As we enter a new decade, there are a number of uncertainties about the current status and long term prospects of the global economy. The current and future state of global economy is largely attributed to the credit crisis that ensued following the Sub-Prime Mortgage debacle in the US. The IMF (International Monetary Fund) estimates that the growth rate in Europe has been sluggish and the outlook for the world’s largest economy remains uncertain. The US market is still limping its way out of the deepest and longest recession since the Great Depression. The picture seems to be dark when turning towards Europe. The so called PIIGS (Portugal, Italy, Ireland, Greece and Spain) continue to suffer from varying degrees of political and economic uncertainty.
Instability in the Eurozone region has been the single most significant event which has kept Economists around the world busy. The situation is getting worse by the way. As such, is there really a way to save Euro? Economists on both sides of the Atlantic are now discussing not just whether the Euro will survive, but how to ensure its demise causes the least turmoil possible. It is increasingly evident that Europe’s political leaders, for all their commitment to the Euro’s survival, do not have a good grasp of what is required to make the single currency work.
The quest for a clear, simple answer recalls the discussions that have followed financial crises around the world. After each crisis, an explanation emerges which the next crisis shows to be wrong, or at least inadequate. The 1980s Latin American crisis was caused by excessive borrowing, but that could not explain Mexico’s 1994 crisis, so it was attributed to under-saving.
Then came East Asia, which had high savings rates, so the new explanation was “governance”. But this, too, made little sense, given that the Scandinavian countries (Denmark, Norway and Sweden) – which have the most transparent governance in the world had suffered a crisis a few years earlier. There is interestingly a common thread running through all these cases as well as the 2008 crisis in which financial sectors behaved badly and failed to assess credit worthiness and manage risk as they were supposed to do.
One must question weather is it right to treat the financial crisis which has affected the major developed western Economies as a “global crisis”. Although the financial markets in the emerging Economies of China and India did react to the adverse developments in the US and Europe, these reactions were short-lived. Even though their growth prospects have been lowered, still it is estimated that China’s GDP will continue to grow by around 8-9 percent, and India will not be far behind with around 6-7 percent of growth for the foreseeable future. In a recent study, Pricewaterhouse Coopers (largest global professional services firm headquartered in London) suggests that the global financial crisis has accelerated the shift in the economic power from the developed to the developing economies. If they continue to grow, the economic output of the emerging markets of China, India, Brazil, Russia, Mexico, Indonesia and Turkey- the so called E7, would overtake that of the established G7 nations: US, Japan, Germany, UK, France, Italy and Canada by 2032.
On the other hand, there are serious challenges for the governments and policy makers in the emerging economics. The higher rates of growth coupled with higher rates of interest in emerging economies are already attracting hot capital flows. This is putting upward pressure on their currencies. Over the last two years or so, most of the currencies of developing countries have increased in value significantly against the US dollar. Brazil provides the good case, where the Brazilian Real (Real is the present day currency of Brazil) has risen by 40 percent against the dollar promoting the government to actively intervene in the currency markets.  Inflation rates in emerging economies have increased and a steep increase in food prices is posing a serious threat to policy challenges and economic gains.
The financial crisis has exposed the hazards of excessive dependence on debt. Banks which generously offered credit to financial markets have now become highly risk averse. On the whole the business and the economic world will have to face serious challenges. Business will have to become smarter and more innovative. Good banking relationships will be a critical success factor for gaining competitive advantage. Technological innovations, which have provided competitive advantage in the past, will be another key factor.
(Ihsan-ul-haq Farooqi is a student of Dept. of Economics, University of Kashmir)

Lastupdate on : Sun, 6 May 2012 21:30:00 Makkah time
Lastupdate on : Sun, 6 May 2012 18:30:00 GMT
Lastupdate on : Mon, 7 May 2012 00:00:00 IST