Global crisis and beyond: Sustainable growth trajectories for the developing world

Despite recent signs of output recovery, casual resumption of the growth model that crashed in 2008–09 will exacerbate the domestic and global imbalances that caused the crisis in the first place – to the detriment of the real economy, equitable development, and employment recovery. The model’s environmental unsustainability is also evident. The author therefore argues for a broad policy agenda including reform of the international financial system, development strategies re-focused on wage-driven domestic demand and viable agriculture, fiscal promotion of greener technologies and demand patterns, and redistributive social policies to reduce inequalities and act as macroeconomic stabilizers in downturns. n early 2009, there was much gloom about the world economy. The worst I financial crisis since the Great Depression had apparently broken out in full fury; asset markets in the United States, Europe and then in most developing and emerging markets had crashed and were exhibiting extreme volatility; world trade collapsed; volatile capital flows made things much worse even for developing countries that had been fiscally and externally “disciplined”, as they were affected by a crisis that was not of their making. By comparison, the situation just a year later seemed to be a sea change. Developing countries (particularly in Asia) were the first to come out of the crisis; indeed, many of them had experienced only a deceleration of still positive growth, rather than negative growth. Output growth in the world economy – including in several of its more important component parts – was recovering from the extreme lows of late 2008 and early 2009 (figure 1). The United States, the United Kingdom and the Euro Area had all been declared “out of recession”, as income had recovered, especially from the second quarter of 2009. Stock markets were upbeat once again, and private capital flows had resumed to some developing countries (though not all). There was renewed optimism that * Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi, email: [email protected]. Responsibility for opinions expressed in signed articles rests solely with their authors and publication does not constitute an endorsement by the ILO. Copyright © The author 2010 Journal compilation © International Labour Organization 2010 210 International Labour Review the world economy would grow again in 2010, with especially rapid recovery in the developing world. Much of this improvement was related to the apparently uncoordinated but nonetheless synchronized recovery packages that were introduced in the wake of the crisis. Across the world, governments responded not only with huge bailouts of troubled financial institutions but also with large fiscal stimulus packages that were effective in staving off depression. Many observers were tempted to see the global recession of 2008–09 as a mere blip in a process of continuing and dynamic global economic growth. But this easy inference was never really valid, as recently evidenced by the sovereign debt crises erupting in countries like Dubai and Greece. These eruptions are part of a wider pattern, since there are two sets of reasons why the process of growth may not continue in a stable and sustained fashion – the first set is structural, and the second, conjunctural.