Tuesday, 6 January 2015

Global Crisis, Recession and Recovery by Dr. Y.V. Reddy / Orient Blackswan

From - Reviews, Vol I, Issue II
“Global Crisis, Recession and Uneven Recovery” by Dr. Y.V Reddy, is written at a time when Indian economy is facing several challenges in terms of slowdown in growth rate and increasing fiscal and current account deficits as well as at a period when rate of inflation is going through hike. 

Today the crisis is over and recovery has begun, but in a different way at different places. No doubt, the crisis has affected almost all nations, but in distinct degrees. The book contains the writer’s thread bare analysis of facts in a simple and lucid manner, which is appreciable. 

The book contains five sections, in which there are 27 chapters. The sections relate to global financial crisis and its impact on financial sectors, government policy, Indian economic performance and prospects etc. While the first section of the book contains six chapters which gives a vivid account of the financial crisis and its effects and consequences. In the first chapter the writer deals with the role played by the central banks during and after the crisis. He makes it clear that the crisis will have to be shared between the central bank, ministry of Finance, and to some extent, the Government as a whole. The author writes about the consequences of the crisis, viz., rebalancing power between the regulator and the regulated, shift in balance in favour of Asia, rise of G-20 on the global platform and a cautious approach towards self-correcting efficiency of markets etc. The causes of global financial crisis are discussed in detail, which makes many doubts of the readers clear. 

Second section of the book focuses on the failure of financial sector with remarks about uncertain recovery as well as the prospects of future. Highlighting the role of financial regulation in developing countries, the author pin points that the causes and cross border transmission of the crisis may differ significantly between developed nations and between developing economies. There is an exclusive chapter on countercyclical policies adopted by the Reserve Bank of India in financial sector. It also highlights the proposal for financial sector regulatory reforms from the viewpoint of developing nations. The author writes about the future of globalization of finance as well as the global regulation of financial sector. The last chapter of this section points out the broad framework for global financial regulation.

The third section deals with the challenges and responses of public policy that emerged during the current global crisis. Dr Reddy, former governor of RBI, has pointed out the feasibility of Tobin Tax and Financial Sector taxation in view of current crisis. He has thrown some light on the developmental dimension of the financial implications as well as fiscal implications of the global crisis. He also highlights the macroeconomic frameworks that are emerging for ensuring overall global financial stability.

The fourth section deals with the concerns of the modern economic scenario especially the financial giant like the World Bank, International Monetary Fund, as well as World Trade Organization. The author has dealt with the recommendations of UN Commission on the global crisis. He has also analyzed the G-20 framework and its future prospects.

The last section of the book highlights on India’s performance and prospects. He has pointed out the experience of India in regulating the financial sector as well as the need for reform in Indian financial sector. In another chapter of this section the author compares the Indian situation with that of Asian economy and the world economy in terms of recovery after the crisis. The final chapter which is the concluding section draws attention to the strategies at the global and national level by the financial experts, for bringing up the economic stability and normalcy.

Being a student of economics, after going through this book “Global Crisis, Recession and Uneven Recovery” written by the ex-Governor of RBI, I have gathered three important points: a) Global Crisis, b) recession, and  c) Uneven recovery. I would like to share my understanding of these three aspects in the following basic points:

The causes and consequences of Global Crisis: - A number of reasons have been mentioned for the crisis that are: failure of state, failure of market, failure of policy makers and intellectuals. The author has mentioned that the crisis was originated due to multiple reasons that reinforced each other. Extensive excesses on several fronts which have occurred in a synchronized manner and ultimately precipitated the crisis. In words of the author, “the excesses were observed in industrial sector, macroeconomic imbalances, focus on inflation, inequalities, financialisation, risk taking, financial innovation, deregulation, greed, globalization and concentration.”1 These were the basic reasons for global crisis. 

He has pointed out the race to bottom in regulation of financial sector as one of the most crucial reason for the global crisis. He writes, “The excesses in financial sector occurred under a benign public policy that believed the costs of regulation to be greater than its benefits. Even the existing regulation was stymied by excessive innovation in finance that aimed to avoid the prescribed regulatory capital and injected complexity to undermine the rules of transparency prescribed by regulators”. 2  

As far as consequences of the global crisis are concerned, the author is of the view that current crisis will result in rebalancing of ideological, institutional and operational functioning of states and markets. He writes, “in recent years, there has been an almost irrefutable presumption in favour of markets and this may be replaced with a refutable presumption in favour of the markets.”3  

The writer calls for redefining the core banking and recommends treatment of commercial banking as a public utility. He mentions, “Universal banking will be de-emphasized and narrow banking will be emphasized. In brief, commercial banking is likely to be closer to public utility than before, and subject to regulations akin to public utilities.” 4  

As regards lesson from the global crisis, the author suggests, “improving transparency and regulatory oversight of hedge funds, credit rating agencies and over the counter (OTC) derivatives should become a priority in the light of the experience from the crisis.”5  Further he writes, “ --- the crisis is global, actions are national, benefits could be selective or universal, but burden in the future may have to be largely borne by the masses who bear no responsibility for the crisis, and those who did not benefit materially from the events that led to the crisis.”6  

Recession: In chapter 6, the writer highlights the Great recession of 2009 in detail. He clarifies the concepts of depression, recession and slowdown. A slowdown is a clear fall of the growth of the economy. It is a short time phenomenon. Recession refers to a sustained decline in the overall economic activity for a period of more than one year, while depression lasts longer than recession and there is a larger decline to business activity. It will have a bad impact on output and employment.

Uneven recovery: If the Great Recession was uneven, so is the recovery, mentioned by the author in chapter 6 page 93. He has pointed out several responses to the crisis at different places in several chapters. He writes in chapter 4, “Initially the response of monetary authorities, followed by fiscal measures, was confined to the US, UK, Switzerland, other European nations and Japan. Later it was realized that it was essential to involve other countries also in globally coordinated actions.”

Dr Reddy has pointed out five possible patterns that could be followed by the countries in their course of recovery. The highly resilient economies may observe rapid recovery from the crisis while less resilient economies would require a longer time to adjust to the new realities and ensure real recovery. While some economies may suffer from high recession before complete recovery, some other countries may prefer taking structural measures over a long period. Hence such countries adopted for slow but positive system of recovery after recession. Some of the nations may adopt a low level of economic activity for longer period and hence such countries suffer from recession for a longer period than other nations of the world.

Comment: Dr Y. V. Reddy’s book is a path breaking analysis of global crisis. But as a student of economics, I have observed that this book was largely concerned with the role of Central Bank in dealing with crisis as well as financial stability of nations. The role of other agencies to deal with the crisis has been ignored by the author. The role of Government has been ignored to some extent. However it is worth reading for students, teachers as well as the policy makers who are interested in having a complete idea of the global crisis.

1.       page 46, chapter-3
2.       page 59, chapter-4
3.       page 28, chapter-1
4.       page-78, chapter-5
5.       page-172, chapter-12
6.       page-63, chapter-4
Reviewed by Dr. S. K. L. Das
Head/ Department of Economics, P.K.Roy Memorial College, Dhanbad Jharkhand

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