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Sumant Sinha Image

What is one to make of this global downturn — is it a prolonged recession, a mild depression or merely a correction? Is it likely to be V shaped, U shaped, a W or even (heaven forbid) an L? Is unbridled capitalism dead, consigned to the dustbin of history along with communism? Are regulated markets back in vogue, is a social welfare state of the European variety more effective, or is the Indian semi-protected market model better?

Are emerging markets getting de-coupled, are they going to drive global growth — taking over as the growth engines from the US, or are they going to suffer under the weight of their export-dependent models? Is the dollar going to stay the dominant global currency with reserves surplus countries such as China, India and Japan continuing to collect US Treasuries, or is the dollar going to fade away eventually under the deluge of spending by the US government?

Will the US fiscal stimulus be sufficient to bail out the US economy and put it on the path to recovery, or as Krugman and Roubini would argue, will there need to be a second stimulus? Will inflation rear its ugly head and will central bankers rush to tighten monetary policy prematurely, thus choking an incipient recovery? Will Chinese and Indian consumers compensate for an over-leveraged US consumer?

Will oil prices stay stable after their recent gut wrenching volatility? Will commodity prices plateau off at these levels or will we see another run up in prices — something which the Jim Rogers and Marc Fabers of the world keep talking up? Will one-off crises such as H1N1 impact global growth? Will global warming result in convulsive changes in the way in which we live our lives and carry out business? Will the world be able to come together cooperatively to deal with climate change in time before island nations such as the Maldives get swept away? Will the monsoon be impacted by such events to change the Indian economy? And what of terrorism and the so called battle of civilisations — how will that play out? And will regimes such as North Korea be brought into the global fold before they develop and deploy nuclear weapons?

Many, many questions and few answers. How does a manager plan in this uncertain environment? And how does an individual plan his or her own life? Let’s take a look at some of these issues and while we cannot come to definitive answers in this column, we shall attempt to arrive at some meaningful markers for the Indian economy as well as for those who hold leadership positions in Indian corporates.

(Almost) unregulated capitalism, of the US variety, has powerful backers in the shape of Wall Street and powerful corporate chieftains. It is doubtful that belief in this model will go away in a hurry. There are too many vested interests that will ensure nothing fundamental changes in the US way of running its economy. The Wall Street model of banking is making a comeback, and as soon as the financial markets begin to right themselves, I can bet that things will be back to the way they were. In the words of Raghuram Rajan, capitalism will still need to be saved from the capitalists. I doubt that anything fundamental will change.

However, this convulsion will mark a subtle but important shift. If the US and the developed world can go through this kind of major economic upheaval bordering on total catastrophe, then in fact they are no better than the less sophisticated emerging markets that these countries had been preaching to, often through the multilateral agencies. The moral authority and the economic lecturing of the western world will be put in doubt and more and more countries will look for their independent path.

The shift of the economic gravity of the world to Asia will also get more pronounced. The growth engine of the world will no longer be the US consumer, but in fact, the Asian consumer. This will not only be a welcome change but also a long lasting one as the Asian consumer starts from a much lower position in Maslow’s hierarchy. In the long run, this will mean a continuing shift of manufacturing to Asia, as well as sustained infrastructure development that concurrently will have to take place.

Without being an economist, it appears to me that this will lead to a long-term decline of the dollar. The euro is made up of too many disparate elements and so cannot inspire confidence as a long-term anchor and most other important currencies are not freely convertible. So in the short term at least it looks like to dollar will continue as the base currency with Fed continuing as the driver of the world’s monetary policy.

The countries of the world have so far shown little ability to work together and pull in the same direction. In the years to come, the issue of climate change will severely test this ability. Changes in the environment we live in and the consequent gut wrenching changes to our economies, issues such as the availability of water, for example, will all begin to become more scarily real as global warming takes hold. Climate change will not respect borders and therefore no country can really be immune to this phenomenon. Therefore, whether we like it or not, all countries will have to pull together and tackle this problem collectively. Action on climate change is not a “nice to have” such as, for example, trade talks — it is a “must have”. As we go into the COP 15 deliberations in December in Copenhagen, expectations are not high, nevertheless let’s hope for humanity’s sake that tangible progress is made.

Will inflation rear its ugly head? I doubt it. There is simply too much slack in manufacturing in the world along with softness on the demand side for this to happen in a hurry. Yes, there may be some inflation in agricultural commodities where either climate change impact or the search for alternative bio-fuels changes cropping patterns and so on, but I doubt we will have significant price rise in the mined or drilled commodities in the near term. As it is, commodity prices have moved up significantly and there may well be an element of financial speculation underlying some of these moves.

So all in all, I foresee a more uncertain economic world where some of the truths of the past have been severely compromised, but have not yet been replaced by other established alternatives. It means an increasingly multipolar world where market strength will be more diffused, cooperation among nations will be crucial but may not happen, thereby imperilling the economic future and livelihood of many of our fellow travellers on this planet. Almost paradoxically, there will also be vast opportunities for those who can capitalise on the eastern swing of economic gravity. But then these are my thoughts only!

Source: Economic Times