Re-thinking Public Subsidies, Institutional Architecture, Policy Commitment on Government Expenditure - the way forward in Economic Crisis

By : Amit Bhushan; Date: May 2012 Contact: amitbhushan@rediffmail.com

The Global economy is in a state of flux. Hitherto, the biggest power engines i.e. the United States, the European Union, Japan, along with most of the Developed World seem to be caught in the brink. The European Union with United Kingdom seems to be on Roller-coaster swinging between possible declines and just about managing to avoid the Recession i.e. if at all. With competition for commodities hot-ting up amongst new consumers such as China, India and this includes even newly rich commodity economies (for other than domestic surplus commodity)for the Primary resources; the commodity prices reflect no signs of ebbing. The companies in the developed world are being constantly challenged to find ways to manage cost of operations, especially in order to fend the Chinese competition and to arrange market access akin to the new consumer nations from Asia. The small countries are now able to bargain for a market for their produce and their companies. The firms in US are now aggressively looking at new markets irrespective of their size in the process to be able to sustain them. In the process new trade systems and policies are being evolved. There is also frequent demand for Long Credit periods at competitive rates as offered by the Chinese for buying goodies from the West. The corporate from Europe are relatively smaller and are unable to adjust to the new paradigm easily. The smaller companies have little political mileage to reciprocate the demand of developing countries for market accesses, or have so much power to develop or nurture valued capabilities in the developing economies, especially at China price. The results are being witnessed in smaller countries of the European Union currently that are no longer able to pursue business interests of their companies and are gripped with this challenge, currently. This is because the smaller business entities in Europe are finding it extremely difficult to adjust to the new competitive dynamics and the smaller countries have little room for maneuvering to help their businesses to find markets. Further, these economies are unable to unable to adjust as a Monetary Union has taken away operational flexibility away from the government of these countries to reduce the value of the currency as a mechanism of adjustment. Reducing salaries of the public/employees is not and easy option and this would result in implications not only on consumption but also on direct and indirect tax mobilization. The job of the governments of these countries is further complicated by the fact, as due to peer pressure these countries have expenditure commitment on child welfare, elderly care, education, health, farm subsidies, etc. akin to other larger neighbor, but with smaller and less resourceful institutional support to push their business interests, they find their demand for their produce and thus their revenues have declined. Thus, they are now troubled with high cost support mechanism for their population with declining revenues, which was not a paradigm envisaged by these governments. The emerging models being suggested to European troubled economies are complicated and their overall impact is unknown. As the demand from the West ebbs, the companies from developing world are going to increasingly sanguine about markets in other developing countries. This would result in demand for institutions is developing world to be more sensitive towards needs of other developed countries, envisage and evolve a balanced trade model to

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take care of the business interests and develop trade and credit support mechanism that is deemed as Fair by the trading entities of the countries involved with such trade. The bankers, insurers, entrepreneurs, logistics providers and arbitrators from the developing world would need to get together more frequently to evolve such models as the West, which was abrogated this job previously, is no longer deemed to be capable of performing such a role in a fair manner. Also, in the present circumstances, the cost of such Western intervention seems to be too high as the new breed of developing countries never got the right price for their commodities from the West. While it is increasingly clear that the world is moving to an era of Free for all in terms of trade, the good part seems to be that it is not being skeptical about the need or benefits of Free trade (with the exception of some of the ideologues from West). The developing world is witnessing a new kind of entrepreneurial politics in which industrial lobbies are becoming increasingly active in legal and policy making apparatus and their impact is visible at the highest echelons of government. The receding of Human Value and pre-occupation with Economic Value is among the hallmark of the age, today. The political structures are increasingly being hijacked and manipulated to satisfy business interest of a few. Hopefully, with the advent of democracy introduced by the West and enlightened self interest of the common folks in the age of internet, the systems will self correct and heal them. The problem is further confounded as the duplicity of the West has been exposed as their governments have pushed their security interest first followed by commercial interest with human values commanding the last slot while engaging with other sovereigns. This has robbed the West of any moral high standing especially at a time when they are no longer capable of providing much human support to other nations due to their domestic turbulent conditions. The retreat of Western corporate from challenges in say Africa is being watched in amusement, bewilderment, amazement and fascination as per psyche of the witnesses. The developing world institutions, sadly, are not investing much on learning the reasons of failure of the Europe due which this economic shift is taking place. There is ever greater need to understand the Laws, policies and institutional capabilities that propped up the Europeans and allowed them to support their high cost domestic model for so long. Also there is need to explore and understand as to why the value of the investment in these institutions is suddenly depreciating and their policy commitments for expenditure are failing to have desired impact as they did a few years ago. There is further need to research need for evolution of reliable institutional structure to support trade, investments and credit amongst developing countries, so that the dependence on Western markets is reduced and their productivity growth is supported. The institutions in the developing world are scarcely taking a leadership in this role and are currently waiting for the West to heal itself and embark on the leadership again. The split amongst the leadership of developing countries for failing to evolve a South-south trade and credit support mechanism is evident as the leadership in these countries find little room for itself to experiment at an international level due to tough domestic conditions. If the situation in Europe aggravates further, the leadership in the developing countries will be seized to study the opportunities and challenges in other developing countries and evolve some mutually beneficial paradigm to enhance trade, investments and credit relations with one another to avoid negative impact of Europe on their domestic economies. In part, this is because of the lack of presence of domestic industry associations in one another as well as a lack of direct banking and logistics connections with one another. These have not evolved as till a decade ago, due to low value and importance of commodities, there was little value in mutual trade and these countries looked only to the West to seek something valuable with the West acting as a harbinger of fairness, justice and prosperity. Now, the competition for resources has led them to re-evaluate their positions and the enlightment coupled with entrepreneurial politics is reshaping the dynamics of domestic governance in

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some of these countries. The new found money coupled with cheap credit that could be sometimes available, is causing a burst of entrepreneurial activity hitherto unseen and is changing social, cultural and political equations to keep reassessing the fast changing environment is much more than ever before. There is also need to create new financial markets that are more robust and competitive. Till now, Europe played the role of financial intermediary for the rest of the World. Most of the money was invested with its institutions who would further invest this money across the world. This worked largely well for the rest of the world as these institutions were seen as safe and offered fair returns. However, now it has been exposed that in their drive to chase higher returns these institutions have put public money at significant risk that too without explicit consent of investors. While the European governments are currently seized with the repair job for these institutions, they are increasingly getting overwhelmed and are looking for support. The tough economic situation is resulting in skeletons falling from the cup-board one after the other. The political structure, current decision making apparatus as well as the economic haze with no clear end of crisis being in sight for the investors, is causing confusion and anxiety. While investors are flocking back to the US institutions and US dollars, this would be at significantly eroded value coupled with lower returns offering of US institutions. For solace, currently the Europeans have little competition as institutions from the developing countries are yet to prove their mettle. Also, the regulatory structure of most developing countries is far from being able to command trust and respect of international investors as the European system has been able to achieve. Even as the world is seized with tough economic conditions, the debate in most of the developing countries is not yet moving to direction for seeking/evolving new paradigm. Instead it is yet about being able to protect the status quo. This is because of the mutual suspicion amongst the developing countries about the motives and benefits of trade and of evolution of binding trade, investment and credit mechanism. Frequent surfacing of corruption charges among the highest level of leadership, lack of transparency in formulation of laws and policies, unstable political climate and lack of confidence in judiciary as well as in judicial process are amongst the reasons for the same. The risk further aggravates as developing countries while trading amongst themselves want to deviate from established international practices that reduce the bankability for such projects or entities involved with the same. Nonetheless, it is time that the developing countries leadership wakes up from their collective slumber to meet the expanded budgetary expenditure of the governments is already putting pressure on the political leadership to think in this direction. Perhaps it is time for the developing world to explore possibility to move on in spite of conditions in Europe.

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