Unlike the U.S, most countries that undergo financial crises are not fortunate enough to be able to make the rest of the world pay for their problems.
When the developing countries undergo crisis, bank failures and stock market collapses are compounded by the associated collapse of the currency. As a result, the governments of these countries end up putting up with ill-advice from the International Monetary Fund (IMF) and similar organisations, which insist on ramming more free-market wine down the throats of these economies, hence opening up newer markets for their production. See! Shock doctrine at play!
There is very little doubt, that India, at present is going through one such crisis. While the economists may blame the food security bill for it, it remains the governments responsibility to be a welfare state and not a dalal street darling. While the financial crisis must be tackled, it is interesting as well as important to look at how in less powerful countries they have been managed in the past.
There is very little doubt, that India, at present is going through one such crisis. While the economists may blame the food security bill for it, it remains the governments responsibility to be a welfare state and not a dalal street darling. While the financial crisis must be tackled, it is interesting as well as important to look at how in less powerful countries they have been managed in the past.
Let's take the example of Argentina.
In 2001, the country was struck with one of the severest financial crises to ever hit any developing country. It resulted in heavy decline in output and employment, doubled poverty rates within a year. Such was the political instability, that the country witnessed six government changes in two years. IMF's plan for Argentina was to go in for further privatization of public assets and more deregulation, along with maintaining very high real interest rates, in the hope of restoring investor confidence and once more attracting foreign capital into Argentina. These policies only served to accelerate the economic decline. In fact, by 2002, half of Argentina was living below the official poverty line, and the peso had declined by 70%.
Then, in 2003, Nestor Kirchner came to power. His government, influenced by what Hugo Chavez was doing in Venezuela, stopped pleasing the foreign investors and directed its attention to domestic producers, and general welfare. It enforced a stable and competitive exchange rate to ensure that domestic production revived and grew. The new exchange rate not only encouraged exports but, more importantly, discouraged imports and allowed domestic producers to sell in the home market. This produced a revival of many labor-intensive traditional industries, such as textiles and metal machinery. It also led to the emergence of newer activities, including services such as tourism and IT, which benefited from the cheaper peso.
A number of important firms, which were privatized during the 1990's were re-nationalized. These included the Postal service, Pension funds, Aerolíneas Argentinas, the energy firm YPF, and AySA - the water utility serving Buenos Aires. The government focused on improving the consumption levels of ordinary people and reduction of poverty. The expansionary policies and commodity exports triggered a rebound in GDP, which has since been consistently growing at over 9%, has created more than five million jobs and encouraged domestic consumption.
Such was the bounce back, that the Argentine government proudly took a hard line with it's external creditors, forcing most of them in 2005 to accept a debt write-off agreement. 65% of the value of the country’s outstanding debt were cancelled in one stroke. The recovery was all the more noteworthy because it was based on economic principles very different from the model which the United States has been preaching and drilling down the throats of most developing countries. What more? Argentina, when compared to other Latin American countries, has a moderate to low level of income inequality - which, by the way - is lower than the United States.
During ancient and medieval times, when India and China possessed and controlled more than 80% of the world's wealth, the growth (GDP in modern sense) was less than 1% p.a, but spanned consistently over centuries. It is the unfortunate by-product of modern times that economies rise and fall like pop stars. In the constant tryst with it, governments should take a more holistic approach and not play along. The greater good should never be compromised.
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