The financial and economic crisis suffered by the world in 2008-2009 was worst than the Great Depression of the 1930s. The global financial crisis occurred close on the heels of a sharp rise in global food and energy prices in 2007 and 2008 and hence had a devastating impact on the poor.
The number of people living in hunger in the world soared to over a billion in 2009, the highest on record. It is estimated that between 47 million and 84 million additional people fell into and were trapped in extreme poverty because of the crisis. The UN “Report on the World Social Situation” (2012) explores the ongoing adverse social consequences of the crisis. The global economic downturn has had wider-ranging negative social consequences for individual communities and societies and its impact on social progress in areas such as education and health will only become fully manifest overtime. The report sounds a note of warning: ‘Given the fragility of the economic recovery and the uneven progress in major economies, social conditions are expected to recover only slowly. The increased levels of poverty, hunger and unemployment will continue to affect billions of people for years to come”.
It is understandable why the severity of the crisis has not received adequate appreciation in India. First, the Indian financial system dominated by the public sector and untainted by the so-called structured credit products remained stable, unaffected by the crisis. Second, in terms of GDP growth there was a slow-down but not a sharp decline. The annual global growth rate declined from about 4% during 2006-2007 to 1.6% in 2008; and further to minus 2% in 2009. Ninety-five countries experienced declines in average per capita income.
In contrast, the deceleration in GDP growth in India was moderate from 8.4% in 2010-11 to 6.5% in 2011-12. The financial crisis originated in developed countries no doubt: but its impact was transmitted to developing countries through international trades, commodity prices, and higher costs of borrowing. This was especially true of those developing countries which were integrated into international markets. In India we are now witnessing its lagged effects. For instance, India’s export growth which had lost momentum in the second half of 2011-12, mainly owing to slow-down in external demand has shown further deterioration in 2012-13. Exports in April-September 2012-13 declined by 6.8% as compared to the level during the corresponding period of 2011-12. There was considerable decline in exports to the Euro area. A more demonstrable case of external sector affecting India’s growth is the risks from the impending US “Fiscal Cliff”. As the RBI puts it. “A major downside risk to global growth is now looming from the US fiscal cliff. The US Congressional Budget office forecasts that the US fiscal deficit will decline by 3.3 percentage points to 4% of GDP in 2013. Such as sharp fiscal consolidation may have a deleterious impact on global growth. There could be an adverse impact of the US fiscal cliff on India’s growth. If global growth slumps there would be spilled over impact on the current account as well…….” It now seems difficult for India to attain even a 5% GDP growth in 2012-13. Thus the full impact of the global financial and economic crisis on the Indian economy is now manifesting itself.
In retrospect a puzzling aspect of the crisis which emerges is: many international organizations were not preparing themselves to face the calamity. Far from it: the crisis came as a surprise for them. The UN Report specifically mentions two conspicuous cases. First, the International Monetary Fund (IMF) which monitors global macrofinancial developments, maintained an optimistic view, and took sometime to realize that the crisis would soon engulf the whole world. “A month before the first tremors of the subprime mortgage crisis in the United States of America were felt, the IMF noted. The strong global expansion is continuing and projections for global growth in both 2007 and 2008 have been revised upwards…………..”
The other example is the Organization for Economic Cooperation and Development (OECD). For instance, three months before the subprime market collapse in August 2007, the OECD took the view that: “the US slowdown was not heralding a period of worldwide economic weakness, unlike for instance in 2001. Rather a “smooth” balancing was to be expected with Europe taking over the baton from the US in driving OECD growth. Our central forecast remains indeed quite benigh: a soft landing in the US, a strong and sustained recovery in Europe, a solid trajectory in Japan and buoyant activity in China and India”. Something is basically wrong in our forecasting tools or techniques and in our ability to interpret economic developments. What are we doing to rectify the shortcomings?
Reverting to social costs of the crisis, the longer term adverse employment consequences are already visible and in many countries youth unemployment has reached alarming levels. Unemployment and underemployment are very high among young people of 15 to 24 years at the end of 2009 there were 79 million unemployed young people and globally the rate of youth unemployment stood at 13%. The September 2010 High-level Plenary Meeting of the 65th session of the General Assembly on the Millennium Development Goals called attention to the critical importance of productive employment and decent work as a means to achieve the goals. Promoting a job-rich recovery will lay the foundation for realising the goal of sustained, inclusive and equitable economic growth.
The devastating impact of the crisis on such a large number of people underscores the importance of social protection for reducing the vulnerability of the poor. In fact social protection should not be viewed as a temporary measure to cushion the impact of the crisis but rather as an ongoing investment to promote sustained, inclusive and equitable economic growth.
The report has an important message for those developing countries like India which do not have universal formal social protection schemes: The disconnect between economic policies and their social consequences can create a vicious circle of slow growth and poor social progress. In India we need to take a fresh look at the present clamour for doing away with food subsidies or the critics of the National Rural Employment Guarantee Scheme (NREGA). Both of these measures serve an important social purpose.