The gobal economy is passing through a period of uncertainty. Agencies such as the World Bank and the IMF believe that the American economy will soon revive and pull forward the global economy with it. One of the richest persons and investor Warren Buffet shares this view. He said, “The American economy will come back… Businesses will be formed. Businesses will expand… We’re not out of the hospital yet. But we will come out of the hospital… It happened in the 19th century, it happened in the 20th century at various times, and we’ve always come back stronger.” On the other hand, investors do not seem to share such optimism. They are buying gold and dumping dollars as evinced in the steep rise of the precious metal in the last few weeks.
The experience of the Asian crisis gives hope to the optimists. The American economy was moving fast forward in the few years preceding 1997. American companies were making huge investments in manufacturing facilities in Thailand and other East Asian countries. The goods produced were being exported to America. Thailand was receiving huge amounts of foreign investments and also got access to the markets of the developed countries. This model of development of Thailand was dependent wholly on the American economy.
The American economy started facing a downturn in 1998. There was a decline in demand for cars imported from Thailand. Correspondingly, American companies like the General Motors slowed down their foreign investments. This reduction in inflow of dollars led to a steep devaluation in the Thai currency. This was the beginning of the Asian crisis. But the crisis did not become deep. At nearly the same time, Internet revolution started in America. Companies like Microsoft and Cisco Systems started making huge profits. The share market of the technology companies-NASDAQ-started booming. Once again global investors started putting their money in the American companies. This inflow of foreign money led to regeneration of domestic demand. American companies once again embarked on importing foreign goods and making foreign investments. The technological development of the Internet helped America come out of the recession. America had similarly come out of previous bouts of recession with the help of technological developments of nuclear reactors, jet airplanes and the like.
This happy circumstance did not happen again, however. The revival of the US economy due to the IT sector petered out in 2002. American economy again started to slip into recession. The Chairman of US Federal Reserve Bank Alan Greenspan was an optimist like Shri Warren Buffet. He thought that the US will again soon come up with another technological innovation and the economy will come back to the high growth trajectory. He decided to put the slowing American economy on oxygen just as a patient is put on oxygen till the medicines start acting. He reduced the rate of interest on property loans. He encouraged Americans to take cheap loans and buy housing. This led to a huge demand for cement and steel in the housing sector and the American economy was able to avoid the recession at that time. But the anticipated technological innovation did not happen. The real economy, excluding the housing sector, continued to decline. American companies started to wilt under pressure from cheap imports from China and India. American workers started to lose their jobs. They could not repay the housing loans they had taken under encouragement from the Federal Reserve Bank. The banks that had given out these loans faced huge losses and collapsed. This was the beginning of the present global crisis. The non-arrival of new technological advances led to the deepening of the recession in America and pulled the global economy with it. It did not rebound as had done after the Asian crisis of 1998. Therefore, it is not possible to predict whether a technological advance will happen which will continue to put the American- and world economy on the path of high-growth.
A survey of history tells us that technological advances happen in spurts. Bronze was invented in about 3,000 BC. Wooden ploughs were used for cultivation before that time and stone axes were used to fell the trees. Production was less with these instruments made of wood and stone. Invention of bronze enabled a huge increase in agricultural production. This was the economic bedrock on which the grand civilisations of Egypt, Indus Valley and Sumer were built. The spate of technological inventions continued for a few centuries. Sailboats, chariots and baked bricks were made. But then new technological innovations began to falter. The special advantage enjoyed by these pioneering civilisations evaporated and they fell to attacks from other peoples such as the Hyskos in Egypt. The Egyptian, Indus Valley and Sumeric civilisations all collapsed around 2,000 BC.
This was followed by a technological hiatus lasting for about 1500 years. The human civilisation remained subdued throughout this long period. Then iron was invented. It spread around 500 BC to faraway lands. Manufacturing of bronze required mining of copper which was found sparsely. Iron was available in much larger quantities. This enabled man to increase agricultural production. This invention was followed by the advent of the ancient Greek and Roman civilisations in Europe and the Maurya and Gupta empires in India. After a few centuries of rapid progress, once again, a long period of stagnation followed till about 1500 AD.
Gunpowder was invented around 1400 AD. Genghis Khan developed his great Mongol Empire covering most of Europe and northern Asia on the strength of this technology. This was followed by the invention of the steam engine in England that established that country as ‘workshop of the world’. Lastly, the development of nuclear power, jet airplanes and computers established the United States as the global economic power.
It is clear that technological advance come in spurts followed by long periods of stagnation. The present phase of technological advances has been continuing for the last 600 years. It is possible that we may be entering a phase of technological stagnation. On the other hand, it is also possible that new technological advance may continue to take place. There appears to be huge potential in space exploration and biotechnologies such a genetic modification. But there is no certainty here. It would be unwise to bank upon development of new technologies. Therefore, the confidence that America will certainly come out of the present recession appears to be misplaced.
We have to be ready to face both eventualities. We should move to expand our domestic markets in case new technologies do not appear and the American and global recession deepens. On the other hand, we should move to adopt and absorb new technologies should such technologies develop. But it would be foolish to assume that American and world economy will revive.
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