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From the
February 2002 issue of
World Press Review
(VOL. 49, No. 2)
The
Global Economy
A “Synchronized”
Recession
Jairam
Ramesh, India Today (weekly newsmagazine), New Delhi,
Nov. 26, 2001
The world economy
is passing through very turbulent times. But there are some
silver linings—a new round of trade liberalization is to
be launched. Inflation is low, interest rates are declining,
many budgets are in balance, equity markets are showing signs
of hope, oil prices are depressed, exchange rate regimes are
becoming more flexible, and, barring Argentina, emerging market
volatility appears to be in check. But all these are overshadowed
by the dark clouds of recession.
Technically, a national recession is defined as two consecutive
quarters (six months) of declining economic output as measured
by inflation-adjusted (real) Gross Domestic Product (GDP). There
is no accepted definition of a world recession, since some countries
can be in recession while others could be growing and, overall,
the world economy could show positive growth rates. That is
what is happening now with the United States, Japan, and Europe
dragging world growth rates down, and China, India, and Russia
pushing them up. On balance, the world economy may still show
a positive 1- to 2-percent growth in calendar years 2001 and
2002, a growth performance previously seen in 1975, 1982, and
1991.
The last time the world economy was in recession in the sense
of negative growth was in the depression-hit 1930s. A more accurate
description of what is happening in the world now is a “synchronized
downturn” in the Big Three—the United States, Japan,
and Europe—and a growth recession in the global economy.
Actually, Japan has been a write-off for the past decade. So
what we have to worry about are the other two, especially the
United States, which is the engine of world growth. It will
be a time before China replaces Europe and Japan as the rear
engine.
A recent International Monetary Fund paper, “The Impact
of U.S. Economic Growth on the Rest of the World: How Does It
Matter?,” quantifies the U.S. role. In 2000, U.S. GDP was
equivalent to about a third of world GDP, measured at market
exchange rates. The United States accounted for nearly a quarter
of the expansion during 1992-2000.
However, this analysis captures only part of the overall impact
on growth, since it is confined to merchandise trade. Investment
and capital flows, stock market performance, and business confidence
and sentiment is not included. Even so, countries like Canada,
Mexico, Malaysia, Singapore, and South Korea are crucially dependent
on U.S. growth. India is much less so since its overall exposure
to the United States is around 4 percent of GDP.
In the third quarter of 2001, U.S. real GDP registered a decline
of 0.4 percent, and it is widely expected to repeat this performance
during October-December 2001 as well, confirming that it is
indeed in a recession after a decade of unprecedented expansion.
GDP data are available only quarterly and continually revised.
That is why the Cambridge, Mass.-based National Bureau of Economic
Research, which tracks business cycles, looks at monthly indicators,
especially on unemployment. By this measure, the United States
is already in a recession. In October alone, it lost about 415,000
jobs, although that month’s joblessness rate of 5.4 percent
was the same as the figure registered in December 1996.
Why is America in recession? Sept. 11 is not the cause. The
real reason is the overinvestment and overborrowing spree of
the 1990s. Unrealistic forecasts of productivity growth created
an atmosphere of “irrational exuberance.” In a way,
therefore, the current slowdown is a welcome corrective to the
excesses of the 1990s.
The expectation of most analysts is that the U.S. economy will
show signs of recovery by the second half of 2002. The Bush
administration will use both fiscal and monetary policy aggressively
to ensure that this indeed happens, although its predilection
for tax cuts instead of public spending could blunt the stimulus
package.
There are two other worries. First, the volume of international
trade is not expected to grow in the next year. This could intensify
the effect of a recession. Second, when real GDP and inflation
are falling, as now, nominal GDP growth plummets. This increases
fears of deflation.
In his book The Return of Depression Economics, Paul Krugman
wrote that while the world economy may not be in a depression,
depression economics has staged a stunning comeback. For India,
while we need to be concerned about the global economy, it is
not disaster or devastation time. Of course, the world slowdown
will be used by the government as an alibi for our growth deceleration. 
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