What a year 2009 has been and what a fitting end to the decade. The year saw a turnaround from the depths of despair, which hit the global economy after the Lehman Brothers? crash in September 2008. Many were hopeful that here was the end of capitalism or at least of liberal economics. Sarkozy was found carrying a copy of Marx?s Das Kapital. He appointed a Commission with Sen and Stiglitz to re-examine the importance of GDP as a tool for policymaking.
In the event the main task was to keep the system going and revive it rather than replace it. It was the people who had staked their all on globalisation with liberal markets?Gordon Brown and the Americans who moved swiftly at G20 Summits in Washington, London and Pittsburgh, and did just enough to turn the corner. The reform of the financial system will be undertaken within the parameters of the old system?by IMF and various legislatures, which will restructure their regulatory institutions.
Much criticism was levelled at modern macroeconomics for instilling the idea that markets always work and cycles were a thing of the past. This happens in every long boom and every crisis destroys the illusion. But this boom had lasted longer and had a wider reach than any previous boom of the 20th or even the 19th century. Asia had been included as had Latin America, and even Africa was beginning to feel its positive impact by the early years of this century.
Yet if modern macroeconomics was at fault, the doctors to restore the patient?s health were also modern economists. Ben Bernanke and Mervyn King were in the middle of the storm as the central bankers of the two of the deepest financial markets and largest economies. They used the tools of trade they had learnt at their universities and managed to innovate on the hoof.
The response of governments was to go for a fiscal reflationary package. This was a back-to-Keynes response.
Yet the crisis was not a Keynesian one. It had been caused by excessive consumption, not by excessive savings in the developed countries. The excessive savings had been in Asia, which required the developed countries?especially the US?to go on consuming to valorise the Chinese savings. The fiscal packages were necessary for that.
But the cause of the crisis at home was the financial market collapse. This required massive state funding to recapitalise the banks. This, in turn, restricted fiscal packages in developed countries and their debts are now precariously high. So, the burden of reviving the economy was taken by central bankers. In terms of academic controversies, it was Friedman, not Keynes, who proved to be pivotal. King and Bernanke innovated Quantitative Easing?flooding the economy with money?which allowed interest rates to be cut to near zero, reduced the burden of servicing debts on consumers and revived consumption.
By the end of 2009, the FT-100 index?Footsie?was back to its pre-Lehman levels. This is just a small indicator that confidence has been restored. Unemployment will take longer to stop rising as employment lags behind output both in the downturn and the upturn. But GDP growth is positive in all major developed economies except the UK. The long-run restoration of the output lost during the recession will take a while, but the direction is upwards. Neither the anti-globalisers nor the Social Democratic Left had an answer, or if they did, was anyone paying any attention to them?
But the cataclysmic change is in the balance of the global economy. The G20 took over from G7, since it was Asia which was crucial. By the time of Copenhagen it was G1?it was the US+BASIC who called the shots. Europe is now a ?sleeping giant? as China once was. The axis has shifted from the Atlantic to the Pacific and from the North to the South and from the West to the East. The US alone has the energy, the flexibility and the demographic dividend to match Asia in the new century, which truly began in 2009.
It has been a magical decade for India. It is now one of the poles of a multi-polar world. The fruits of liberal economic reform, often eaten but only with disdain, have made India great. Perhaps the leadership will acquire a taste for these fruits and grow them more avidly.
?The author is a prominent economist and Labour peer