Recession: Then and Now

A Contrast and Comparison

By B.M.Bhatia

Looking back at The Great Depression of 1930s and comparing it to the prevailing gloom on the future of world economy will be both informative and instructive. Federal Bureau of Economic Research (FBER), a body of top economists in the United States of America, charged with the responsibility of tracing business cycles has already announced its verdict: the economy of the United States of America has been certainly in the throes of recession since December 2007 and that the down-turn will run into 2009 with signs that it could deepen into big depression. The decline in Dow Jones by 680 points has already signaled a crash in stock exchange market in developed economies.

There is no crystal ball gazing into which one could completely and reliably predict the doom. But certain indicators are there such as significant stock market drop, change in the unemployment rate and initial jobless claims.

The generic definition of term recession could be said to be the reduction of a country's gross domestic product (GDP), drastically reduced economic activities like personal income, employment, industrial production, and wholesale-retail sales for span of at least two successive fiscal quarters.

Recession is multifaceted having many attributes that befall concurrently e.g. industrial employment, banks, financial investment, and corporate profits.

Main causes of recession could be :

* War

* National debt

* Inflation

* Currency crisis

* High rate of Interest

* Consumerism

There are marked similarities in the situation of the 1930s and the current situation in the world economy. Also there are noticeable differences between the two situations. Differences, as the current situation unfolds over the next few years, perhaps, would outweigh the similarities. We have to keep our fingers crossed and wait for some time. However, projections of IMF and World Bank confirm that growth rate in the western countries led by the United States of America, the strongest world economy of present times, is going to decline in 2009. Export trade is going to suffer a decline. So will the import trade. With oil prices falling sharply, oil producing countries, OPEC and non-OPEC (excluding Russia), are going to bear the brunt. There are reasons for countries like India and China to smile. Even the latter is projected to come down from its pedestal of over 10.0 percent growth rate it recorded for several years and is going to face a jolt. Its growth rate in 2008-09 is going to be same as that of India but will come down to 5.0 percent next year. On the other hand India is destined to maintain 7.5- 8.0 percent growth rate. The balance of economic power is going to change radically, shifting from western countries to Asia. The scenario has the potential to change world politics. This is not utopia. Hard facts today confirm these projections.

Finally, in the crisis of the 1930s, America threw up a charismatic leader in the person of Theodore Roosevelt who gave the country ‘New Deal’ and led the nation out of morass. Whether Obama can rise to the occasion in the present case remains to be seen.

The announcement of recession in the United States of America was presaged by UN forecast that world output could grow by 1.0 percent in 2009. The setting up of a commission of experts headed by Noble laureate, Joseph Stiglitz has a clear message: the crisis calls for bold fiscal interventions and turns spotlight on the economic role of the state. The projected slow growth would trigger decline in production, wages and consumer spending. Once, over fiscal intervention by the state as in emergency is not enough. The malaise is deeper and one that calls for a rethink on a broader basis- a rethink not merely on the role of state in terms of crisis is not enough. We have to look deeper into systematic inadequacies that need correction. A recalibration of global and national systems is the need of the hour. Anarchic capitalism has had its day. It repeatedly produced economic crisis. That type of capitalism has to be replaced by a sensible capitalism. It is not that the American capitalism will melt away. It will survive the current crisis but in a modified form. It will not be a Wall Street run show or a market oriented capitalism but capitalism that ensures sustainable growth in which the poor and downtrodden get a slice of the growth rate.

This accords well with India’s current economic policy. At first even Manmohan Singh was swayed by the booming sensex which touched a peak of 20,000. Then began the tumble. In a few weeks time it dropped to 10, 000. But the slide did not stop there. Its downward trend continued and fell to 8, 000 and even lower. Manmohan Singh realized that it was wrong to rely on stock exchange indices or for that matter in flow of Foreign Direct Investments (FDI) for growth and prosperity of Indian economy. We have to strive for growth with social security. That led to the policy perspective we are now following and to which the world is now turning.

Several measures aimed at damage control and to salvage the situation have been put in place. But these are sporadic, in separate quarters and focused on immediate steps individual countries have taken. There is no co-ordination in the programs initiated. These programs put at individual level or by a group of countries are in the nature of pain killers and not cures. They do not herald the advent of a much needed systematic reform and restructuring of the world economy and international economic relations. The road to be traveled has been mapped and signposts have been laid. But a concerted move in that direction is yet to be made.

In the post Second World War period we had the Brettonwood Conference that gave us IMF and World Bank to serve as regulator of exchange rates and flow of funds across the national borders. The world has since changed drastically. The situation requires new approach to restructuring of world economy and international economic relations.

As confusing as the situation is, are the strategies too for taking the country out of recession. There are as many economic schools of thought as the trees outside White House. If the Keynesian economists advocate deficit spending by the government, the growth, supply-side economists are for the cuts in taxes in order to promote business capital investment. Those economists who have no particular ideology to follow recommend non intervention of the government not interfere with natural market forces. Like the politicians proposing populist budget, the populist economists would want benefits for consumers, in the form of subsidies or lower-bracket tax reductions.

The president elect of the United States of America has gathered together the best available talents in the country to provide the required expertise to carry out this task. He claims that immediately after his oath as president on January 20 2009, the plan would be put into practice. But he can not do it alone. He has to secure close co-operation of the prime players in the global economy- Japan, China, the European Union, Russia and India, for rebuilding world economy and restructuring its economic order. We wait for that initiative.