised because it visualises a number of imponderables that make it meaningless to engage in any quick estimate of the direct and indirect effects of the terrorist attack. It is more than likely that the U.S. has already slipped into recession since consumer spending, the one positive factor that has propped up the U.S. economy during the past year, has plummeted and shows no signs of recovery. In addition, the unemployment rate is now the highest in nearly a decade and the toll of retrenchments - extending beyond airlines - is growing by the day. The IMF is hopeful of a quick recovery in 2002; but considering the poor value of past forecasts (in the course of the past year the IMF has revised downwards by nearly two percentage points its prediction of global economic growth in 2001) such estimates need not be taken seriously. It is important to recognise now that the current recession will not disappear on its own and urgent steps have to be taken lest it deepens in the world economy. There are a couple of unique features of this global recession. First, since the recession is widespread, for perhaps the first time in more than two decades no one part of the developed world - U.S., Canada, west Europe or Japan - can provide a growth stimulus to the others. The recession of the early 1990s, for example, was short-lived partly because Japan was able to exert a contra influence on the other major economies. Since the four biggest economic blocs are all slowing down this also means that the developing countries, the countries in transition and the middle-income countries are all either already affected or are going to be pulled down shortly. Second, the contemporary slowdown has been precipitated by businesses cutting back on investment, which in turn is the result of huge excess capacities created during the heydays of the so-called `new economy'. The recessions in the past quarter century have been occasioned by other reasons like government monetary and fiscal compression which were part of anti-inflation strategies.

The world economy need not, however, topple over the precipice. For one thing, low global inflation, low commodity prices and low oil prices give the larger economies sufficient freedom to use interest rate reductions and higher government spending as instruments to boost investment and consumer demand. The central banks in the developed world have already made major cuts in interest rates. And as if to prove the adage that when in trouble governments turn to Maynard Keynes, a number of them - notably the U.S. - have already announced major Keynesian type spending programmes. There is always a risk in such a situation that every lobby's pet expenditure schemes will be pushed through as part of a spending stimulus package. But most developed country governments have sufficient cushion to absorb the effects of what should be minor aberrations. Since a slowdown means a decline in growth of trade as well, the best prospects for developing countries too lie in boosting domestic demand. This is where, to maintain economic growth, higher government spending - provided it is targeted and monitored closely - is the best short-term option for the developing countries as well.

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