And if the current global crisis is not managed prudently and in a well co-ordinated manner, fears are being expressed that this would lead to deflation and depression.
The initial response of some countries has been protectionism that would further restrict the already slowing down international trade hit by credit crunch and the over-cautious approach of the giant commercial banks to lend to credit-starved businesses in conditions marked by sharp economic downturn. The best bet in the development markets is that the economies in the West would start recovering by the end of 2009 or beginning of 2010.
But the stipulation about economic recovery may not materialise as the current global crisis is the worst of a serious of crises that hit Latin America, South East Asia , Russia in quick succession and finally perhaps peaked in the United States and Europe. Perhaps, this deep and prolonged recession a depression cycle that hits world economies in 60-70 years.
Western economists hoped that the boom and bust cycle would perhaps end over time with the IT revolution and high annual growth rate achieved by China over past few decades. But this has not happened.
But the question arises why do crises occur ? In the course of economic growth, imbalances occur. They need to be monitored and addressed in the initial stages of their development, much before these assume the proportions of a crisis. The common government failure to synchronise short and long- term solutions to achieve stable growth. The focus on short-term gains make policy makers overlook the long- term benefits. And harmonised inter-sectoral development is made all the more difficult by a dominant renter class.
Imbalances in national economies acquire individual and international dimensions depending upon the size and exposure of a domestic economy to the international markets.
Economic imbalances beget crises both at the national and international arena.
Conventional wisdom says that every crisis brings an opportunity for new businesses and reforms. But more importantly, the crises are often the harbinger for a radical change. It is generally acknowledged that that crises make it easier to bring about reforms as the status quo mellows down.
Normally, the imbalances are temporarily corrected by exchange and interest rate adjustments and not through a paradigm shift an overall development strategy to bring about the needed structural changes in the economy. As money is treated as the lifeblood of the economy, short-term positive outcome is achieved by monetary policy or a fiscal stimulus but structural imbalances do not go away.
No doubt, massive wealth has been created in recent years that is concentrated in a few pockets But a substantial portion of it has been lost in the current financial crisis.
The evolution of the casino economy over time ( excessive speculative trading in currencies , commodities, stocks and real estates has deprived the real sectors of the economy of needed money the develop faster. It has prompted manufacturing firms to thrive on unbridled mercantilism, resulting in price volatility and strengthening inflation.
By restricting flow of cash into production channels and impoverishing consumers, the speculation fever retards capital formation, the core function of progressive capitalism.