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It is not just a financial crisis

FREE PRESS Journal, Apr 04, 2012

PROF. R. VAIDYANATHANIt was suggested that the crisis in the economy of the West will get sorted in a few months andlater it was felt in a few years. When there was a crisis in East Asia it was called Asian crisis andthen there was a Latin American crisis.

But when there is a crisis in Anglo Saxon economies it becomes global crisis.

We also accept it as it is and feel since we are part of " globalised" world we are also in crisis.

The crisis in Europe and US is not just a financial or economic one. It is a much deeper malice.The crisis is due to very high level of indebtedness of both Government and households. Twoimportant developments have taken place in the last two decades. One is regarding the share of Global GDP on purchasing power parity basis. In the early nineties, the share of Group of 7 ( G-7) was more than 50% and that of emerging markets nearly 36%. In the year 2012, it is expectedto be reverse. That is the share of G- 7 in Global GDP is around 36 % and that of emergingmarkets above 50%. That is the nature of the crisis. The axis of economic power has irretrievablyshifted to primarily to Asia and other emerging markets.

The reason for the decline is two- fold.

One is the increasing indebtedness of the west - both that of Governments and households. For instance, Britain has 500% of its GDP as debt and USA 280%, France 350%, Germany 300%,etc. The household indebtedness is also severe. It is nearly 100% of GDP in Britain and morethan 80% in many other developed economies. In India and China it is less than15 %. So thefundamental crisis is due to indebtedness of families beyond sustainable levels and it is to duethe fact that increasingly families are on decline and single parent families are becoming norms.

All the traditional role of members of family is undertaken by the Government.

Old age care/ medicare/ child welfare/ social security etc. Actually family as an institution is insteep decline with more than 50% of the births in USA in 2010 was outside wedlock.Illegitimacy has become New Normal. In the case of Blacks it was as high as 80% and Latinos itwas 60%. Single parent families are norm and it is mostly singly mother families. Lots of studieshave shown that families with father are more useful to the child in terms of stability. But thereare, for instance, more households with TV sets than with fathers in the UK. That means the

sovereignty of the family has come to an end in the Western world and in that sense " familieshave been nationalised" and government has become new head of the family.

In such a situation the ability of family to control or even advise children is difficult and so wesee the results in the form of street riots in the UK in the last year.

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Other than this the unemployment rate in Europe is at unsustainable levels particularly amongyouth. The unemployment rate among youth categorised as 16 to 24 ( unless in India where even

persons in forties are classified as youth leaders!) is as high as 50% in Spain and Greece and inPortugal/ Italy it is 30%. This level of unemployment coupled with declining sovereignty of families is a combustible material for the continent.

Because of declining fertility rate there is inadequate growth in population.

This gives rise to the issue of migrant labour needed in brown colour work like garbageclearance/ plate cleaning etc. This gives rise to social tensions since migrants are looked downupon for grabbing jobs. Whenever there is economic distress, it is the migrants who are the targetof the unemployed youth. So from that point of view, Europe is sitting on a tinder box.

The crisis is multifaceted. It is a crisis of demography and a crisis of declining family as aninstitution. What we call loss of sovereignty for families since families have been nationalised.

The Anglo- Saxon world is not going to come out of this crisis any time soon.

May be it may take 80 quarters or even more.It is important that India recognises the crisis for what it is and not just as a financial marketscrisis. India should stay away. Otherwise, it will be singed in the crisis, neither of our making nor to our liking. More de- linked we are better for us.

(The author is Professor at Indian Institute of Management Bangalore.