The world economy is reverting to Economic Depression- like situation: Rajan

raghuram_rajan_1Raghuram Rajan, the Reserve Bank of India governor, during his conference at London Business School, expressed concerns over the world economy reverting to the situation of Great Economic Depression of 1929. He asked the central banks around the world to define the rules of the game to find a solution to the grave situation which is expected to come up in the near future. Rajan who was among the few to predict the financial crisis of 2008, emphasized on the fact that the issue is much broader than anticipated, not just restricted to industrial countries or emerging markets. He basically pointed out towards the monetary policy easing strategy adopted by many developed countries which is quite too similar to the situation prior to the Great Economic Depression which is considered to be the longest and the most widespread period of economic depression. The central banks of many countries have a tendency to slip into the beggar-thy-neighbour strategies in order to boost to their slowing economies. The central banks have failed to realize that their international responsibilities supersede their domestic interests rather than the other way round. He also elucidated the current scenario by saying “ the question is are we now moving into the territory in trying to produce growth out of nowhere, we are in fact shifting growth from each other, rather than creating growth”. He had warned earlier regarding the ill-effects of the expansionary policies of the central banks. The expansionary policies work to increase exports and reduce the dependence on imports. This was done primarily by devaluing currencies as a key to boost economic development of the country. Perhaps, he may be referring to the Euro’s decline in value or the Japanese Yen which has seen a great drop in its value with the Prime Minister Shinzo Abe coming to power. He is also critical of the impact of the world scenario on developing economies particularly India. In respect of the Indian perspective, he said that the situation is very much different in India where the central bank has yet to lower the interest rates to spur investments. He, being RBI governor, has put in efforts to try to shut the market reactions but the future impact is a degree of concern to him.
Apart from this, he also talks about unidirectional capital outflows and criticizes the extensive quantitative easing announced by European central bank and Bank of Japan. The unilateral exchange rate intervention is weakening the recipient’s financial stability.
However, RBI clarified recently that RaghuramRajan did not imply the risk of the great Economic Depression resurfacing but only pointed as the situation was caused by many factors apart from the steps the central banks are undertaking to boost growth.
He therefore, highlights the need of the” rule of game” and the requirement to debate what are the powers of the central banks in influencing the world economy. He also concluded that there is a high need of increasing the role of multilateral institutions like International Monetary Fund (IMF) to re-examine the “rule of the game” for responsible policy. IMF should also analyze the unconventional monetary policy and declare them in-or out-of-bounds. – (Rajan did not make alarmist remarks-RBI, The Hindu, 29 June 2015)

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