Extend,dont just expand

Stimulus packages wont work if they dont increase market depth

Not long before the traumatic events that rocked the global and national economies across the world,the last decade had witnessed the growing integration of national economies in an increasingly globalised world,bringing in its wake promises of prosperity and hopes for a better world. There is now an increasing sense that the party might be over,unless urgent solutions are found. The atmosphere has changed to one of tremendous uncertainty and anxiety,as the crisis has swept not merely the financial world but also,in recent weeks,the real economy,spanning almost all sectors and segments.

So what is it that can and should be done to stop the free fall? Economists and policy-makers worldwide have been trying to outdo each other in prescribing monetary policy and fiscal policy measures to quick fix the global economy,and provide what appears to be both monetarist and Keynesian solutions.

Notwithstanding the slew of monetary policy measures,reports indicate that banks are lending even less,not more. Gordon Browns plan to rescue British banks a couple of months back,slowed a growing crisis of confidence,but less than two months later,it is being criticised for having failed the credit markets; and a second stage of the banking rescue is being worked out. On the fiscal stimuli front,one of the latest prescriptions for the US economy has been that of economist Jeffrey Garten of Yale who has prescribed a big bang global bail-out that is even bigger than what we have seen so far,one that puts governments in front of the contagion rather than always one step behind,and that is large and sweeping enough to restore confidence.

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All of this seems akin to prescribing larger and larger doses of the same medicine,on finding that it does not work!

Demand failures have to be reversed not merely by expansionary monetary policies and larger fiscal stimuli packages but also by working out the contents of these carefully. The contents depend on context: here one of inadequate demand for credit and products of banks and financial institutions,just as for consumer goods and goods of retail. This problem of inadequate demand has to be looked at in the overall context of the nature of the growth which occurred in the last decade or so.

The growth in the last couple of decades in most economies took place against the backdrop of an unprecedented pace of global integration. Integration has,however,been largely unequal,both across economies and within individual economies. While this is inevitable to some extent in a free market economy,which we have all learnt to value,this in turn contributes to demand failures. This is so because while the relatively better-off sections of the population would be willing to consume more even ostentatiously in times of prosperity and good cheer,luxury consumption is certainly passé in times like the present. This creates an automatic brake on overall demand and dampens the effect of both monetary and fiscal policies. There are limits to consumption,just as there are to growth.

So what is it that can keep the party going and the global economy moving? The answer appears to lie in having a party with a larger guest list,not merely a larger cake. In the past,the demand-side problem has been handled by the developed world by expanding markets in emerging economies. This time too,the expansion will have to continue still beyond,to include the hitherto excluded.

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Credit and monetary policy measures will need to target those sections of the population which have hitherto been at the margin. Stepping up credit through micro-finance institutions and other institutions tackling those otherwise not in the system can do what no amount of reduction in SLRs can. It would also be convenient to banks because risk return analyses speak volumes in favour of such lending.

Similarly,design of the fiscal stimuli packages needs to be done in a manner which enables greater inclusiveness of those in the unorganised sectors and in the informal economy. Bringing these sections into the ambit of the fiscal stimulus packages will do to demand what no amount of expansion in of the fiscal stimulus packages can. Extend,and not merely expand,is what seems to be the need of the day.

The writer is in the Indian Administrative Service. These views are personal. expressexpressindia.com