Recession and Nepal Exploring the options

There is a remarkable economic contraction in developed countries for the first time after World War II. In less than a month, IMF has come out with revised projection of the overall economies of developed world to come down to 0.3% from the earlier projection of 0.5%. The shrink in the economies and continued fall in producer and consumer confidence has posed new challenges to global economic players. The emerging, developing and less developed economies have now become the victims of the mistakes that they never committed. The American-led economic mismanagement has cast doubts over the sustainability of the ethics of global financial integration. It is alleged that such integration has transmitted the US viruses around the globe. The indicators show that rich-world recession is inevitable but there is a chance that the catastrophe may be prevented. This is possible only when the countries are capable of sustaining stimulus for a longer period of time.

A cautious approach to moving towards practising a limited extent of capital account convertibility has offered China an opportunity to help rescue the fragile global economy. It is anticipated that the world’s financial institutions are likely to lose US$ 1 trillion because of the current crisis. IMF’s $260 billion reserve is not sufficient enough to rescue the credit crunch in the West. Raising taxes during the slowdown is not a realistic decision either. China has a significant source of glo-bal savings. Currently it has nearly $2 trillion in foreign exchange reserves. The mec-hanism to invest this reserve in the troubled West should be worked out immediately. In the meantime, China should also acknowledge the threat of its rising non-performing assets, where 40% of the industries are loss-making units. Corrective measures at home are needed to rescue markets abroad.

As a result of the global economic crisis, China’s financial markets and exports will be affected inevitably as well. Therefore, it is in China’s interest to contribute significantly to this crisis. Let us hope the proposed November 15 meeting of the world’s top twenty economies in the US will consider the mutually agreeable modality for collaboration to manage and reintegrate the global economy in a real sense. The need is to bring up new global financial architecture. For instance, the 27 leaders within EU have recently endorsed plans for a “pact on immigration”, including an extended Blue Card scheme to balance the supply-side constraints of skilled scientists, engineers, doctors and others.

US president-elect Obama has constituted the 17 members Transition Economic Advisory Board to seek opinion on how to deal with the threat of a deep global recession. Surprisingly, a measure of US manufacturing activity plummeted in October to its lowest level in 26 years. In one month, American companies slashed 240,000 jobs. The recession is global because a few days ago the world’s second biggest reinsurance company, Swiss Re, reported a net loss of £163 million for the third quarter after a drop in the value of credit default swaps. EU governments had to clear a £5.2 billion loan for Hungary to rescue the country’s economy. Australia’s central bank has cut its main rate by bigger-than-expected 75 basis points following a decline in house prices and retail sales. A third of German workers are worried about keeping their jobs. It is anticipated that in advanced countries, recessions associated with house price busts could double the unemployment rate. Japan’s economy has miserably contracted. Although not reported extensively, Canada’s downshift has proved more powerful than expected. The bottom-line is credit crunch. “Deprive a person of oxygen and he will turn blue, collapse and eventually die. Deprive economies of credit and a similar process kicks in” (The Economist, Oct 9, 2008).

The world economy in general faces frightening challenges in sustaining strong economic growth of the past few years. Paul Krugman says, “We are going to have a recession and perhaps a prolonged one but perhaps not a collapse”. However, this pessimism also raises a serious question about the strength of capitalism at a time when there is a cultural shift in the belief in the primacy of markets.

During a real estate boom we can withdraw millions of rupees from our home

equity. The global trend shows housing prices coming down indicating the fact

that keeping the margin will not be possible anymore. The question then is how to

safeguard your anticipated weakening economy? It is advisable to keep as much of cash as possible by eliminating the idea to take loans and buy homes. As debt collection is expected to be hastened, pay off as much of personal and private loans. In Nepal, before the economy is affected by global recessionary virus, those who intend to sell homes/properties

are advised to do it now at a time when the assets command a good price. Lastly, small scale entrepreneurs should avoid investing in new capital.

Pyakuryal is professor of Economics, TU