The world economy continues to be on a downward spiral. According to the latest estimates prepared by the International Monetary Fund, the global economy, reeling from financial crisis, was on track to shrink for the first time in 60 years in 2009 by as much as 1.0 percent. These projections were sharply lower than those in the World Economic Outlook update published on 28th January that had put global growth at 0.5 percent for the year.
The revisions "reflect unrelenting financial turmoil, negative incoming data, sinking confidence, and the limited effect to date of policy responses with respect to the restoration of financial health system." Advanced economies were expected to suffer "deep recessions" in 2009, shrinking between 3.00 and 3.50 percent.
The United States, the worlds largest economy, was projected to contract at an annual rate of 2.6 percent, and Japan, the second largest, by a staggering 5.8 percent. The 16-nation eurozone was expected to contract by 3.2 percent. The IMF also sharply lowered growth projections for emerging and developing countries to between 1.5 percent and 2.5 percent. The world economy was, however, expected to gradually stage a modest recovery in 2010, with growth between 1.5 percent and 2.5 percent, but downside risks were significant.
The recovery would depend on comprehensive policy steps to stabilise financial conditions, sizeable fiscal support, a gradual improvement in credit conditions, a bottoming out of the United States housing market and the cushioning effect from sharply lower oil and other major commodity prices. Given the overall condition of world economy, the IMF projections appear to be in accordance with the changing ground realities in most of the countries.
Of course, the statistics has to reflect the reality that uncertainty is increasing, demand is shrinking and recession is still deepening despite huge rescue packages announced by the policymakers of various countries, including the US, worlds largest importer. Needless to say that this is not only highly disturbing but exposes the major weakness of "economics" as a subject which has largely failed to address such a situation sure-footedly and without major hiccups.
While human dimensions of such a deep and unprecedented recession are obvious, exact remedies are neither perfect nor neutral in their impact. The old Keynesian model still in use has not been improved to an extent to provide immaculate solutions in this kind of uncertain situation. For instance, nobody could be certain about the exact impact on growth, employment, etc, and the time lag between a stimulus package and the recovery process in an economy.
The biggest problem is, however, related to the "moral hazard" inherent in the model. Why the future generations or unrelated entities should be punished for the greed or follies of a particular class to damage the system is a legitimate question.
The US bankers who are accused of the wrong-doings, triggering financial turmoil that led to recession are still living luxuriously while others have to pay for their mistakes/misdeeds in the form of higher taxes and missed opportunities for a long time to come. Anyhow, though cyclical downturns are an essential feature of capitalist economy, it is still regarded as the best system which can deliver and we have to live with it. This system has lifted millions of people from poverty.
In the meantime, Pakistani authorities could only watch and pray that forceful policy efforts now under way in most of the advanced economies are able to produce the desired results in the near future. A quicker recovery in these economies is essential to promote our exports which are largely destined to advanced countries, particularly the US and Japan.
Emerging and developing economies are still projected to post reasonable growth rates but unfortunately, Pakistan has failed to diversify its exports over the years despite repeated advice to move in that direction. It is high time for the government to realise that the country needs stable exports to keep its import expenditures and export revenues in tandem.
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