Much of 2008 was marked by a speculation about which big company was to fail next! After the Bear Sterns rescue, people started guessing who was next to disappear - through failure or takeover. Citi, UBS, AIG, Lehman, Merrill were all in the fray. Finally Lehman went bankrupt and Merrill was acquired while the rest survived to see another day. As the fears of a catastrophic global meltdown receded, a certain optimism justifiably took root amongst investors. Not too long though! As Euro area problems boiled over through the PIIGS and a few others, a new specter has started to hang over the global economy - sovereign defaults.
In short sovereign defaults are failures of a government to repay its debt obligations. It is not new to the modern global economy. Argentina defaulted in the 90s, several smaller countries defaulted through second half of 20th century and so on. However it is probably the first time since second world war that some of the developed economies are the candidates for default - in this case most notably Greece and Portugal and to a lesser extent Spain, Italy and Ireland.
Sovereign defaults are imminent when the government of a country runs into debt trap - a state of affairs when one needs to keep borrowing ever increasing debts to simply keep repaying the earlier ones. The obvious reason this starts to happen is because the governments in question spend more than they earn - leading to budget deficits. But then that is the modus operandi of most governments in the present world. Why the sudden change of fortunes? The problems arise when the deficits grow too large for the government's current and expected income as well as when the interest payments go up as the investors in that government's debt start demanding a higher interest rate on their lending. Unfortunately most often these two trends coincide. Investors start to get wary of spendthrift governments - especially those with economies growing slowly or not at all. The increase interest payments on the debt then pushes these governments to start borrowing more, which further unnerves the investors and the cycle continues. Often it is broken in its early stages by belt tightening by government thereby reducing actual deficits as well as by creating more faith amongst investors - thus reducing interest payments on further borrowings.
Will Greece default? Will any of the other PIIGS default? The likelihood of Greece defaulting is low but not insignificant. The likelihood of any others defaulting is indeed quite low. Greece is a much more classic case than the rest, of a government spending too much for its own good with the hope that the buoyant global economy of the pre-2007 era would keep its problems under control. Thus the crisis hit it the hardest. The others are better managed in comparison - though no models of austerity!
While the world worries about the spendthrift governments in southern Europe, there are voices of concern over a frugal Germany as well! It might almost sound contradictory to see experts crow over over-spending and under-spending at the same time for countries in the same monetary union. There is some merit to it, but there are deeper questions raised about the structure of global economy in the process. The rabit-hole may indeed go much deeper, but more on that later!
Wednesday, July 21, 2010
Sunday, July 13, 2008
The society defining forces
Several things have shaped human societies over time. There have been a few regular themes and then a few which came and went. What we need to understand from here on is which are the drivers now and how do we manage them for a better tomorrow.
In the past religion, natural resources and land have been almost constant drivers of social structure and restructuring. Periodically there have been special themes. The racial anger before WWII or industrial revolution in 19th century imperialism or the outcry against imperialism in 20th century or the rise of nationalism in western world political revolutions in 17th and 18th centuries.
The social structure is built and altered by some of these inherent forces as also some upheavals like war, disease or large scale migration. In the modern times, the drivers shaping us have been predominantly emergence of a new global military order, fossil fuels, international mobility of capital/goods/labor, religion and finally technology.
How the society will evolve from here with the pushes and pulls of these factors is not an easy thing to imagine. Harder still is an attempt to shepherd the course of events in the desired direction - if at all we know what that is.
One of the trends emerging in recent times is the reestablishment of population as a driving force of prosperity. Before the industrial revolution, GDP was almost linearly linked to the number of people a region had. That in turn was driven by resources, rivers and trade along with government spending on massive projects. Post industrial revolution, mass manufacturing enabled the societies with fewer people to catch up and leave behind those with more people. With an edge in military technology of the western powers imperialism followed. Long after the dark age experienced by the colonies is over, these economies are still reeling under the impoverishment suffered during the colonization.
Slowly the things are coming a full circle though. Technology improved so much more in the interim that the mass manufacturing became commoditized, the western world itself is trying to move up the value chain into services economies and outsourcing manufacturing to cheaper locations. Once again population is coming back to the centre of economic activity. The demographic dividends that the populous countries are looking to reap is an evidence of that. As for the western economies, the declining population has started to ring alarm bells leading to all sorts of desperate efforts to get women to have children. The worry is very real.
Where are we headed from here. For more than 3-4 decades the populous countries will probably continue to play catch up on the standards of living of the west. However, post that the populous countries will appear lot mightier than the sparse west. Just as Europe went to the sidestage of the global arena to make way for US, the western world will make way for the populous countries. Once again the world will look more balanced - more prosperous than it was in 1st century, but with pretty much the same relative relevance of various regions.
As an Indian, I am not worried whether India will grow big mighty and prosperous. I would however, like to ensure that the process is smooth and does not encounter the special obstacles of the prevalent times. To do so, the most crucial three things are ensuring access to credit, education and healthcare to the near poverty line people of the country. Else much of the demographic dividend could turn into demographic liability.
In the past religion, natural resources and land have been almost constant drivers of social structure and restructuring. Periodically there have been special themes. The racial anger before WWII or industrial revolution in 19th century imperialism or the outcry against imperialism in 20th century or the rise of nationalism in western world political revolutions in 17th and 18th centuries.
The social structure is built and altered by some of these inherent forces as also some upheavals like war, disease or large scale migration. In the modern times, the drivers shaping us have been predominantly emergence of a new global military order, fossil fuels, international mobility of capital/goods/labor, religion and finally technology.
How the society will evolve from here with the pushes and pulls of these factors is not an easy thing to imagine. Harder still is an attempt to shepherd the course of events in the desired direction - if at all we know what that is.
One of the trends emerging in recent times is the reestablishment of population as a driving force of prosperity. Before the industrial revolution, GDP was almost linearly linked to the number of people a region had. That in turn was driven by resources, rivers and trade along with government spending on massive projects. Post industrial revolution, mass manufacturing enabled the societies with fewer people to catch up and leave behind those with more people. With an edge in military technology of the western powers imperialism followed. Long after the dark age experienced by the colonies is over, these economies are still reeling under the impoverishment suffered during the colonization.
Slowly the things are coming a full circle though. Technology improved so much more in the interim that the mass manufacturing became commoditized, the western world itself is trying to move up the value chain into services economies and outsourcing manufacturing to cheaper locations. Once again population is coming back to the centre of economic activity. The demographic dividends that the populous countries are looking to reap is an evidence of that. As for the western economies, the declining population has started to ring alarm bells leading to all sorts of desperate efforts to get women to have children. The worry is very real.
Where are we headed from here. For more than 3-4 decades the populous countries will probably continue to play catch up on the standards of living of the west. However, post that the populous countries will appear lot mightier than the sparse west. Just as Europe went to the sidestage of the global arena to make way for US, the western world will make way for the populous countries. Once again the world will look more balanced - more prosperous than it was in 1st century, but with pretty much the same relative relevance of various regions.
As an Indian, I am not worried whether India will grow big mighty and prosperous. I would however, like to ensure that the process is smooth and does not encounter the special obstacles of the prevalent times. To do so, the most crucial three things are ensuring access to credit, education and healthcare to the near poverty line people of the country. Else much of the demographic dividend could turn into demographic liability.
Sunday, March 09, 2008
Sone ki chidiya - the less understood part of our past glory
Indians have only now started coming out of a defeatist mentality of living in the past glory of indian civilization. Today's indian is confident - and often wants to mingle with the whole world and pick what is best - including things at odds with the traditions.
That is of course a very healthy thing. Contrary to popular oldies' cries, the typical indian youth has maintained her interest and pride in indian culture while embracing new ideas from west or east. What i would want to focus upon in this article is the fact that not many indians (including the oldies) are aware of the phenomenal economic might of the indian subcontinent throughout most of the known history of human civilization. We often take great pride in our culture - almost always in a apologist attitude that we dont have money but we have values. What i am saying is that throughout most of the human history, we had values alright, but we had money as well; and tons of it!
Watch out for the following numbers.
Share of Indian GDP in global GDP was as follows
1st Century - 33%
10 century - 30%
15 century - 25%
16th century - 25%
17th century - 25%
18th century - 18%
19th century - 12%
1920 - 8%
1950 - 4%
2000 - 5%
2008 - 8%
Where does that leave us? We missed out briefly on the industrial revolution and got left behind and ruled over for ~200 years; taking away our lead for a couple of centuries. That aside, we were always the most prosperous part of the world. We are again set to be so. If you leave out 19th and 20th Centuries, India pretty much is the centre of the world.
And it looks all set to be in the decades to come. We always led the world economically, spiritually, intellectually. We will need to continue doing that in the decades to come. The world anyways looks lost without a sensible leader.
What we are growing into is not a miracle or a emerging economy doing well - it is our rightful position under the sun.
WE ARE THE WORLD!!!
That is of course a very healthy thing. Contrary to popular oldies' cries, the typical indian youth has maintained her interest and pride in indian culture while embracing new ideas from west or east. What i would want to focus upon in this article is the fact that not many indians (including the oldies) are aware of the phenomenal economic might of the indian subcontinent throughout most of the known history of human civilization. We often take great pride in our culture - almost always in a apologist attitude that we dont have money but we have values. What i am saying is that throughout most of the human history, we had values alright, but we had money as well; and tons of it!
Watch out for the following numbers.
Share of Indian GDP in global GDP was as follows
1st Century - 33%
10 century - 30%
15 century - 25%
16th century - 25%
17th century - 25%
18th century - 18%
19th century - 12%
1920 - 8%
1950 - 4%
2000 - 5%
2008 - 8%
Where does that leave us? We missed out briefly on the industrial revolution and got left behind and ruled over for ~200 years; taking away our lead for a couple of centuries. That aside, we were always the most prosperous part of the world. We are again set to be so. If you leave out 19th and 20th Centuries, India pretty much is the centre of the world.
And it looks all set to be in the decades to come. We always led the world economically, spiritually, intellectually. We will need to continue doing that in the decades to come. The world anyways looks lost without a sensible leader.
What we are growing into is not a miracle or a emerging economy doing well - it is our rightful position under the sun.
WE ARE THE WORLD!!!
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