In recent times the world economy witnessed the most violent and worst financial upheaval since the Great Depression of 1930s. The current global financial crisis has brought in severe economic turbulence in industrialised nations and there is apprehension of its impact in developing economies. The existing global economic meltdown, a sub-prime mortgage phenomenon, is attributed to fraudulent relationship between investment banks and credit rating agencies originating in the US. In addition, the origin of recent global economic crisis is said to have had deep roots linked up with 9/11 devastation, and Iraq and Afghan wars.

A group of crazy and awfully greedy and immoral economic actors intentionally conspired to amass wealth hastily through asymmetrical investment in real estates violating fundamental economic laws of supply and demand and without working hard to multiply wealth. Prof. Muhammad Unus, Nobel Prize winner in Economics (2007) and popularly known as banker of the poor, lamented: “The crisis was created by a handful of people driven by “extreme greed,” but it is the poor people, the bottom half, 3 billion people, who’ll be hit the hardest through no fault of their own”. The global financial crisis is the syndrome attributed to combined functions of corruption, immorality and “fast-track-arm-chair” approach to monopolise wealth to spur growth by a few super-brains at the cost of billions of hungry in the world.

In an unhealthy race to become billionaires overnight, the so-called super-brains fully disgraced the philosophy of honesty, ethics, morality, value judgments, welfare and emotions while speculating on excessive concentration of enormous wealth in their hands through unfair means. Recession in US and other developed economies is not a new phenomenon. This is a downswing phase of business

cycle coupled with a fall in profit and investment followed by high levels of unemployment and inflation or deflation leading to market failure. A recession is a contraction phase of the business cycle, or “a period of reduced economic activity”.

The effects of global financial crisis are comprised of: firstly, financial contagion and spill-over for stock markets, which have tumbled by more than 40% from their recent highs, and secondly, downturns in developed countries may also create channels of adverse impact on developing countries, which include: rise in unemployment and decline in remittances; fall in FDI and equity investment; commercial lending, investment and capital adequacy ratio

will be under pressure; and aid-budget to be reduced due to debt problems

and weak fiscal positions. In addition, the vulnerable economies may suffer a decline in exports with high cost attributing to devaluation of domestic currency with respect to US dollar, and reduction in tourists inflow resulting in further pressure on current accounts and balance of payments situation. Consequently, lower investment will lead to retarded growth.

The impact of global economic meltdown on developing economies primarily depends on the extent of economic integration with global economies. The higher the level of integration of domestic economy with global economy, greater the adverse impact of economic crisis. To address economic depression, Keynes’ prescription was to sustain aggregate demand by increasing public expenditures. This holds true even today. The US, European Union, Japan, China, India and other emerging economies readily opted for providing huge bail-outs. Alternatively, government may also opt for providing tax incentives by lowering tax rates, and increasing the limits for standard and business personal deductions. A reasonable package of fiscal and monetary stimulus such as tax cuts and reductions in prime lending rates would help an economy move towards speedy recovery.

The OPEC asserted “no to protectionism and yes to liberalisation” during November 2008 summit. However, the latest information reveals that the US may consider the proposal for nationalisation of private banks, if necessary, to avert untoward incidents in the economy. In contrast, Prof. Muhammad Unus remarked optimistically that global economic meltdown would provide opportunities to billions of poor people in the world through establishing and strengthening micro-financing institutions to operate small and medium scale enterprises, where there will be no credit crunch with safe deposit and credit readily available to sustain smooth economic transactions with adequate employment generation in rural areas. Deposits and investments are rarely safe in mega commercial banks and financial institutions during financial crisis. Thus, the role of micro-financing institutions is crucial to fight recession and attain twin objectives of growth and poverty alleviation.

Prof Dahal is President of Nepal Economic Association