“Global

Crisis, Recession and Uneven Recovery”

- by Dr Y.V Reddy






















Reviewed By - Durganand Raturi
Batch - MIM 2019-2020
Roll No - MIM-I-128





Overview

At times when the Indian economy was facing challenges in terms of slow growth rate and increase
in current and fiscal deficits and when the inflation was rising , Dr Y V Reddy came up with this
wonderful book, “Global Crisis, Recession and Uneven Recovery”.

Today the world is on other level of crisis and economy dropdown which may take long to even
become stable.

The book contains 5 sections where there are 27 chapters. The sections relate to the global financial
crisis and its impact on financial sectors, government policy, Indian economic performance and
prospects etc.

The first section of the book contains six chapters which give a vivid account of the financial crisis
and its effects and consequences.

The second section of the book focuses on the failure of the financial sector with remarks about
uncertain recovery as well as the prospects of the future. Highlighting the role of financial
regulation in developing countries, the author pinpoints that the causes and cross border
transmission of the crisis may differ significantly between developed nations and between
developing economies.

The third section deals with the challenges and responses of public policy that emerged during the
global crisis.

The fourth section deals with the concerns of the modern economic scenario especially the financial
giant like the World Bank, International Monetary Fund, as well as the World Trade Organization.

The last and the fifth section of the book highlights India's performance and prospects. The author
compares the Indian situation with that of the Asian economy and the world economy in terms of
recovery after the crisis.










Dr.Reddy initially examines the role of central banks in the evolution of the global financial crisis.
This is followed by a brief account of the distinguishing role played by central banks in developing
countriesstating some aspects of the functioning of central banks in crisis management.

The world of finance has some characteristics that make it more vulnerable to greed. However, the
most important source of the global financial crisis was the world of globalised finance with its
unclear ethical foundations, dominated by what may be termed global financial conglomerates and
facilitated by considerations of political economy, especially in the international financial centre.


Dr.Reddy included the failure of the state, market, governance, intellect and morality. This is
followed by an account of the distinguishing features of the world of finance. There is a brief account
of what values, morals and ethics mean. Against this background, the unique features of the world of
globalised finance, as distinct from the world of finance in different countries, are explained. The
concluding part contends that the issue of ethics in general and the world of finances, in particular,
are relevant to the crisis; but that an important reason for the crisis is globalised finance.

Economists have compared the current global financial crisis to that of the Great Recession of the
1930s. The current crisis has in fact affected all countries across the world in different degrees and
that way, it was truly a global recession. Today the crisis is over, the recovery has started at different
paces in different places. Dr Reddy is of the view that the recovery from the global crisis is going to
be prolonged and uneven.


There is an account of the way the crisis is being managed and the inevitability of rebalancing in
several areas as part of reaching a new normality. The concluding part holds that Asia is likely to
emerge as a region of immense economic significance and possibilities of financial activity, provided
public policies play a facilitating role.


The implications of actions and unconventional measures are described, since most have to be, by
their very nature, withdrawn or unwound in due course. Unlike the relatively smooth coordination of
policies to manage the crisis, the exit from unconventional measures that is beginning is likely to be
characterized by pulls and pressures. Further, exit strategies need to reckon the destination of exit,
which has to be a new normality and not the old one that had proved unsustainable. Several
approaches towards a new normality are detailed, most of them involving a rebalancing of competing
considerations,


The Future of Finance section on the background explains the context in which the future of the
financial sector is being considered currently, with respect to central banks, commercial banks, non-
banking financial companies (NBFCs), financial markets and globalised finance

There have been deep and wide-ranging global debates on the future of finance consequent to the
global financial crisis. Theories governing economics and of public policy are being intensely
reviewed. Some of the subjects under discussion and review are appropriate policies relating to the
adequacy of institutions, the framework of incentives in institutions, governance arrangements in
various institutions, the macroeconomy, financial sector, role of finance in the context of the
economy, and the future of globalization of finance. Sometimes the issue of sustainability of the
global financial system is linked to overall global economic stability, the sustainability of the climate
and, in fact, the stability of the global social fabric as a whole. Apart from the review and reform of
the financial sectors in the US, UK and Euro area through expert committees and legislative debates,
there have been multinational initiatives to make recommendations for the future of the financial
sector.



There is now relief the world over that financial collapse due to the crisis in 2008 has been avoided,
and that although the world experienced a recession in 2009, the prospects for 2010 appear to be
better. However, there is some uncertainty about recovery and prospects for the future. This article
(i) provides a brief account of the crisis of 2008, the policy response and its observable outcome; (ii)
assesses the potential costs of having avoided the collapse; (iii) outlines the features of what may be
described as the great recession of 2009; (iv) notes the signs of uneven recovery observed in many
countries and the uncertainties on the path to normality and (v) highlights some of the implications
of these developments for public policy in India.

The crisis had multiple causes that can for the sake of brevity be reduced to five factors. These are: (i)
inappropriate macroeconomic policies; (ii) ineffective regulation of the financial sector; (is) an
inadequate GFA, especially the international financial institutions and international monetary
systems; (iv) the inevitability of cycles in the market economy and (v) an extraordinary but
synchronised failure of markets. While there is no agreement on the weight to be attached to each
one of these explanations, public policy has responded to the crisis in a proactive manner in order to
avoid serious adverse consequences.



The Regulation of the Financial Sector in Developing Countries: Lessons from the Current Crisis is
divided into five sections. The first section provides an overview of the considerations that are
important in drawing lessons from the global crisis, especially from the point of view of developing
economies. The second section addresses the major issues concerning the scope of and limits to
counter cyclicality in regulation, in view of the widely perceived need for such an approach to avoid
similar crises in future. The third section addresses issues relating to comprehensiveness in the
regulatory scope of the financial sector, which have recently found focus. The fourth section explores
possible improvements in regulatory structures suggested by the recent crisis. The concluding
section lists several broader

Countercyclical Policies in the Financial Sector: The Indian Experience chapter is divided into six
sections. The first section provides a background on the major features of the Indian economy that
are relevant to the regulation of the financial sector. The second describes the dynamics of
countercyclical policies in India to illustrate the interactions between the government and other
public institutions on the one hand, and the central bank on the other, in the evolution and conduct of
the regulation of the financial sector as a whole. The section illustrates the operation of the political
economy in regulation. The third section discusses the countercyclical policies adopted by India,
which could be contrasted with the dominant view before the crisis--that such policies are
inadvisable and in any case, ineffective. The fourth section provides a detailed account of the specific
measures adopted to induce countercyclical elements at the time of boom. The fifth section explains
the policy response to the crisis, and illustrates how the instruments used at the time of boom could
be used to counter the dampening effect or shocks arising out of the global financial crisis. The last
section draws a few broad conclusions from the Indian experience.



The first section explores the links between macro-policies and the regulation of the financial sector.
The second analyses the changes being contemplated in the regulatory structures. The third section
provides a detailed account of the relationship between competition, regulation, ownership and
governance. The fourth section merely poses questions relating to financial innovation in the context
of regulation. This is followed by an account of the issues relating to the regulation of institutions and
markets, including infrastructural services. The concluding section is devoted to the broader issues
of national regulation and global finance.

The emergence of the global financial crisis and consequent review of the regulatory structure reveal
that the most critical tasks relate to rebalancing the competing considerations that govern regulation.
The importance of the financial sector has to be better balanced with the real sector, and it should be
recognised that the former is a means and not an end. Financial markets play a critical role, but they
cannot be unfettered. They require an active public policy, but with the recognition that the
apparatus of the state is also vulnerable to capture.



The Proposals for Financial Sector Regulatory Reforms: Perspectives of Developing Countries
presents the perspective of developing economies on reforms in the regulation of the financial sector,
which are under consideration globally in response to the global financial crisis.

The first section indicates the context and relevance of the reforms proposals, followed in the second
section by a more detailed consideration of some of the proposals for reform under discussion
globally. The third section highlights some of the missing elements in the agenda for reform, while
the fourth section poses some broader issues for consideration. The fifth section mentions a few
issues concerning the role of the G-20.

Developing countries have to cover three broad policy areas related to the future of financial-sector
regulation on their way forward. The first related to macroeconomic management on which several
lessons have to be drawn, many of them relevant to the financial sector. The second concerns the
policy related to the future of their domestic financial systems, on which the recent debates on
financial sector reforms aim to provide some guidance. The third relates to the management of the
integration of their financial systems within the international financial system, particularly the
international regulatory architecture. This is indeed a very complex territory.


Redefined Approach to Globalisation of Finance and Regulation highlights the importance of
redefined approaches to the GFA, with special reference to the regulation and globalisation of the
financial sector. The first section advocates a multi-level approach to globalised financial
architecture. The second section describes the process of rebalancing and the importance of
decentralisation and diversity. The third section makes a distinction between multinational and
international banks in the design of the globalised regulation of the financial sector. The fourth
section proposes a possible redefined approach while the concluding section endorses, with some
caveats, Professor Stiglitz's analytical framework for such a redefined approach.


The global financial crisis has led to a reconsideration of the benefits and risks of liberalising the
financial sector. The first section of this chapter describes the agenda for assessment and reform of
the financial sector in response to the lessons learnt from the crisis The second section lists the
balancing of critical considerations for assessment and reform. The third section provides a summary
of the globally coordinated approaches to the reform, and also discusses the impact of Basel III
proposals. The fourth section narrates the reforms undertaken or proposed (or under consideration)
in select countries. The fifth section considers some select issues, urges for development orientation
to the reforms, and makes a brief mention of the outlook for the reforms.


The concluding section commands such a tax at the national level and encourages the consideration
of globally coordinated action.

To conclude, it is essential to address the issue of excessive roli on market mechanisms, in particular
the excessive growth of the financial sector. Hence, there is considerable merit in countries insisting
on keeping open the option of levying taxes on all financial transactions as a matter of public policy.
Such a tax may ideally cover several financial markets, in particular currency markets.

Keeping a tax regime in position, even at nominal rates, would be advisable so that financial markets
remain aware of the instrument at the command of public policy and its willingness to use it. The
experience with regard to the benign neglect of asset bubbles in the recent crisis and preference for
countercyclical policies provides the logic for putting mechanisms similar to the Tobin Tax in place
on a continuous basis.
The measurable downside of such taxes appears to be negligible. While it is held that the Tobin Tax
may be ineffective, it has never been the case that it has toxic potential, like some finance
innovations. It is true that revenue is uncertain, and it is also true that international agreement on
such taxes and distribution of such revenues are difficult; however, difficulties have not deterred
cooperation in many initiatives.


The global financial crisis has resulted in a dramatic review of the role of the financial sector in
economic management. One of the most significant developments in this regard has been a review of
the policy of deregulation of the past, with emphasis on maintaining financial stability. This chapter
argues that a rebalanced regulatory regime for the financial sector, which is currently under
consideration globally, should address issues of both stability and development

The chapter initially explains the benefits that might have accrued due to deregulation of the
financial sector in the past. This is followed in the second section by a narration of excessive
deregulation and its possible adverse consequences. The third section explains measures under
consideration for a rebalanced regulation making out a case for development finance in such an
approx rebalanced regulation. The concluding section emphasizes an approach to avoid extremes in
the new balance being contemplated. With regard to India, a case is made out for domestic
orientation in the search for new balance in the regulation of the financial sector.


The context in which the taxation of the financial sector is being intensively examined now,
consequent upon the global financial crisis, is explained in the first section of the chapter. The second
section summarises the new approaches under active consideration for taxing the financial sector.
The third section comments on general issues, while the fourth section comments on the Indian
context.


Fiscal Implications of the Global Financial Crisis is divided into five sections. The first section
explores the extent to which fiscal policies were the cause of the crisis and the direct impact of the
crisis on the fiscal position. The second section explains the fiscal response to the crisis, including the
composition, extent and quality of the stimulus. The third section elaborates on the limits to the
stimulus; exit from the stimulus and the consequences of the fiscal stimulus. The fourth section
narrates the challenges of management of public debt as a consequence of the fiscal stimulus. The
concluding section relates to the way forward with regard to fiscal management globally.

In some of the advanced economies, there may be a need to deleverage the financial sector, the
private sector and the public sector simultaneously. In fact, the deleveraging process in the private
sector even after shifting a significant burden of their deleveraging to the public sector may not be
complete. This is als the time when the financial sector may need more capital as per evolving global
consensus to avoid future stress on financial stability. If the demographics of an advanced economy
demand considerable expenditure on health and social security, the burden of managing public debt
could be severe.If the fiscal position is weak for a prolonged period in major economies, the head-
room available for countercyclical policies will be less in these countries. In such a situation, it may
be difficult for fiscal policy to supplement the countercyclical monetary policy that has been
advocated as essential for global financial stability. In other words, the weak fiscal position will
increase the burden of macroeconomic stability on monetary policy and regulation of the financial
sector.


Macroeconomic Framework and Financial Stability is useful to clarify the concepts of
macroeconomic framework and financial stability, since they are often used contextually. In the
current context, discussion on financial stability is largely influenced by the global financial crisis and
hence on avoidance of systemic risks to the financial system. However, it is appropriate to take a
broader view of financial stability in a more normal circumstance and with a developmental
perspective in the case of developing countries like India. The concept of financial stability was
explained in the Indian context in June 2004 as follows:

The concept of financial stability needs to be understood contextually also. For us in India, it means:
(i) ensuring uninterrupted financial transactions; (ii) maintenance of a level of confidence in the
financial system amongst all the participants and stakeholders; and (iii) absence of excess volatility
that unduly and adversely affects real economic activity. Such financial stability has to be particularly
ensured when the financial system is undergoing structural changes to promote efficiency. The
structural changes relate to ownership, regulation and competition, both, domestic as well as
external competition.

The concept of macroeconomic framework generally refers to the set of comprehensive policy
measures that are undertaken to pursue broad economic objectives. The objectives normally relate
to economic growth, low or stable inflation rate and sustainable balance of payments. While the
central focus is on welfare of people as reflected in what may be described as the real sector, from
the policy point of view, the macroeconomic framework generally refers to the conduct of monetary,
fiscal and external sector policies. Policies relating to the financial sector, which were generally
considered as part of the microeconomic policies have, after the global financial crisis, gained a
distinct place in the set of macroeconomic policies.


International Monetary System: Issues and Options is divided into four sections. The first section
narrates the current status of the international monetary system and the context of the global
financial crisis in which there is a debate on the subject. The second section highlights the
alternatives to the existing system under consideration. The third section explains the proposals for
improving the current system or current non-system on the assumption that the alternative systems
are at present not feasible. The fourth concluding section explores the possible implications of recent
developments in Euro on the international monetary system.


The global crisis that erupted in 2008 is a testimony to the failure of economic policies and
institutions. But the response of public policies in avoiding a collapse of financial markets has been
praise worthy. However, almost two years after the manifestation of the crisis and uneven economic
recovery that has been observed recently the outlook for the global economy is unclear. The
intellectual frameworks that would govern the future as well as the institutional structures that
would be in place are at best still evolving. The report of the UN Commission provides a good
reference for assessing the current status of efforts to create new sets of policies and institutions for
a better global economic order.

There is a recognition in intellectual and policy circles that the causes of the crisis, and hence the
cure, go beyond the financial sector. While role of state was critical in averting a disaster the crisis,
the underlying dominant philosophy now is that state intervention should be for emergencies and for
exceptional reason The approach to public ownership of enterprises (including those in the financial
sector) is somewhat similar, despite the example of successful China where public ownership
continues to dominate. There is an agreement that there is a trade-off between immediate actions to
avert the collapse and stimulate the economy, and long-run compulsions of correcting
macroeconomic imbalances, deleveraging the balance sheets of households and the financial sector,
and ensuring price stability. There is, however, a serious rence of opinion on optimal balance in these
matters.


Framework: Review and Prospects is divided into sections in which first section of the chapter
narrates the origin and evolution of the G-20. The second section reviews its contribution, while the
third provides an assessment of and prospects for G-20.

The fourth section mentions possible approaches to reforms of the International Financial
Architecture. The concluding part elaborates on the new realities that the G-20 should take note of,
and makes a brief reference to the importance of India in the process.


Volatility in private capital flows has been recognised as a reality for most EMEs. Managing volatility
has become an important challenge for policymakers, particularly in emerging Asia. It is increasingly
recognised that excess volatility in capital flows has harmful effects on the real sector output and
macroeconomic stability. Policymakers are, therefore, grappling with a variety of options to minimise
the adverse impact of such volatility while taking advantage of the benefits of a liberalised capital
account. The use of capital controls is only one instrument for policymakers. It is, therefore,
necessary to identify a policy framework that would enable optimal management of their capital
account in times of volatility. This chapter is divided into three parts. The first part explains
multidimensional aspects of volatility in capital flows. The second narrates policy options and policy
dilemmas in managing the capital account. The third and concluding part consists of some comments
on policy questions involved in managing capital flows in EMEs.


The New Global Financial Architecture: Approaches and Issues is divided into four sections. The first
section describes the pillars of the Global Financial Architecture (GFA), while the second section
explains the context in which the new GFA is being considered and past proposals as well as
initiatives. The third section elaborates on the current approaches under consideration and
undertakes new initiatives. The concluding section lists a few issues relevant to the new GFA.


India's Financial Sector in Current Times: Priorities for Reform comments on India's strengths and
vulnerabilities vis-à-vis these critical factors, namely, macro-economic management, monetary
policy, regulatory coordination, appropriateness of incentive systems, excessive financialization, and
the banking system. From the narration, it is possible to infer major areas that need the immediate
attention of policymakers and regulators in the Indian context at the current
juncture.


Macro Framework, External Sector and Financial Sector is divided into five sections. The first section
is devoted to a description of macro policies that are proving to be a source of comfort for India
during the global financial crisis. The second section is devoted to the management of the external
sector, which contributes to growth with stability and is also exhibiting its resilience to the stresses
of the global crisis. The third section is devoted to the regulations of the financial sector in India that
enabled India to moderate the boom-bust cycle that the world is witnessing The concluding section is
a brief account of the way forward.

India's macro policies give high priority to the avoidance of serious macroeconomic imbalances for
several economic, social and geopolitical reasons, India does not figure in debates on the global
economic imbalances arising out of excess savings or excess con- hampton by select countries. An
avoidance of persistent imbalance has been saving and investment, consumption and investment
demand, domestic or external demand, and in the current or capital account of the external sector
are the results of the public policy. Avoiding serious imbalance is very important for India in view of
the country's vulnerability to four important sources of shocks.

These two shocks-on accounts of fuel and food-are essentially current account shocks. The third
source of shock is related to the finance of government, namely, the large amount of public debt as a
proportion of the Gross Domestic Product and persistence of fiscal deficit. The fiscal stress is
structural, in the sense that it did not come about to tackle a temporary problem. Since India's debt-
to-GDP ratio is over 70 percent of GDP, the maneuverability for public policy in times of any stress is
restricted


Financial Sector Regulation in India: Review and Proposals for Reform also has section in which the
first section, this chapter draws attention to the major issues being considered in global debates on
revamping the regulation of the financial sector, and reviews the status in India with respect to each
issue. The second section is a brief narration of a critique of the Indian experience, and its
justification. The third section analyses three important proposals for reform, namely the
establishment of a Commission on Legislative Reforms, a Financial Stability and Development
Council, and the issuing of new bank licences.

India may feel relieved to have avoided the worst effects of the crisis in the financial sector. That is
not enough. In order to move forward, it must appreciate both global realities and the Indian context.
In moving forward with appropriate reforms in the financial sector, the following factors must be
borne in mind: (i) the financial sector and its reform is not an end in itself; (ii) the risks are amplified
if the reforms in fiscal and real sectors are not in consonance with the pace of reform in financial-
sector regulation; and (iii) the highest priority should be accorded to efficient intermediation of
domestic savings and domestic investment with a wide participation of the people of India.


Asia, and in particular China and India have shown remarkable resilience during the crisis and
contributed impressively to the global economic recovery. The first section of the chapter identifies
the reasons for such resilience followed by an assessment of prospects and challenges, in the second
section. The third and fourth sections analyse the future of two distinguishing characteristics of the
Asian model, namely export-led growth and bank-dominated financial sector. The concluding section
brings together lessons from the Asian experience and its increasing claims for leadership in the
global economy. In the narration, Indian experience is contrasted with experience of other EMES of
Asia.


The exit strategies of any country, from stimulus and other extraordinary measures taken to combat
a global crisis, have to be viewed in the context of the entry measures taken to manage the crisis from
which exit is sought. In reality, the exit strategies could also include some pre-crisis policies that
were responsible for the crisis. Ideally, exit policies should be considered as an extension of a review
of policies adopted in the pre-crisis period and the measures taken during the crisis period. The first
section of the chapter highlights the perceptions on the Indian economy prior to the crisis as one of
the riskiest to being one of the most resilient when the crisis materialised.

The second section gives a brief account of the three phases of Indian economic policy, namely pre-
crisis, crisis and post crisis, which correspond to the initiation of exit measures. The third section
explains monetary measures and exit strategies; while the fourth, fifth and sixth sections give an
outline of regulatory fiscal and external sector policies in relation to exit strategies. This is followed
by Jocating some issues that appear to be common to exit strategies in many countries, keeping in
view Indian experiences so far. The concluding section lists some challenges specific to managing exit
from the extraordinary measures taken to mitigate the impact of the global crisis.