Crises have a habit of turning conventional wisdom-the sort which rides high when times are good-on its head. The real challenge for commentators and policy makers is to be open in their thinking and to draw the right lessons from crises with a view to prevent history repeating itself in an unpleasant manner. The difficulty is in gripping the nuances?it?s easier to either come down in favour of the conventional wisdom notwithstanding its flaws or to suggest a complete reversal. But the correct lessons are likely to lie in the shades of grey which often get lost between the black and white.
Consider in this context the two defining crises of the present?the continuing financial/economic crisis and now a potential global pandemic of swine flu. At one level, both are expressions of the downside of globalisation?a crisis which affects one corner of the world has the potential to adversely affect other regions and countries which had no role to play in precipitating trouble.
So, we will in India, bear the consequences of the profligacy of the US financial system just as we will likely bear some of the consequences of unhygienic pig farming in Mexico. So let?s once and for all drop the decoupling hypothesis?in an increasingly intertwined world, even large countries (and large economies) like India and China cannot escape major global crises. At the same time, this should not be used as an argument to actually demand decoupling through an autarkic rejection of globalisation?the benefits of inter-twining are too many. The challenge is to find policy mechanisms which minimise the downsides.
Interestingly, some of the lessons on the current crises, may be learnt right here in India. We can?t escape the twin realities of having been immune (at least in our domestic systems) from any major financial sector collapse or any significant animal to human disease pandemics?two major global scourges of the recent past. Financial sector collapse has now afflicted every part of the world over the last two decades (Africa, Latin America, South East Asia, Europe, US) with the major exceptions of India and China. And animal-borne influenza epidemics, a common feature of emerging economies (swine flu from Mexico, Sars from China and avian flu from South East Asia).
Now, both these crises and their derivative subjects can be topics for multiple columns, so let?s just take one element of each, which formed the conventional wisdom earlier but which must be thought over.
Evidence seems to now suggest that modern industrial livestock farming?apparently the best way to farm?is responsible for the growing frequency and severity of diseases in farm animals. In emerging economies, industrial livestock farming may have brought greater scale and efficiency, but in the absence of the highest standards of hygiene, it has also brought newer viruses, mass infections in animals and quick transmission to humans. Pig farming in Mexico, civet cat farming in China and chicken farming in South East Asia all happen at an industrial scale, in squalid conditions with little concern for either animal health or the health of workers who handle these animals. The fact that three potential pandemics have recurred in very quick time (swine flu, Sars, avian flu in about five years) shows that the right lessons aren?t being learnt. India?s more disorganised livestock farming sector may have actually ended up preventing a major outbreak of these infectious diseases. The challenge, of course, is to move to the highest standards of hygiene. But in the interim, is disorganised livestock farming a better option? Maybe, maybe not.
A world away from swine flu is the financial crisis. Consider the conventional wisdom that had developed around the role of central banks before the crisis?they are at their best when independent from the government, managing only monetary policy through interest rates with a singular focus on keeping inflation at very low levels. Bank supervision, it was thought, should be with an independent agency. Now, all these assumptions stand open to question. Should central banks be targeting inflation as low as 2%? This leaves little room for policy manouevre when there is zero inflation or deflation?the real rate of interest will at best be zero or positive and not negative as it should be in a severe downturn. Also, given the failure of independent regulators to prevent a banking crisis, should central banks have that role instead? If, after all, the central bank is going to have to bail out banks with cash, they ought to supervise them, too. Even the most fundamental wisdom on complete independence is up for question?if governments are going to play big roles in bailouts shouldn?t they be in the loop with central bank policy. Also, shouldn?t those central banks like in the US which had regulatory responsibilities but failed, be made accountable to government? Is the RBI model the right one after all? Maybe, maybe not.
To be perfectly honest, the number of questions comfortably exceed the number of answers at least at this point in time. But that is perhaps the way it ought to be. It is only when we begin to ask questions with no easy answers that we get closer to sustainable solutions to our most pressing problems.
dhiraj.nayyar@expressindia.com