Description
Many economists have offered theories about how financial crises develop and how they could be prevented. There is no consensus, however, and financial crises continue to occur from time to time.
IIPPE Financialization Working Group "The Financial Crisis and Developing Countries“ SOAS
Outline
? ? ? ? ?
The popular questions The 2008 Crisis: causes and triggers Effects on the Third World Generally Distinctiveness of the Indian experience India: A potted history of the Indian economy
? ? ? ? ?
1947-69 Planned Development and its Abandonment 1969-1984: Liberalization by Stealth 1984-1991: Domestic liberalization 1991-2001: Global Opening? 2001 to present: Mini Credit Fuelled Industrial Boom
? The Present Financial Crisis: ? Financial Transmission Mechanisms for India ? Recession Transmission to India ? A Turning Point in Indian Economic History too? ? Sources and Acknowledgements
Inquiring Minds want to know...
? Decoupling or Contagion (Financial and/or Real)? Growth
? ? ? ? ? ? ?
slowdown? Protectionism versus Globalization? End of growth-producing ‘Reforms’? Fate of Outsourcing? Inflation? End of Indian M&As? Assumptions: Neoliberal policies fuel recent ‘tiger’ like growth ‘Strong Fundamentals’ and the Impending Elections (May 2009)
Recession Adv. countries Return of the postponed?
2008 Financial Crisis
Financialization 1970-2007
SubPrime Housing Bubble
The Long Downturn 1970s ?
Stock Market Bubble Emer ging Mkts bubbl e
Debt bubble Reverse Capital Flows
2008: A Historical Turning Point
? The Financial and the Real ? Financialization postpones long downturn effects on ? Decelerating First World Economies thro increased capital inflows creating ‘Anglo-Saxon capitalism’ ? Increasing state role thro neoliberal-ization of (predominantly financial) markets ? Declining US hegemony through growth competition thro A-S model with IW and growth repression in IIW and IIIE ? End of all three as focus shifts to production, state and
‘Rise of the Rest’
2008’s effects on the Rest
? ? ? ? ? ? ?
Immediate loss of trade and finance But long run gains in policy options, new terms of trade? Financial contagion greatest in most liberalized markets Least liberalised most successful = demonstration effect ‘Rise of rest’ not merely artifact of US deficits Decrease in hot money potentially good Recession does curtail Western Markets of even less liberalized economies ? Need to
? Focus on internal and/or southern markets ? Re-coup capabilities for economic governance
The Indian Experience...
? Big Bourgeoisie at Independence (not Kalecki-an
? ? ? ? ? ?
‘intermediate regime’) Significant 1st stage ISI in 1930s Economic Nationalism formative Growth inevitably largely endogenous (derided as ‘trade pessimism’, autarky, inward-looking, ‘socialism’) Growth pattern of high Inequality + Poverty Since mid-1980s enthusiasm for Neo-liberalism, ‘globalization’ and the US among educated opinion But 2 major steps up in growth (circa 1950 and 1980) do not coincide with freer markets of ‘globalization’
... The Indian Experience.
? IMF/WB involvement absolutely large , proportionally ? ? ? ?
? ? ?
insignificant Internal pressures for economic liberalization (my date 1969) Until recently state leads growth: first, direct state investment, later demand boost through state salaries and spending Reserve Bank of India (RBI)’s conservative: no hyperinflation RBI not formally independent but respected (until recent Min Fin electorally motivated takeover of liquidity injection oversight from RBI) Nationalization of major banks 1969. Capital Controls slowly and incompletely lifted Foreign Financial Institutions’ presence limited
500000
400000
200000
700000
600000
100000
300000
0 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01
2001-02
2002-03 2003-04 2004-05 2005-06 2006-07 QE
Sectoral GFCF at Current Prices 1980-2007 (Rs Crore)
Public Sector
Household Sector
Private Corporate Sector
1947-69 Planned Development
? Nationalists opposed Drain, Deindustrialization, Colonial not a
national state ? Planned National Development includes bourgeoisie (Bombay Plan etc.) ? Import Substitution Industrialisation (ISI) + Agrarian Transition
? Egalitarian agrarian reforms = Higher productivity, surpluses,
market ? Planned industrial development = Large Pub sector + diversified industrial structure + self-reliance
? Quasi Marxist strategy undermined by agrarian power ? Crisis of planning in Late 1960s = Green Revolution ? Achievements: derided but actually higher ‘Hindu’ rate of
growth; diversified industrial structure, institutional development
‘Fetters’ and Planning
? Corresponding to each state of development, there tends to
grow a certain economic and social stratification which is conducive to the conservation of gains from the use of known techniques. Such stratification has a part to play in social progress. But beyond a point, it hampers innovation and change, and its very strength becomes a source of weakness. For development to proceed further, a readaptation of social institutions and social relationships thus becomes necessary … The problem, therefore, is not only of merely rechanneling economic activity within the existing framework; that framework itself had to be remodelled. ? p. 7.
The Hindu Rate of Growth in Historical Perspective
1969-84 Under-cover Liberalization
? Prima facie increase in statism: nationalization of Banks,
industrial control increased, substantial 2nd state ISI, antismuggling, FERA, MRTP, etc. ? Underlying trend point elsewhere:
? labour repression, ? Green and White Revolutions, ? state intervention pro-capitalist by default
? Inflation + middle-class political unrest + emergency +
1977 Janata Government ? Self-constraining inequitous growth process set pattern ? Agrarian bourgeoisie ? Urban and industrial investment ? provincial propertied class ? seamless Indian capitalist class
1984-92 Domestic Liberalization
? From late 1970s onwards hesitant but then accelerating
?
?
?
? ?
decontrol: various reports (Desai, 1969, Jha, 1981) critical of state intervention 1984 Rajiv Gandhi domestic liberalization with limited international opening Accompanied by usual rhetoric about free market and export-led growth; though exports remain stagnant Growth rate picks up circa 1980 not after 1991, as neoliberals have it Consumer durables-led boom (mainly vehicles) Energy/import intensity real cause of Balance of Payments crisis
Cargo Cult? Exports and Imports as %GDP
Growth and the Neoliberal Story
1991-01 Global Opening?
? ? ? ? ? ? ? ? ?
Structural Adjustment (but like 1981 IMF loan, paid back early) Privatization of parts of very large public sector Growth and industrial growth accelerate, however, Despite Neoliberal and export led-rhetoric, exports rise only in traditional categories: textiles, gems and jewellery, leather etc. Balance of Payments gap closed by remittances Import penetration increases Mainly driven by pent-up demand for goods with high import content Narrow domestic market easily saturated: industrial recession by 2001. Capital Controls remain:
? RBI’s conservatism prevails over Ministry of Finance enthusiasm ? India escapes 1998 Asian meltdown ? Continuing caution about portfolio investments and reserve
accumulation
India’s Public Sector Crown Jewels
? ? ? ? ? ? ? ?
Bharat Heavy Electricals Ltd Coal India Ltd Hindustan Aeronautics Ltd Indian Oil Corporation Ltd National Aluminium Co Ltd NTPC Limited Power Finance Corp Ltd Rural Electrification Corp Ltd ? Shipping Corporation of India Ltd Steel Authority of India Limited
Bharat Electronics Ltd Bharat Petroleum Corporation Ltd GAIL (India) Ltd Hindustan Petroleum Corp Ltd MTNL NMDC Limited Oil & Natural Gas Corp Ltd Power Grid Corp of India Ltd
Wire Transfer
2002-07 Credit Fuelled Industrial Boom
? ? ? ? ? ? ? ? ? ? ?
Govt capacity for stimulus lower ; Fuelled by easy consumption credit Increase in retail banking Inflow of foreign loans + portfolio inv. + foreign financial institutions Seemingly lifts historically heavy Foreign Exchange constraint India’s reserves in August 2008 $310 bn, third in world But accompanied by trade deficit (unlike China and Japan) But Trade Deficit > software + remittances ? current account deficit Covered only by capital movements M&As abroad rise, investment income rising but also outflows Deficit on business services But India begins exporting higher value added products: Chemicals, engineering goods and pharma. ? Growth concentrated in some sectors ? Slowdown evident since 2006
India’s own credit-feueled boom
Financial Crisis Transmission Mechanisms
? Portfolio Investments and Withdrawals by IFIs
? Fall in Sensex ? Depreciation of rupee
? Exposure of Indian banks to toxic assets:
increased operations). ? Exposure of non-bank FIs and corporates to domestic stock and currency markets. ? Expected to be large, RBI permits banks to provide loans to mutual funds against certificates of deposit (CDs) or buy-back their own CDs before maturity. ? Cutbacks on credit to individuals by banks. Marked deterioration in growth of all consumer loans. Given reliance of growth on this sort of credit, impact on growth could be high.
? RBI estimate 450m (90m public + 360 pvt) ? + depositors and investors in foreign banks operating in India (recently
Easy Come (US$ m)
Portfolio Investment
35,000 30,000 25,000
20,000
15,000
Portfolio Investment
10,000
5,000
0 1995-6 1996-7 1997-8 1998-9 1999-0 2000-1 2001-2 2002-3 2003-4 2004-5 2005-6 2006-7 2007-8 -5,000
Easy Go (US$ m)
Portfolio Investment
15,000 10,000
5,000
Portfolio Investment
0
-5,000
-10,000
Sensex: Halved by Crisis
40 20
Rupee Value
60 30 10 0 50 Year 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
1/12/2008 50.1
Recession: Transmission
? Effect on trade with US, EU and developed countries: already China and UAE/Saudi Arabia biggest trading partners
? Effect of rising dollar on B of P ? Commodity Price inflation (?) ? Growth slowdown to 7.8% (IMF projection) ? Reduction in remittances from US compensated by Gulf countries (?) ? Hit to outsourcing(?)
Oil Hit
20000 10000 0 2001-02 -10000 -20000 -30000 -40000 -50000 -60000 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 P R EU U.S.A. OPEC China
India at Crossroads?
? ? ? ?
Overall, growth slowdown of Indian making Effects of crisis/recession only compound it Potential return of ForEx constraints unless reorientation No Decoupling without coupling (globalization rhetoric notwithstanding) ? Real questions:
? Will India accept expansion of home market as the new imperative?
Address inequality and poverty? ? Will its opinion makers give up their destructive worship of the market and the US? ? Will it address the cultural – religious, caste and gender dimensions of inequality? Re: esp. Mumbai attacks last week
? In short, will it introduce a new age of Reforms, in the sense the
word conveyed before neoliberalism?
Sources and Acknowledgements
? Indian progressive economists ? See esp. www.macroscan.org ? www.networkideas.org ? Reserve Bank of India data and analysis at www.rbi.org.in ? World Bank/IMF
? My analysis of the dynamics of India’s political economy
since 1947 to appear as
? The Making of the Indian Capitalist Class
? Thanks for support in writing to Zentrum Moderner
Orient, Berlin
doc_685857274.ppt
Many economists have offered theories about how financial crises develop and how they could be prevented. There is no consensus, however, and financial crises continue to occur from time to time.
IIPPE Financialization Working Group "The Financial Crisis and Developing Countries“ SOAS
Outline
? ? ? ? ?
The popular questions The 2008 Crisis: causes and triggers Effects on the Third World Generally Distinctiveness of the Indian experience India: A potted history of the Indian economy
? ? ? ? ?
1947-69 Planned Development and its Abandonment 1969-1984: Liberalization by Stealth 1984-1991: Domestic liberalization 1991-2001: Global Opening? 2001 to present: Mini Credit Fuelled Industrial Boom
? The Present Financial Crisis: ? Financial Transmission Mechanisms for India ? Recession Transmission to India ? A Turning Point in Indian Economic History too? ? Sources and Acknowledgements
Inquiring Minds want to know...
? Decoupling or Contagion (Financial and/or Real)? Growth
? ? ? ? ? ? ?
slowdown? Protectionism versus Globalization? End of growth-producing ‘Reforms’? Fate of Outsourcing? Inflation? End of Indian M&As? Assumptions: Neoliberal policies fuel recent ‘tiger’ like growth ‘Strong Fundamentals’ and the Impending Elections (May 2009)
Recession Adv. countries Return of the postponed?
2008 Financial Crisis
Financialization 1970-2007
SubPrime Housing Bubble
The Long Downturn 1970s ?
Stock Market Bubble Emer ging Mkts bubbl e
Debt bubble Reverse Capital Flows
2008: A Historical Turning Point
? The Financial and the Real ? Financialization postpones long downturn effects on ? Decelerating First World Economies thro increased capital inflows creating ‘Anglo-Saxon capitalism’ ? Increasing state role thro neoliberal-ization of (predominantly financial) markets ? Declining US hegemony through growth competition thro A-S model with IW and growth repression in IIW and IIIE ? End of all three as focus shifts to production, state and
‘Rise of the Rest’
2008’s effects on the Rest
? ? ? ? ? ? ?
Immediate loss of trade and finance But long run gains in policy options, new terms of trade? Financial contagion greatest in most liberalized markets Least liberalised most successful = demonstration effect ‘Rise of rest’ not merely artifact of US deficits Decrease in hot money potentially good Recession does curtail Western Markets of even less liberalized economies ? Need to
? Focus on internal and/or southern markets ? Re-coup capabilities for economic governance
The Indian Experience...
? Big Bourgeoisie at Independence (not Kalecki-an
? ? ? ? ? ?
‘intermediate regime’) Significant 1st stage ISI in 1930s Economic Nationalism formative Growth inevitably largely endogenous (derided as ‘trade pessimism’, autarky, inward-looking, ‘socialism’) Growth pattern of high Inequality + Poverty Since mid-1980s enthusiasm for Neo-liberalism, ‘globalization’ and the US among educated opinion But 2 major steps up in growth (circa 1950 and 1980) do not coincide with freer markets of ‘globalization’
... The Indian Experience.
? IMF/WB involvement absolutely large , proportionally ? ? ? ?
? ? ?
insignificant Internal pressures for economic liberalization (my date 1969) Until recently state leads growth: first, direct state investment, later demand boost through state salaries and spending Reserve Bank of India (RBI)’s conservative: no hyperinflation RBI not formally independent but respected (until recent Min Fin electorally motivated takeover of liquidity injection oversight from RBI) Nationalization of major banks 1969. Capital Controls slowly and incompletely lifted Foreign Financial Institutions’ presence limited
500000
400000
200000
700000
600000
100000
300000
0 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01
2001-02
2002-03 2003-04 2004-05 2005-06 2006-07 QE
Sectoral GFCF at Current Prices 1980-2007 (Rs Crore)
Public Sector
Household Sector
Private Corporate Sector
1947-69 Planned Development
? Nationalists opposed Drain, Deindustrialization, Colonial not a
national state ? Planned National Development includes bourgeoisie (Bombay Plan etc.) ? Import Substitution Industrialisation (ISI) + Agrarian Transition
? Egalitarian agrarian reforms = Higher productivity, surpluses,
market ? Planned industrial development = Large Pub sector + diversified industrial structure + self-reliance
? Quasi Marxist strategy undermined by agrarian power ? Crisis of planning in Late 1960s = Green Revolution ? Achievements: derided but actually higher ‘Hindu’ rate of
growth; diversified industrial structure, institutional development
‘Fetters’ and Planning
? Corresponding to each state of development, there tends to
grow a certain economic and social stratification which is conducive to the conservation of gains from the use of known techniques. Such stratification has a part to play in social progress. But beyond a point, it hampers innovation and change, and its very strength becomes a source of weakness. For development to proceed further, a readaptation of social institutions and social relationships thus becomes necessary … The problem, therefore, is not only of merely rechanneling economic activity within the existing framework; that framework itself had to be remodelled. ? p. 7.
The Hindu Rate of Growth in Historical Perspective
1969-84 Under-cover Liberalization
? Prima facie increase in statism: nationalization of Banks,
industrial control increased, substantial 2nd state ISI, antismuggling, FERA, MRTP, etc. ? Underlying trend point elsewhere:
? labour repression, ? Green and White Revolutions, ? state intervention pro-capitalist by default
? Inflation + middle-class political unrest + emergency +
1977 Janata Government ? Self-constraining inequitous growth process set pattern ? Agrarian bourgeoisie ? Urban and industrial investment ? provincial propertied class ? seamless Indian capitalist class
1984-92 Domestic Liberalization
? From late 1970s onwards hesitant but then accelerating
?
?
?
? ?
decontrol: various reports (Desai, 1969, Jha, 1981) critical of state intervention 1984 Rajiv Gandhi domestic liberalization with limited international opening Accompanied by usual rhetoric about free market and export-led growth; though exports remain stagnant Growth rate picks up circa 1980 not after 1991, as neoliberals have it Consumer durables-led boom (mainly vehicles) Energy/import intensity real cause of Balance of Payments crisis
Cargo Cult? Exports and Imports as %GDP
Growth and the Neoliberal Story
1991-01 Global Opening?
? ? ? ? ? ? ? ? ?
Structural Adjustment (but like 1981 IMF loan, paid back early) Privatization of parts of very large public sector Growth and industrial growth accelerate, however, Despite Neoliberal and export led-rhetoric, exports rise only in traditional categories: textiles, gems and jewellery, leather etc. Balance of Payments gap closed by remittances Import penetration increases Mainly driven by pent-up demand for goods with high import content Narrow domestic market easily saturated: industrial recession by 2001. Capital Controls remain:
? RBI’s conservatism prevails over Ministry of Finance enthusiasm ? India escapes 1998 Asian meltdown ? Continuing caution about portfolio investments and reserve
accumulation
India’s Public Sector Crown Jewels
? ? ? ? ? ? ? ?
Bharat Heavy Electricals Ltd Coal India Ltd Hindustan Aeronautics Ltd Indian Oil Corporation Ltd National Aluminium Co Ltd NTPC Limited Power Finance Corp Ltd Rural Electrification Corp Ltd ? Shipping Corporation of India Ltd Steel Authority of India Limited
Bharat Electronics Ltd Bharat Petroleum Corporation Ltd GAIL (India) Ltd Hindustan Petroleum Corp Ltd MTNL NMDC Limited Oil & Natural Gas Corp Ltd Power Grid Corp of India Ltd
Wire Transfer
2002-07 Credit Fuelled Industrial Boom
? ? ? ? ? ? ? ? ? ? ?
Govt capacity for stimulus lower ; Fuelled by easy consumption credit Increase in retail banking Inflow of foreign loans + portfolio inv. + foreign financial institutions Seemingly lifts historically heavy Foreign Exchange constraint India’s reserves in August 2008 $310 bn, third in world But accompanied by trade deficit (unlike China and Japan) But Trade Deficit > software + remittances ? current account deficit Covered only by capital movements M&As abroad rise, investment income rising but also outflows Deficit on business services But India begins exporting higher value added products: Chemicals, engineering goods and pharma. ? Growth concentrated in some sectors ? Slowdown evident since 2006
India’s own credit-feueled boom
Financial Crisis Transmission Mechanisms
? Portfolio Investments and Withdrawals by IFIs
? Fall in Sensex ? Depreciation of rupee
? Exposure of Indian banks to toxic assets:
increased operations). ? Exposure of non-bank FIs and corporates to domestic stock and currency markets. ? Expected to be large, RBI permits banks to provide loans to mutual funds against certificates of deposit (CDs) or buy-back their own CDs before maturity. ? Cutbacks on credit to individuals by banks. Marked deterioration in growth of all consumer loans. Given reliance of growth on this sort of credit, impact on growth could be high.
? RBI estimate 450m (90m public + 360 pvt) ? + depositors and investors in foreign banks operating in India (recently
Easy Come (US$ m)
Portfolio Investment
35,000 30,000 25,000
20,000
15,000
Portfolio Investment
10,000
5,000
0 1995-6 1996-7 1997-8 1998-9 1999-0 2000-1 2001-2 2002-3 2003-4 2004-5 2005-6 2006-7 2007-8 -5,000
Easy Go (US$ m)
Portfolio Investment
15,000 10,000
5,000
Portfolio Investment
0
-5,000
-10,000
Sensex: Halved by Crisis
40 20
Rupee Value
60 30 10 0 50 Year 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
1/12/2008 50.1
Recession: Transmission
? Effect on trade with US, EU and developed countries: already China and UAE/Saudi Arabia biggest trading partners
? Effect of rising dollar on B of P ? Commodity Price inflation (?) ? Growth slowdown to 7.8% (IMF projection) ? Reduction in remittances from US compensated by Gulf countries (?) ? Hit to outsourcing(?)
Oil Hit
20000 10000 0 2001-02 -10000 -20000 -30000 -40000 -50000 -60000 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 P R EU U.S.A. OPEC China
India at Crossroads?
? ? ? ?
Overall, growth slowdown of Indian making Effects of crisis/recession only compound it Potential return of ForEx constraints unless reorientation No Decoupling without coupling (globalization rhetoric notwithstanding) ? Real questions:
? Will India accept expansion of home market as the new imperative?
Address inequality and poverty? ? Will its opinion makers give up their destructive worship of the market and the US? ? Will it address the cultural – religious, caste and gender dimensions of inequality? Re: esp. Mumbai attacks last week
? In short, will it introduce a new age of Reforms, in the sense the
word conveyed before neoliberalism?
Sources and Acknowledgements
? Indian progressive economists ? See esp. www.macroscan.org ? www.networkideas.org ? Reserve Bank of India data and analysis at www.rbi.org.in ? World Bank/IMF
? My analysis of the dynamics of India’s political economy
since 1947 to appear as
? The Making of the Indian Capitalist Class
? Thanks for support in writing to Zentrum Moderner
Orient, Berlin
doc_685857274.ppt