(An excerpt from the book "Towards a green era" by Patali Champika Ranawaka)
Everyone now agrees that the present global economic crisis is much deeper than the crisis the world had experienced 80 years ago, before the Second World War.
It has been estimated that the bailout package for the whole world will exceed the total cost of the Second World War, including rehabilitation and reconstruction costs involved in the Mac Arthur and the Marshall plans. According to one provisional estimate the total money needed would be around 4 to 8 trillion US$ (Bail out Nation Barey Ritholtz). Some others estimate that it would be over 15 trillion US$. Whatever the estimated cost, we should realize that the total world GDP was around 50 Trillion US$ (2006) and this clearly shows the gravity of the crisis that the world is facing today.
Few questions arise out of this crisis. Could the so-called developed countries (G-20) be able to raise this money without adopting inflationary measures (excessive printing of money) and would they be able to resolve the crisis and achieve long lasting sustainable economic prosperity. Or else, will this crisis lead to a social and political crisis in a way that happened in the 1930s. And will there be a shift in the wealth and power of the world, eliminating old super powers and creating a new world map with a new order. Or, would there be a conscious attempt to address the crisis and resolve it in a responsible manner?
There are few discernible aspects of the present crisis. Firstly, it is a credit crisis. That means individuals and nations have spent lavishly on credit, much more than they earned, postponing repayment to the future. So, logically, there would come a day when the debt has to be paid, failing which the system collapses. That day has come. Secondly, individuals and Finance Companies have invested in high interest - high return businesses which are very difficult to sustain. This type of greed for quick money would cause Finance Companies to stop the high interest payments and even default on repayment of deposits. Panicked depositors would demand their deposits and the particular Finance Companies would not be in a position to meet the demand. Then these Financial Companies will collapse and this would knock out other companies. This trend could cripple the entire financial system.
Thirdly, a market based financial system works not only on physical production of goods and services, but on trust and confidence of the investors and consumers. If there is a public perception that their invested money is not safe, they naturally ask their money to be returned. This leads to a situation where there is no investment and no spending either. This in turn creates non circulation of money on one side and an accumulation of consumer goods which could not be sold on the other. Industries and trading services face a crisis. Unemployment and closing down of factories and shops become the order of the day.
Fourthly, some finance companies which have already collapsed could not be simply salvaged because their assets and liabilities are so big that even nation states or international financial Institutions would not be able to supply the money needed as bailout packages. That kind of situation could lead to bankruptcy of the nation states and collapse of world financial markets.
Fifthly, we see the impact of the huge difference in the labour market in a globalized economy. For example, producing high tech goods involve high costs in so-called industrialized countries. But in other parts of the world these same goods or services could be produced at a very low cost. This could lead to a crisis in the industries in the developed world. This phenomenon is evident in scientific services as well. It creates unemployment within industrialized countries and these countries tend to take protective measures to save their industries, their agriculture and their services, and in so doing they go against the laissez faire approach of free market and globalization which they preached for others to follow. That might be the end of the free market and the process of globalization.
These are the obvious visible impacts of the present crisis. There are others which are not so obvious but which should nevertheless be given due consideration.
Related posts
- Global recession - Blessing in disguise? - Part 2
References
- This article is part 2 of excerpt from chapter 1 of "Towards a green era" by Patali Champika Ranawaka
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