We are witnessing the start of an economic crisis that could perhaps dwarf the Great Depression of 1929. The only difference is that the economic growth of the past 80 years might provide a cushion to soften the impact this time around.
This Beed talked of the looming crisis in March 2008 (#390, 'The American Dream') and has not been that surprised by the present situation in which government actions around the world are losing credibility. So far, more than three trillion dollars have been poured into banks by different governments, but it appears that this massive attempted bailout has not yet stemmed the crisis.
The financial sector went too far in creating dubious instruments to leverage brick and mortar assets, and these have now become worthless bits of paper. The epidemic has spread to Europe and parts of Asia. So far, India has not been badly affected, but as it is tied to the global economy, it surely will be. Which means Nepal too will be hit, thanks to its fixed exchange rate with India. It is therefore time to talk about the Beed's favourite subject: what to do in the long term with our exchange rate. Apart from the Indian impact, here are some of Beed's views on the crisis and Nepal.
Left-leaning economists are having a field day crowing about the failure of capitalism. They feel Nepal should not pursue a market-reform agenda similar to that which has led to the global crisis. However, the only model that has brought about rapid economic growth successfully has been one that seeks a market-oriented economy where the government plays the role of facilitator and regulator.
Just because there has been a crisis?like many others which have been dealt with in the past?it is not necessary to experiment with any other 'isms'. Our finance minister and other propagators of socialistic economic models should give up those thoughts. Nehru's mixed economy ensured India missed out on the global mainstream for three decades; let us learn from that lesson.
A short-term impact we might see is a decline in demand for skilled jobs in the US and Europe, which would in turn have an affect on migration?although the labour markets in the Middle East may not be hit so hard.
For Nepal's overcrowded banking sector, there are lessons to be learnt. The attraction for some banks in keeping all their eggs in the real estate basket may cause them problems. One cannot lend to the developer, the contractor and the consumer of the same building project. And the government does not have the money to bail out our banks in the way other countries have. Banking liquidity here can also be affected by the money taken out of Nepali banks to invest in the Indian stock market through various channels. With the stock market drop of the past six months, it will take quite some time for people to get their money out and back to Nepal.
The most important issue is now for the Central Bank and the government to look at efficient regulation, without becoming a regime of control. Any control-oriented mechanisms will hit an already weak investment climate, so the challenge is to design policies and take measures that rise above creating 'control freaks' and instead provide 'facilitators' to ensure the Nepali economy avoids the worst of the crisis.