From Tehelka Archives November 29, 2001 – Approaching global recession: No cushion this time

A global economic meltdown seems likely and this time round the US will be in no position to provide a buffer – but closed economies like India and China are likely to fare better, writes Noor Mohammad

If the recent Organisation for Economic Cooperation and Development (OECD) projection is to be believed, the world economy is already in the grip of a recession. That means the world Gross Domestic Product (GDP) growth will end below 2.5 per cent — the level set by the International Monetary Fund (IMF) for economic slowdown to qualify as recession — in 2001. Worse still, the OECD semi-annual report released last week does not see any prospect for recovery until the middle of next year. The OECD report further says that GDP growth will be less than one per cent in the so-called OECD region in 2001- well below the two per cent growth rate forecast by the 30-member organisation in its May report. The growth will remain very weak in the first half of the next year.

The OECD report says that real GDP in the United States is projected to grow at 1.1 per cent in 2001, a tardy movement after the sharp rise of 4.1 per cent last year. The scenario for the world economy turned bleaker following the September 11 terrorist attacks. The report says, “The US, the epicentre of the shock, stands to suffer most directly and immediately, and is gauged to be already in recession.” The report also sees a severe impact of the US recession on Europe. Besides, Japan’s economy is also expected to shrink further by 0.7 per cent this year and 1 per cent next year.

A World Trade Organisation (WTO) report released before September 11 projected a world trade growth of just 3 per cent in volume terms in 2001 as against impressive 13 per cent in the previous year. The report also warned that the figure could be cut down if the economic environment worsened.

A recession means more job cuts across the globe in the coming months. The worst hit will be countries whose exports constitute a big chunk of their GDP. The more open and globally integrated an economy, the more severe will be the impact of the world economic recession. India will be relatively secure from the rigours of recession, as it is still far less integrated into the global economy than countries of South East Asia, like Singapore, Korea and the Latin American countries, like Argentina and Mexico.

The South East Asian crisis in 1997 revealed how integrated the world economy has become over the years. The collapse of the baht, the Thai currency, sent world financial markets into a tizzy. As a result, foreign investors fled en masse from emerging markets, causing a virtual economic chaos. The so-called “tiger economies” of Southeast Asia had fallen apart. Even distant economies, like Brazil and Russia, felt the reverberations of financial collapse. For the first time, Russia was forced to default on its sovereign debts. Brazil was saved from going under only because of active support from the US.

Significantly, over the years, the double-digit growth figures in Southeast Asian countries, like Singapore, Korea and Thailand, have been put up as a success story of the Western economic model. The lower growth figures in relatively closed economies, like India and China, were attributed to their reluctance to open up the economy. However, the crisis proved that closed economies are less vulnerable to volatility of world economy.

The US then played a key role in containing and defusing the economic crisis. The US economic boom offered a cushion to the besieged world economy. Uncle Sam absorbed much of the shock, by allowing free market access to imports from crisis-hit countries. The policy of free trade followed by the US in the aftermath of Southeast Asian crisis averted a possible meltdown of global economy.

There will be no cushion if the world economy goes into a tailspin this time. China and India are likely to fare relatively better, but they do not have the capacity to offer cushion against a global economic meltdown.

The only silver lining is that consumer confidence in the US is still intact. The US Federal Reserve has already cut interest rates seven times this year to reverse the downturn in the US economy. Besides, three or four months from now, massive public spending in the US is also likely to rev up the economy.