Mumbai: Five years after the Lehman Brothers’ collapse, the Dow Jones Industrial Average has scaled record highs, while the S&P BSE Sensex is still well below the peak it reached in January 2008. Stock markets in the US, the epicentre of the financial crisis, have done rather well out of it. Emerging markets, which had nothing to do with either the housing bust in the US or the baroque financial structures that came crashing down, have done much worse than US markets.
That’s not all. Five years after the crisis, the once heady growth rates of the emerging economies have plunged. India’s gross domestic product growth rate has come down from over 9% to less than 5%. China’s growth, too, has fallen. The latest purchasing managers’ indices show optimism in the developed countries and gloom in emerging economies.
These trends, so contrary to what was expected when the crisis broke out, have busted quite a few myths and demolished many smug assumptions. Here are a few of them:
The myth that emerging markets would decouple
This fond hope was destroyed early in the crisis, when emerging markets fell harder than markets in the developed world. The simple reason: they had gone up much more during the boom and the carnage in the developed markets led to indiscriminate selling by desperate investors. The decoupling thesis got its second wind when the governments of developing nations stoked economic growth through stimulus programmes and ultra-easy money policies in the West saw funds sweep back to emerging markets. Now that the promise of unlimited cheap money is ending and the West is getting back on its feet, emerging markets are again facing outflows. The fact of the matter: emerging markets are sorely dependent on policy in the developed world.
The myth of the BRICS: from BRICS to BIITS
The boom years of 2003-07 were the heydays of the BRICS economies, which were sold to investors as the future world leaders. The countries had little in common with each other, a fact that has become prominent with the recent fall from grace of emerging market currencies. An International Monetary Fund background paper, prepared for the recent G20 summit, talks instead of a new grouping of vulnerable economies with large current account deficits. These are Brazil, India, Indonesia, Turkey and South Africa, or BIITS. This new group includes the three BRICS members that have current account deficits, while excluding the two—China and Russia—that have current account surpluses.
The myth of US decline
This is a thesis that was playing out even before the financial crisis. What the crisis proved was that, when the chips are down, the US is the only safe haven. Funds flow back to the US after every scare in the global markets. A wobble in China, sabre-rattling in the Middle East, a threat in Europe and funds rush back to the safety of the US. The central role of the US dollar and of the US government as the underwriter of the global economic system has been amply illustrated by the crisis. It is the linchpin of a global economy. New shale gas finds have strengthened the US economy. US companies are in robust health. In short, reports of the demise of the US economy as a result of the financial crisis are greatly exaggerated.
The myth that Main Street would trump Wall Street
The dream that international finance, with its toxic derivatives, would be reined in and the pride of place go back to the real economy is in no danger of coming true. Immediately after the crisis erupted, there was a rash of analyses about how the Western economies had been captured by high finance, which had grown like a parasite upon the real economy. Well, five years after the crisis, Wall Street is booming, while Main Street is whimpering. What kind of a recovery is taking shape in the US, where millions of people have given up searching for a job? The simple truth is that finance is the glue that holds the global economy together.
The Anglo-Saxon economies, in particular, have prospered on the basis of a competitive advantage in finance. Sure, there has been an attempt made to make banks more stable through new capitalization norms drawn up at Basel, but that is unlikely to be enough to prevent the next bubble.
What then has been changed by the global financial crisis? It isn’t the US economy, because the great hope there is that the wealth effect will make people consume more and that will lead to a recovery. It isn’t the Chinese economy, where a recovery is being attempted on the back of higher investment spending and exports. It isn’t in Europe, where loose monetary policy has papered over the cracks and the fundamental tensions underlying the euro haven’t been addressed.
It isn’t in India, where there have been few attempts to effect structural change. Whatever happened to the need to redress global current account imbalances? Is the global economy going to lurch from crisis to crisis as it has done since the 1990s, with bubbles in between? Is it going to be business as usual then till the next crisis?