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Follow UsBANGALORE, INDIA: Some has dubbed the slowdown of the US economy in 2007 as the worst fiscal crisis in a decade.
In the spring of 2007, the US sub-prime housing market went into a tailspin creating in its wake a credit crunch. The meltdown slowed down the real estate market, the construction industry, caused huge losses to mortgage companies and hurt banks and financial institutions such as Citigroup, Merill Lynch and UBS.
Consumer confidence was lukewarm in the US holiday season of Halloween and Thanksgiving - a key indicator of consumer spending - and US inflation went up in November spurred by increasing energy prices.
Consumer prices increased 4.3 per cent on a yearly basis, the highest in recent memory. The US has been accumulating deficits and has been more reliant on foreign inflows; hence the dwindling dollar.
Recent examples of these new-age capital injections by investors include the Abu Dhabi Investment Authority's (ADIA) 4.9 per cent stake in Citigroup and the Government of Singapore Investment Corp's (GIC) $9.74 billion into Switzerland's largest bank, UBS.
To prevent a serious recession-like scenario, the US Federal Reserve has had to cut down interest rates at least four times in the last six months. The UK has also followed suit and cut interest rates hoping to prop up the flagging economic growth.
If Indian exporters are worried about the appreciating rupee, they are not alone. The US dollar has been falling against major global currencies including the Euro.
Financial globalization at work
Economists feel that the current economic volatility is the first major test of financial globalization. According to Frederic Mishkin, a Federal Reserve governor and author of The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich, foreign capital flows have increased from five per cent of the global economy in the early `70s to 21 per cent.
In his book, Mishkin argues that the effects of financial globalization can work both ways: increasing global diversification could lower the likelihood that financial shocks will be concentrated in individual economies and thus lead to economic downturns.
On the positive side, he feels that financial globalization could lead to institutional reforms that create stabler financial systems, and more capital inflows to fuel risk-taking on the part of financial institutions.
Rest of world is doing great
Since 2003, thanks to globalization and booming economies like India and China, the world economy recorded an annual growth rate of 5.2 per cent (two per cent higher than the world economy in '80s and '90s). With the exception of the developed Western markets, the rest of the world has scripted a good economic story.
In 2006, over 104 countries, most in the developing world, grew at five per cent rate. According to the World Bank, developing economies grew 7.3 per cent in 2006 - more than twice as fast as high income countries -aided by high growth in India and China.
Closer home
While this is the big picture view of the world economy at play, closer home in India, the effects of globalization seem to have benefited India and especially Indian outsourcers.
This year, the rupee has appreciated 12 per cent against the dollar and BPO and IT companies have been affected by the sub-prime mortgage meltdown that has forced US banks to tighten their purse strings.
The Indian companies have been dealing with these problems by hedging currencies and also increasing their business outside the US. In fact, the Indian IT services companies are positive that a downturn in the US economy could lead to more outsourcing to offshore locations in order to cut down spending.
"Whenever the world is facing cost pressures or facing a little lower demand, then US companies will face the need to take out costs," Azim H. Premji, chairman, Wipro, said recently.
Research firm IDC has projected a rather gloomy prediction for tech spending in 2008, estimating that it range between 5.5 per cent and six percent next year compared to seven per cent in 2007.
However, BRIC countries - Brazil, Russia, India and China - are expected to grow 16 per cent in 2008. It is clear that the world economy is in flux due to the effects of globalization.
While the economic prognostications suggest a gloomy year ahead, it must be said that 2008 would be an indicator of how most of the world economies will reform and adapt themselves to the new globalized world order.
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