Tackling Economic Paralysis - 2012
With UN’s sanctimonious advice out on the grim economic outlook for 2012, all Institution of public importance such as Governments, Financial Institutions and Corporate organizations should huddle their management resources to plan for the emerging scenarios and plan to mitigate the impact.
The UN report has assessed the biggest risk are: Exaggeration of the European Financial deterioration and Fiscal tight-fistedness of the large developed countries. Given the trends, both scenarios are expected to play out or at least cannot be ruled out. The Corporates, Financial Institutions and Governments would be better off, if they plan in advance for steering their organizations through these scenarios rather than concentrating their energies only on avoiding these situations.
Some of the other risks staring at the World are –
1. Paralysis of Policy making - Due to economic stagnation, the impact of decisions made by leaders did not have the desired impact. As a result, there is considerable loss of faith of people about decision making apparatus. Now people are much more circumspect, demand more involvement and participation in decision making and put decisions/proposals to much tougher scrutiny. This is resulting in much slower decision making with the result that ability of collect necessary resources to push a decision has waned.
2. Sovereign debt distress – Most governments’ disembarked Fiscal prudence measures and attempted to walk their way out of recession by spending money from the exchequer without raising tax resources. This has resulted in stretched government’s finances and waning ability of the governments to push development and growth.
3. Financial Sector distress – The imprudence of financial sector to lend out to unbankable propositions was at the heart of the 2007-08 crises. Huge amount of capital was spent to clear the mess and monetary policy was almost re-written to ensure that there is ample liquidity in the system so that the chaos is washed out with minimal impact to ordinary people. However, the liquidity also ensured that some of the fiscally imprudent governments were also able to raise finances for their hare brained schemes and these governments are now staring at the risk of default. The financial sector is again at Risk and Central banks of Large developed Economies have joined forces to tackle the situation.
4. Weak aggregate demand – With so much bad news, the people are turning pusillanimous. They are making attempt to save for the rainy days that seem to be staring at them from increasingly close quarters. With governments to in fiscal austerity mode, the overall demand is being projected downwards.
With the above situation, no country is unaffected. Lower demand in US and Europe is slowing down growth of export led growth of APAC region including China. Till now, the demand downturn in the developed world had only affected Japan and Europe including some US companies since the consumers were increasingly shifting to cheaper products/substitutes and thus cheap Chinese goods had continued to see demand for itself, however this round may witness an overall contraction of demand which might lead to a slowdown of manufacturing in Asia, Mexico etc. spiraling into reduced demand of Primary goods from Africa, Brazil, Australia etc.
To avoid the economic squeeze, a variety of attempts are being simultaneously pushed i.e. a growth in demand of these manufactures in Asia itself with a mix of Western investments in promoting the lifestyle and tax breaks by local governments, attempts at better distribution of wealth in Northern Africa so as to reduce poverty and improve consumption (ensuring Energy supplies to the world aren’t threatened), a spate of new projects in middle east to ensure levels of employment are maintained, rise of South American nations (other than Brazil) etc. This is besides attempts of the West for achieving Financial Restructuring and stability with minimal impact to people. The governments are trying to reduce expenses (read benefits to people) and raise resources (increase taxes) so that the deficits are brought within manageable limits and investors can be assured to buy the government bonds again.
Though these attempts may be well meaning, the people are being increasingly circumspect. They see western governments as serving the corporate interest as only benefits targeted to common people are reduced. This is while an ever larger portion of the cost of infrastructure to support corporate interest is also burdened on to them. All this while, the benefit to corporate are seen as rising so that they increase investment and do not shift overseas. They are looking at better bargains and are increasingly resolved to go for Trade wars if it comes to that.
The people of the manufacturing economies in Asia, Mexico see Governments as working for the Western interest through increased market access and tax breaks for their investments while ensuring that they receive peanuts for their manufacturing labour for which their Western counterparts may be drawing nearly ten times as much. The news of taint and corruption of their political leaders hasn’t helped in reducing their woes.
The people in MENA are agitated for a better, more equitable deal with more freedom and yearn for better, more fulfilling life style of their own choosing. Same is the case of South American nations who are looking for better/more equitable partnership with the rest of the world. The idea of political leadership negotiating for their interests in some vacation resorts and doling out unacceptable compromises is unlikely to work. This has raised the risks of an economic meltdown manifold.
It is a foregone conclusion that a meltdown will produce many victims. Some would be bigger victims than others while for a few, though the loss would not be much yet the pain may be unbearable. It is about time people realize the risk and work to gain control of their lives.