Oil has touched a 3-month low and optimists have already passed the verdict that inflation has peaked. Credit rating agency Moody's on Monday said inflation may have peaked in India as is reflected by the latest moderation, even though global investment banker Goldman Sachs raised projection for the rate of price rise by 1.5 per cent to 11.5 per cent for the current fiscal.
Inflation remains at a 13-year high of 11.98 per cent for the week ended July 19. Falling crude prices and slowing down of commodity boom cycle, recovery of US dollar are the other reasons which support the optimists.Global inflationary pressure could undoubtedly subside but the domestic situation may continue to remain bleak. This was reflected in the hawkish stance of the RBI(Reserve Bank of India) at the recent monetary policy review where it raised Repo Rate by 50bps and CRR by 25bps to 9% each.Some might criticise it as a regressive step but the fact remains that inflation fears remain intact.
The inflation numbers can be expected to remain high owing to the what is called the ‘base effect’. Last year the prices had begun to moderate at this point of time. However this time they continue to remain firm .So year-on-year percentage rise in prices will be higher resulting into scary inflation numbers.
Monsoon has been erratic this year. Rainfall has been below average in key areas of Gujarat,Andhra Pradesh and Maharashtra.As a result the cash crops like groundnut could take a severe blow.Groundnut and cotton prices are expected to remain firm.Edible oil prices are already high and poor harvest may not help either.
Steel prices ,a major component of WPI (Wholesale Price Index)calculation in India ,had been kept artificially low.Steel producers had imposed a voluntary three month moratorium on prices on behest of the government.This three month deadline expires in first week of August.As global steel prices remain high domestic hike in steel prices will prevent inflation from heading south.
Globally crude prices are hovering around their 12-week low. Indeed this is good news but fuel prices were already kept low in India. So even if crude oil bubble continues to deflate domestic prices will remain intact.Moreover expecting crude oil prices to slip into double digits and hoping for a subsequent decline in fuel prices at home will be too optimistic. One more bad news from the financial markets or a fresh war of words between Israeli and Iranian governments could see the ‘black gold’ paring with the recent losses.Recent figures reveal that the demand for oil in developed world has been moderating. This is an encouraging development and will undoubtedly benefit the inflation-hit emerging economies.
Market is expecting no further cut in interest rates by US Federal Reserve in August.Even a slight hike by 25bps is a possibility, though a distant one.If this happens then crude oil will lose its appeal as hedge against the weakening dollar and a further decline in prices could be seen.
So one should not read too much into this recent stabilization in inflation.This euphoria may turn out to be a short-lived.Till then pray for a divine intervention in the form a good monsoon. It’s a shame on our policymakers that Indian agriculture is yet to witness a Promethean growth. The entire nation’s economic and monetary policy is held ransom to the performance of south-west monsoon. Everyone in this emerging economic superpower, from the ordinary farmer to the RBI Governor, looks up to the skies for relief!
Saturday, August 2, 2008
Threat to globalization goes intellectual
With American economy witnessing a downturn many economists have begun to point an accusing finger at an unlikely suspect: the free market itself. Peter Gosselin took a note of it in a recent piece in the Los Angeles Times. "The nation and its political leaders," he wrote, "have begun to sour on the notion that the current market system is the key to a fair, stable and efficient society."
Uptil recently America projected itself as the champion of free market. It democracy and free markets were the governing principles of groups like G-8,OECD. The view that markets no longer work, if true, would turn economic thought on its head and be a major intellectual victory for the American left. “Widespread acceptance of that view would have profound implications for the future of market economies and open the door to a massive expansion of government,’’ says influential commentator Kevin Hassett.
The world economy has seen globalisation collapse once already. The gold standard era came to an abrupt end in 1914 and could not be resuscitated after World War I. Are we about to witness a similar global economic breakdown?
Although economic globalisation has enabled unprecedented levels of prosperity in advanced countries and has been a boon to hundreds of millions of poor workers in China and elsewhere in Asia, it rests on shaky pillars. Dani Rodrik of Professor of Political Economy at Harvard University believes that unlike national markets, which tend to be supported by domestic regulatory and political institutions, global markets are only "weakly embedded". There is no global anti-trust authority, no global lender of last resort, no global regulator, no global safety nets, and, of course, no global democracy. In other words, global markets suffer from weak governance, and therefore from weak popular legitimacy.
The presidential electoral campaign in USA has highlighted the fragility of the support for open trade in the world's most powerful nation. The sub-prime mortgage crisis has shown how lack of international coordination and regulation can exacerbate the inherent fragility of financial markets. The rise in food prices has exposed the downside of economic interdependence without global transfer and compensation schemes,believes Rodrik. Meanwhile, rising oil prices have increased transport costs, leading analysts to wonder whether the outsourcing era is coming to an end. And there is always the looming disaster of climate change, which may well be the most serious threat the world has ever faced.
The threat to globalisation is not from communism,dictatorships ,protectionists, trade unionists and protesting youth. Rather it’s the mainstream economists who are questioning globalisation's virtues.This could akin to academic blasphemy in today’s highly intedependent and competitive trade environment.
Paul Samuelson is worried that China's gains in globalisation may well come at the expense of the US. Paul Krugman, today's foremost international trade theorist has argued that trade with low-income countries is no longer too small to have an effect on inequality. Alan Blinder, a former US Federal Reserve vice-chairman, is worried that international outsourcing will cause unprecedented dislocations for the US labour force. Martin Wolf, the Financial Times columnist and one of the most articulate advocates of globalisation, is disappointed with how financial globalisation has turned out.
While these worries hardly amount to the full frontal attack mounted by the likes of Joseph Stiglitz, the Nobel-prize winning economist, they still constitute a remarkable turnaround in the intellectual climate.
Howver this is not to say that globalization has no takers in the intellectual sphere. Jagdish Bhagwati, the distinguished free trader, and Fred Bergsten, the director of the pro-globalisation Peterson Institute for International Economics, have both been on the frontlines arguing that critics vastly exaggerate globalisation's ills and under-appreciate its benefits.
Facts still offer an overwhelming support for the free markets. A wide body of research has developed that demonstrates the empirical relationship between free markets and economic growth. A study by Harvard University economist Robert Barro found that property rights and free markets were the most important institutional elements for promoting economic growth.
Similarly, the Fraser Institute's 2004 Economic Freedom of the World Report documented that the free-market recipe of competition, entrepreneurship and investment activity is the key to fostering economic growth. According to the study: "Countries with more economic freedom attract more investment and achieve greater productivity from their resources. As a result, they grow more rapidly and achieve higher income levels."
Studies also show the negative impact of regulation on growth. Harvard economist Silvia Ardagna and Dartmouth College's Annamaria Lusardi found that tight regulatory environments discourage entrepreneurs who are motivated by new business ideas.
We had the 1973 oil crisis, where prices quadrupled, the 1979 Iranian turmoil, which also devastated oil markets, and the savings-and-loan debacle, where more than 700 banks failed. Even the glorious Reagan revolution was marred by fluctuations: One of the deepest recessions of the postwar period happened during Reagan's first term.
Even with those setbacks, the free-market system won because other approaches didn't merely deliver fluctuations, they delivered constant misery. Free markets helped US win Cold War. Nations from Ireland to Estonia have embraced free-market ideology and seen a historically unprecedented economic transformation believes Kevin Hassett.
Although none of the intellectuals has unleashed an open tirade against globalization its clear that voices of dissent have shifted from streets to the columns of financial press.But the problem is that they are yet to come up with a better substitute-an improved economic model.
Uptil recently America projected itself as the champion of free market. It democracy and free markets were the governing principles of groups like G-8,OECD. The view that markets no longer work, if true, would turn economic thought on its head and be a major intellectual victory for the American left. “Widespread acceptance of that view would have profound implications for the future of market economies and open the door to a massive expansion of government,’’ says influential commentator Kevin Hassett.
The world economy has seen globalisation collapse once already. The gold standard era came to an abrupt end in 1914 and could not be resuscitated after World War I. Are we about to witness a similar global economic breakdown?
Although economic globalisation has enabled unprecedented levels of prosperity in advanced countries and has been a boon to hundreds of millions of poor workers in China and elsewhere in Asia, it rests on shaky pillars. Dani Rodrik of Professor of Political Economy at Harvard University believes that unlike national markets, which tend to be supported by domestic regulatory and political institutions, global markets are only "weakly embedded". There is no global anti-trust authority, no global lender of last resort, no global regulator, no global safety nets, and, of course, no global democracy. In other words, global markets suffer from weak governance, and therefore from weak popular legitimacy.
The presidential electoral campaign in USA has highlighted the fragility of the support for open trade in the world's most powerful nation. The sub-prime mortgage crisis has shown how lack of international coordination and regulation can exacerbate the inherent fragility of financial markets. The rise in food prices has exposed the downside of economic interdependence without global transfer and compensation schemes,believes Rodrik. Meanwhile, rising oil prices have increased transport costs, leading analysts to wonder whether the outsourcing era is coming to an end. And there is always the looming disaster of climate change, which may well be the most serious threat the world has ever faced.
The threat to globalisation is not from communism,dictatorships ,protectionists, trade unionists and protesting youth. Rather it’s the mainstream economists who are questioning globalisation's virtues.This could akin to academic blasphemy in today’s highly intedependent and competitive trade environment.
Paul Samuelson is worried that China's gains in globalisation may well come at the expense of the US. Paul Krugman, today's foremost international trade theorist has argued that trade with low-income countries is no longer too small to have an effect on inequality. Alan Blinder, a former US Federal Reserve vice-chairman, is worried that international outsourcing will cause unprecedented dislocations for the US labour force. Martin Wolf, the Financial Times columnist and one of the most articulate advocates of globalisation, is disappointed with how financial globalisation has turned out.
While these worries hardly amount to the full frontal attack mounted by the likes of Joseph Stiglitz, the Nobel-prize winning economist, they still constitute a remarkable turnaround in the intellectual climate.
Howver this is not to say that globalization has no takers in the intellectual sphere. Jagdish Bhagwati, the distinguished free trader, and Fred Bergsten, the director of the pro-globalisation Peterson Institute for International Economics, have both been on the frontlines arguing that critics vastly exaggerate globalisation's ills and under-appreciate its benefits.
Facts still offer an overwhelming support for the free markets. A wide body of research has developed that demonstrates the empirical relationship between free markets and economic growth. A study by Harvard University economist Robert Barro found that property rights and free markets were the most important institutional elements for promoting economic growth.
Similarly, the Fraser Institute's 2004 Economic Freedom of the World Report documented that the free-market recipe of competition, entrepreneurship and investment activity is the key to fostering economic growth. According to the study: "Countries with more economic freedom attract more investment and achieve greater productivity from their resources. As a result, they grow more rapidly and achieve higher income levels."
Studies also show the negative impact of regulation on growth. Harvard economist Silvia Ardagna and Dartmouth College's Annamaria Lusardi found that tight regulatory environments discourage entrepreneurs who are motivated by new business ideas.
We had the 1973 oil crisis, where prices quadrupled, the 1979 Iranian turmoil, which also devastated oil markets, and the savings-and-loan debacle, where more than 700 banks failed. Even the glorious Reagan revolution was marred by fluctuations: One of the deepest recessions of the postwar period happened during Reagan's first term.
Even with those setbacks, the free-market system won because other approaches didn't merely deliver fluctuations, they delivered constant misery. Free markets helped US win Cold War. Nations from Ireland to Estonia have embraced free-market ideology and seen a historically unprecedented economic transformation believes Kevin Hassett.
Although none of the intellectuals has unleashed an open tirade against globalization its clear that voices of dissent have shifted from streets to the columns of financial press.But the problem is that they are yet to come up with a better substitute-an improved economic model.
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