Growth can be stimulated by integrating into the global market system. The dark side of such openness is the unethical competition to safeguard domestic economy through protectionism practiced through additional duties or quotas on imports.
As recession is deepening, countries are raising their voices to dismantle trade barriers but eliminating barriers is interpreted as the reiteration of protectionism. For example, countries have raised import duties or passed stimulus measures with trade-distorting subsidies. Countries of G 20 have already adopted 47 measures aimed at restricting trade. Russia´s high tariff on used cars, China´s stringent conditionality in import standards on food, India´s ban on Chinese toys and the US giving subsidies to embattled automakers or car dealers are some of the examples of protectionism.
It is difficult to predict exactly when the present recession will end. Past experience shows that it might come to an end in about eighteen months, provided fiscal and monetary stimulus plans are put in place such as giving cheap rates to borrow money.
It is difficult to quantify the costs accrued from trade barriers. The World Bank estimates that even without protectionism, the biggest global downturn of the last 80 years is likely to result in the largest annual decline in world trade. Therefore, the big question is: what would be the best alternative – survive with devastating trade wars or sustain by removing the barriers? Secondly, should the countries continue protectionism through stimulus programs or safeguard domestic market by discouraging consumers to buy imported goods?
The bottom-line is that the theory of protectionism should not be orchestrated to play against economically-insecure populations. The statistical information on global trade barriers that are practiced outside the WTO rules should be made transparent and the decisions to check such practices should be taken up by the authorized global institutions.
There is a realization among some groups of exporting nations especially with regards to protectionism that in order to improve their own trade positions, they should impose measures that temporarily increase exports or restrict imports. Compared to the inadequate instruments and inexperience to combat recession during the Great Depression of 1930s, we now have at least well-thought and well-developed fiscal and monetary tools to stabilize the markets and promote growth. The only problem is the disinterest or inefficiency of global regulatory institutions.
There is a severe business cycle contraction through reduced economic activities since recession has exceeded 16 months deviating from the normal belief that the reduction in a country’s GDP lasts just for two quarters. Nepal still suffers from double-digit inflation accompanied by the fall in the purchasing power of money. Unemployment has been a serious threat to social cohesion and Nepal is also experiencing depression.
At the moment, in the absence of productive investment, massive decline in gainful employment, and erosion in aggregate demand, the housing business in Nepal´s urban centers is still booming. As an example, one ropani (about 333⅓ m²) of plot in Chobhar, Kirtipur that cost 2.4 million rupees last year now costs 3.2 million rupees. As can be seen, the added value within a year is 33 percent. The rise is even more noticeable in prime locations, making Nepal´s situation scarier than some Western countries.
The US has encountered a dramatic decline in house price for the first time since the 1930s. Big lenders are dangerously exposed to the high risk loans market. The situation became such that the value of the property became less than the loan amount. We need to learn lessons from US’s mistake, otherwise the lending institutions with adequate capital today could easily be declared bankrupt tomorrow with negative net worth.
Past experiences tell us that it will probably take 18 more months for the current recession to end, provided fiscal and monetary stimulus plans are put in place.
It is difficult to predict exactly when the present recession will end. Past experience shows that it might come to an end in about eighteen months, provided fiscal and monetary stimulus plans are put in place such as giving cheap rates to borrow money. Otherwise, the recession will continue. There is a possibility that the recession will continue until the end of 2010. The US National Bureau of Economic Research had stated that this recession began in December, 2007 in the United States. This means the world has already gone through a sixteen-month-long contraction, and it is yet to show any sign of normalcy.
The Great Depression of 1930-32 lasted for 43 months beginning August 1929 to March 1933. Then, unemployment surged to 25 percent & GDP contracted by 28 percent.
Recession during 1980-81 was longer-than-average (16 months). However, recession during 1990-91 and 2001 was famously mild and short-lived. The average of 10 recessions since World War II is 10.4 months, with a range of six months in 1980 and 16 months in 1980-81. Let us hope the recession in Nepal does not become uncertain and unpredictable such as our political uncertainties.
In the last G20 meeting held in April, the countries came out with two schools of thought. The US recommends stimulating the economy through tax and spending policies. The Europeans recommend more control over markets. The Organization for Economic Co-operation and Development (OECD) has recently warned that protectionist measures will intensify the crisis. As economists believe that the downturn will be worse than IMF´s previous projection of 2.2 per cent, OECD for that matter has urged its 30-member countries to avoid bailouts to carmakers and instead increase spending on infrastructure and lower income taxes for the less well-off.
Some of the lessons that Nepal needs to learn from the ongoing recession: immediately avoid meeting extra-budgetary demands, do not waive even good loans, avoid hoarding government surpluses eliminating the norm of public expenditure management, increase domestic consumption by making infrastructural investments to generate employment and raise aggregate demand, revise the targets for achieving MDGs, make regular debt payment to Indian Oil Corporation, harmonize the contradicting incentive provisions stated in Foreign Direct Investment and Enterprise Act, 1992 and Income Tax Act, 2002, revise regulatory measures on lending policies for sick industries and seek inter-party consensus to increase development expenditure especially on social sectors.
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