Hyderabad: In 2013, the city of Detroit filed for bankruptcy, as it had to make tough choices between servicing its pensioners or its debt, keeping its museums open or its police force intact.
In 2015, RBI governor Raghuram Rajan feels the developed economies may have to take “similar difficult decisions” as the global economy still remains weak. “There is a palpable sense of gloom in the developed world, a feeling that growth is unlikely to take off in the foreseeable future. If secular stagnation persists, these countries will have to undertake painful structural reforms, figure out how to restructure their promises (debts, social-security commitments, and pledges to keep taxes low), and distribute the resulting burden,” Dr Rajan wrote in Project Syndicate.
He, however, feels that the world’s economic outlook could take a turn for the better. “The US may become the world’s engine of growth. Declining oil prices could provide a major boost, especially to oil-importing developed economies. Technological advances could still come to the rescue.”
Dr Rajan advised policymakers “to understand the factors underlying the global economy’s anemic performance and the implications of continued feebleness”. Analysing the impact of slow growth in the developed economies on the emerging markets, Dr Rajan said that the slow growth in the advanced economies has shut down a traditional development path: export-led growth. “As a result, emerging markets have had to rely once again on domestic demand. This is always a difficult task, given the temptation to over-stimulate.”
In a comment that should caution Indian policy makers, Dr Rajan said that the abundance of liquidity sloshing around the world - the result of developed countries’ ultra-accommodative monetary policies has made the task more difficult still as the smallest sign of growth in an emerging economy can attract foreign capital.
“If not properly managed, these flows can precipitate a credit and asset-price boom and drive up exchange rates. When developed-country monetary policies are eventually tightened, some of the capital is likely to depart. Emerging markets will have to ensure that they are not vulnerable,” he explained.
