This week marks the 10th anniversary of the 9/11 attacks by Al Qaeda in the US.
Ten years ago the world was in the midst of the TMT (technology, media, telecom) bust and the consequent cyclical recession when the attacks occurred. The economic response to the attacks was massive liquidity injection by the Alan Greenspan-led Federal Reserve. That monetary easing combined with a laissez faire regulatory philosophy paved the way for a real estate boom that eventually led to a credit bubble of epic proportions and then the massive global credit crisis of 2008.
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Emerging markets were fortunate. They had substantially cleaned up their sovereign balance sheets and their companies had shed the fat during the Asian crisis years from 1997. The monetary easing in the West, combined with reasonable fundamentals, yielded an economic and stock market boom. Reflecting this prosperity, the market in Brazil went up 1,600% from 2003 to 2008. India and China were up 600% during that time.
Geopolitics during this time was defined by the President George W. Bush phrase “you are either with us or against us”. Many countries (some voluntarily, others without much choice) aligned themselves with the objectives of the US and the UK in the “war against terror”. In much the same way that the years from about 1955 to 1990 defined the Cold War Era, the last decade in my view has been that of the “9/11” regime. A global regime not only has economic, political and strategic implications, but also very direct day-to-day human consequences. It is also not a choice that many countries make: It becomes an imperative under which they have to function.
During the early years of the Cold War, India’s experts, particularly in engineering, were trained in the Soviet Union. In later decades, most of our educated elite pursued their higher education in the US. In the last 10 years, with US visas getting more difficult and local opportunities getting more attractive, many of our students went to the UK, Singapore and Australia and many more have chosen to stay home. Beyond economics, these choices have had human consequences for families—emotional support, care for the elderly and sheer physical distance. Economically, the 9/11 regime resulted in foreign direct investment and foreign institutional investment flows into India that helped build firms, nurture entrepreneurs, and create jobs. On a negative note, terrorist attacks on Indian soil saw a remarkable rise.
The death of Osama bin Laden, the reduction of daily fatalities in Iraq, the revolutions that made up the Arab Spring, the release of Dick Cheney’s new and self-reverential autobiography, and most importantly the US’ preoccupation with what the Financial Times columnist Martin Wolf has called the “great contraction”, mark the end of the 9/11 regime.
A new regime is upon us. You could call this regime the “The Great Contraction” or the “Long Malaise” as Joseph Stiglitz does or the “Dull Era” as I prefer to call it. The principal actors in this new drama are the US, the European Union and China. Bit parts are on offer to Switzerland (the franc), gold, India, Brazil and Australia. We are entering a phase in which monetary policy is pushing on a string, fiscal policy is constrained, growth is dull and the improvements in deficits will be disappointing. Gridlock in the US, a broken political structure in Europe, and a stubborn, mercantilist China make for a perfect “duller for longer” recipe.
What can India proactively do to survive this global regime change?
Geopolitics defined the terms of reference for the “9/11” and “Cold War” global regimes. Geoeconomics defines this one. The most important thing that India can do is to eliminate its revenue deficit—this is the difference between the money it takes in as taxes and the money it spends each year on “schemes”. As with any arithmetic subtraction, the revenue deficit will be eliminated if revenues rise and/or expenses reduce. We have done a few things right such as eliminating the petrol subsidy. But we continue to do many things wrong including adding new schemes each year that are populist. We will have to undertake strong economic reforms, particularly on the supply side of food and infrastructure. These reforms, while initially painful, will result in the cushion we will so badly need should the “Dull” global regime impose severe costs as it rolls on through this decade. The economic reforms of the early 1990s and the serendipitous economic effects of the 9/11 era brought us through to about 2008. India weathered the 2008 crisis, partly because we had an accidental fiscal stimulus in place, which worked in counter-cyclical fashion. But all the unexpected (and unplanned) positives have now receded.
We have one year before we enter another election cycle in India. The time to start on reform is now.
PS: The world looks quite different from what Francis Fukuyama predicted in the “The End of History”. Capitalism, pan-Islamism and liberalism are each fighting demons of their own.
Narayan Ramachandran is an investor and entrepreneur based in Bangalore. He writes on the interaction between society, government and markets. Comments are welcome at firstname.lastname@example.org