If globalisation caused the current economic crisis, can it also help it bounce back?

It is often said that "If the US sneezes, the rest of the world catches a cold." It feels like, right now, the US not just has a cold but a severe case of pneumonia and the rest of the world getting severe allergic reactions.

While the range and depth of the economic woes in the US is astounding, it is even more amazing how quickly it became a global problem. Several countries experienced bubbles almost simultaneously, and economic slowdowns are occurring worldwide. The question now is: will globalization also mean the world economy will recover more quickly than it would have in less inter-connected times?

Just like contagious diseases spread when people come into contact with each other, the financial crisis now sweeping the world could not have spread so quickly were it not for the many ways the economies of the world are now so inter-connected - much more so than at the time of the last major global recession 30 years ago.

U.S. banks got in to trouble because they were holding mortgage securities that were worth a lot less than the banks initially thought they were. It turns out that many European banks had invested in those same mortgage securities.

The disappreance of boundaries and a global marketplace were touted as having huge benefits. This was also proven many a time - consumer spending in America boosted the corporate performance and forex reserves in China. China in turn has more money to invest - and is the largest investor in many of the US economic products.

The big question is whether this 'coupling' can mean the effects of a downturn in any one country can be softened. Can we expect that when a few key economies make a turning point toward recovery, those countries will quickly lift the rest of the world with them?

If only economic predictions had any rational answer!

Some sobering lessons for India - from the past and for the future

The current global economic crisis is now spawning a lot of questions on the sanity of the free-market economics. After all, the US has been the bastion of capitalism and preacher or this mantra to the rest of the world - even arguing that true zeniths in political freedom can only be attained through the free market.
It has 'therefore' been very sobering where that country finds itself nationalising banks and propping up troubled financial and corporate entities. What was once spurned as 'meddling' in the economic chain of demand and supply now is sought after.
It pays to note that only in adversity does new thinking and bold innovations truly stand out. In 1991, when India was going through one of its worst economic crises and there was less than 2 weeks of forex reserves, the country had to pledge gold reserves to secure a loan from the IMF. Those conditions on lending led India down the liberalisation path - one that has paid rich dividends in the past 17 years. In these 17 years, India pulled more people out of poverty than in the previous 45 years.
Now is not the time to blame liberalisation or the economic policies around privatisation and wealth creation. It is easy for politics to get in the way of economics. But it is not easy for it to get out.

He who cannot practise, preaches...

The US is envied for congregating the best brains and the best infrastructure in one place. Nowhere else does one see the number of elite business schools, economic models around free markets, pundits and consultants offering every kind of advice to the world, an educated electorate and a mature media.

Given all this, it is certainly surprising how none of these helped predict or soften the current economic woe sweeping the country and the world. While the rational model preached living within one's means and investing for the future, the country as a whole lived for the present and ran up huge debts. It seems like there were no lessons learnt from the dot com boom in the 1990s - where lofty ambitions and greed led to sanity being thrown out of the window when it came to economic prudence. The recent housing and financial market collapse suggest that memories are indeed very, very short. A growth engine built on just hope and promise can only go so high and when reality sets in, it seems to drag even more people down.
It has always been fashionable for many a developing country - including India - to consult an American pundit in managing the former's economy. It certainly must be a pretty sobering experience now.