Should India bail out the western countries?

Two contradictory news items have emanated from western countries.

On the one hand, industrial production is rising, share markets are stable if not moving upwards, the number of claims for unemployment compensation  is declining and the expectation is that the global crisis is behind us.

At another remove, the condition of the common man appears to be deteriorating. A psychologist working for the British government spoke of elderly people dying in their houses because they did not have the money to buy oil for heating their homes. Teachers are complaining that the reduction in the outlay on the mid-day meal scheme is depriving students from poorer households of  a square meal every day. The resultant lack of nutrition has affected their learning abilities.

The caretaker of a tourist windmill in the Netherlands regretted that the number of student visitors had declined because of truncated school budgets. Employees of a telephone company in that country are facing a layoff because the bookkeeping work will be outsourced to the Philippines to reduce costs.

Such mutually contradictory news reports are rooted in the fiscal stimulus packages implemented by their governments. They have obtained loans or printed notes and have provided easy loans and tax reliefs to their banks and companies to tide over the present economic crisis. Such relief measures are leading to reduced costs and higher profits for the companies, but the underlying economy continues to be weak and the jobs and living standards of the poor under strain. Earlier these companies were engaged in hi-tech production and exports, notably jets and semi-conductors. They were earning huge profits.

They have now started producing these goods in the developing countries such as India, China and Vietnam because labour is cheap there. As a result, Western countries are able to export fewer goods.

Their factories are closing down. Governments have less revenues with which to provide mid-day meals to students. The companies are doing well but the people are suffering.

The question is whether the benefits accruing to the companies will be sustainable or will the Western economies face recession again?

Many analysts consider the present uptrend to be well-grounded. The improvements in the growth rates and buoyancy in the share markets are artificially induced and will prove to be temporary. Say, a person is suffering from malnutrition because he has lost his highly paid job and has refused to accept an appointment with a lower pay. He is taken to hospital for treatment. The doctor gives him glucose and he feels better. This improvement in health is not sustainable because the patient still does not have the money to buy food.

Similarly, the western economies are suffering because they have lost their hi-tech advantage and are refusing to adjust to lower levels of income. This hard truth is being covered up by providing a fiscal stimulus. They are feeling better again. However, this improvement is not sustainable because they do not have the means to compete with cheap goods produced by the developing countries.

This reality will definitely hit them after the stimulus packages are discontinued.  The economic crisis in the western countries will soon recur. It is against this backdrop that our policies will have to be formulated.

The critical issue from India’s point of view is that the fiscal stimulus being given by the western countries is being funded by money borrowed from us. The money sent by Indians to the Swiss banks via the hawala route is being used by the Swiss banks to buy bonds issued by the governments of the western countries.

The western countries are using that money to provide tax relief to their companies under the stimulus package. Also, China and  a few other countries are directly buying bonds issued by these countries.

The developing countries have to decide whether to continue to provide money to the western countries or to turn off the tap and use that money to increase the consumption levels of their own people. For example, the western countries will not  get funds so easily if the Government of India takes effective measures to bring back the black money stashed abroad.

In Prime Minister Manmohan Singh’s reckoning,  we must assist the western countries that are facing an economic crisis so that the world economy does not weaken, our exports remain buoyant and we continue to attract FDI from them.

In my assessment, we will not get these benefits even if we bail out some of the stuttering European governments. The western governments will be increasingly burdened by debt if we lend to them. The interest rates at which they will be able to sell the bonds will rise.

This will lead to an increase in the interest burden and will aggravate the worsening fiscal situation. Before long, they will have to raise taxes and this will affect the ability of their citizens to buy carpets from India.

It will also erode the ability of their companies to invest in India.

The trend is noticeable at this juncture. New bonds have been issued by the Government of Greece at an interest of  22 per cent. The interest rate on bonds is 13 per cent in Portugal and 9 per cent in Hungary. The stable economies of Germany and America will also face difficulties as the weakness of the developed countries spreads from the periphery to the centre.

Manmohan Singh must realise that the rich man, whose health has deterioated because he hasn’t accepted a less-paying job, cannot be rejuvenated by an infusion of glucose. He must of necessity  have to take up a job even if it offers lower wages.

The western countries have attained their present high standards of living by selling hi-tech goods and extracting natural resources of the poor countries by military conquest. Now they have few goods to sell to the developing countries and they do not have money to wage wars either. Their multinational corporations have dug their own grave by transferring their frontier technologies to the developing countries in the quest for cheap labour.

Western countries cannot be saved by providing easy loans. They will have to  adjust to lower standards of living.

The prime minister wants to assist the western countries. This is fine from the standpoint of the Vasudev Kutambakam philosophy--the whole world is one family. But it devolves on the doctor to tell the patient that he needs wholesome food, not glucose. The west will have to produce cheap goods to revitalise the economy of the countries that are suffering. Manmohan Singh should not mislead them by providing cheap loans and ignoring the imperative--the need to effect a downward revision of wages.

He needs to tell the western countries that a logical consequence of globalisation is global equalisation of wages. He should urge them to lower their standard of living, instead of helping them to maintain their present high standards.

The writer is a former professor of Economics at the Indian Institute of Management, Bangalore.