The Age of Stagnation: Why Perpetual Growth is Unattainable and the Global Economy is in Peril
THE AGE of Stagnation is a book of gloom that promises little hope for us even as various economists and policy makers are charting out new growth paradigms for all the nations. Satyajit Das, the author, is quite blunt in stating that the way we have progressed, we are moving towards deep stagnation with little chance of revival. More importantly, we have reached the limit of growth and all that our economic theory books have spoken of this limit being boundless are, in fact, incorrect.
His starting point is the financial crisis, which has not just dealt a body blow to the world economy, but also sown the seeds of deep-rooted stagnation. While a large number of experts believe that tackling the financial crisis and getting it out of the abyss was good enough, the author argues this may not necessarily be so.
The main challenges are growth, productivity, innovation, employment, work force, resources, environment, etc. All these factors, which have been assumed to be given with the trajectory being upwards, are not necessarily true as we have reached barriers. He points towards two specific anomalies. One is on the exchange rate front and the other on interest rates, where countries have followed the policy of ‘beggar my neighbor’ by bringing about competitive policies, which, in turn, has enhanced volatility in the markets. Easy money has impacted economies and led to enhanced debt at a time when companies are less than profitable. This process hence has sown the seeds of future crises of indebtedness, especially since revenue growth is not keeping pace with the debt servicing requirements.
If we put things in perspective, he points out four reasons for the financial crisis. First there was great dependence on borrowing to create economic activity through the NINJA loans. Second, there were imbalances in consumption, investment and savings, leading to over investment and debt. Third, rapid financialisation added to the woes as it was an area that was alluring but less understood. With rapid growth in financial engineering, the crisis was deepened. Last, several governments followed large entitlement programmes and hence broke economic rules of prudence. The question we naturally need to ask is whether or not we are doing the same now also, with the liberal dose of QE across major economic blocks being the starting point. This is because it was the prevalence of similar policies of easy money which led to the creation of the crisis.
Now let us look at some specifics that make Das believe there will be more stagnation. He quotes John Hicks, who said that true growth is the amount that can be withdrawn without affecting the ability to produce more growth in future. Otherwise, growth today is at the expense of future growth. Here we have not succeeded. There is a shortage of resources and our tryst to push up farm output has actually over exploited land with higher doses of irrigation, seeds, fertilisers and pesticides.
Second, there is reverse globalisation in action. The flow of funds from developed countries to emerging markets, which spawned high growth, has moved in the reverse. Regulation, which is a masquerade for protection, is the rule, with all countries trying to protect their turfs.
Third, the emerging markets that were to be the bastion of growth have slowed down in this process. Chinese slowdown, which has made headlines in recent times, will be a drag on the world economy.
Fourth, Das highlights the bane of inequality, which has grown over time and quotes from Thomas Piketty. This entire episode of financial crisis and its resolution was all about bailing out the rich.
Fifth, he laments quite forcefully the democratic deficit that has emerged, with US and Europe still dominating institutions like the IMF and World Bank that were to help the developing countries. It is not surprising that all over, households have shifted from financial investments and savings to gold and land as policies appear to be skewed in favour of the rich.
Last, Das speaks of the loss of jobs and stagnant wages for the majority that will push growth downwards.
Two things stand out in this book. The first is that while he is quite forthright with his views, the author does not provide any solutions. The second is whether or not it is really doomsday, or has the author gone overboard when interpreting the business cycle which is natural in the Schumpeterian world of creative destruction?
Most of what the author has said is true but has probably been looked at from one side of the prism and the positives have not been considered. This is important because when we had the boom just before the crisis set in, which was called the Great Moderation, no one expected a collapse, which did take place. In hindsight, it is easier to be wise. Similarly, presently, while conditions do not appear too bright, would it be right to assume that the direction is only downwards? This is where the reader should draw her own inferences.
Madan Sabnavis is chief economist, CARE Ratings