What ails the UK and western economies

May 18, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

The industrial revolution which missed India eventually resulted in this once developed and rich country being placed on the receiving end of a ruthless colonial enterprise.

Those engaged in indigenous trade and crafts were coerced into producing primary goods for export at prices convenient to the United Kingdom.

Thanks to newly found mechanised facilities, their industries were now capable of producing far more and better finished products than the artisans in India. These value-added goods were then dumped in India and other markets of the vast British Empire.

England enriched itself substantially because without input cost escalations and those associated with overcoming hurdles to market entry, its industry never really faced the challenges of a normal business environment.

Such undisputed control on the sea routes, the sources of raw material and also the end market could ensure that inflation and margins never really mattered in their scheme of things.

The vast profits generated in these colonies found their way back into the UK, transforming it into possibly one of the richest economies in the world. Obviously, its navy and armed forces gained the prowess to aggressively push forth with its colonial agenda to perpetuate its usurious economy.

As with every economy which sees high growth rates, England too witnessed increasing economic disparities amongst its highly class-based society which soon simmered with the perceptive difference between the haves and the have-nots.

The increasing influence of Marxism across Europe was for the first time pushing its working classes to take to collective bargaining for a larger share in this newly found prosperity. Its feudal society had no option but to buy their peace through broad-based social security benefits and inclusive public welfare initiatives which in those economic conditions was well affordable.

World War II changed it all and whilst Europe and the UK did emerge victorious, they also ended up practically bankrupt with their economies in need of huge resources to rebuild themselves.

The UK could no longer afford the elaborate infrastructure essential to retain control on its sprawling empire where the sun never set. It wisely made a diplomatic exit in the hope of retaining influence on its Commonwealth of colonies.

What though was unexpected was despite the shambles it had been left in, India rapidly settled as a democracy. Churchill’s uncharitable ranting and raving clearly pointed to his being possibly one of those few capable to foresee the eventual impact of losing this jewel in his Queen’s crown.

The UK economy soon began wilting under pressures exerted by a real business environment. The British multinational executives who famously conducted business on the golf courses could no longer keep pace with hungry local competition and the nationalistic forces unleashed by our newly born nation haunted by its history of economic exploitation.

Fortunately for the UK, its small population and limited geographical expanse made a fairly quick economic revival possible allowing for its expensive public welfare systems to survive, albeit partly due to electoral compulsions.

I believe the story of the UK can apply to the rest of the developed western world in smaller or greater measure.

The poor colonies were gradually emerging as economies in their own right whilst the developing world remained obsessed with post World War II issues. The sudden improvement in India’s health standards (which was not too difficult considering they were as good as none when we gained our independence) also resulted in a population boom while the prosperous world had decreasing growth rates and in some cases even a depleting population.

Simply taking India’s case, with a GDP of $1.73 trillion and per capita income of about $1,180 we are a middle-income nation today. This despite our numbers growing from 320 million in 1947 to over a billion. Obviously, the vast numbers emerging from poverty are consuming more food and using more oil. Add China to this equation and we will conclude that commodity shortages will persist till productivity in developing countries catches up with growing demand.

The western economies, despite misgivings, will increasingly find their living standards under threat which in turn will result in excess capacities as is the case with the U.S. today. The depleting and aging population in these countries will progressively render their expensive public welfare programs unviable.

In their eagerness to curtail input costs and thereby inflation, most of them moved out of manufacturing activity which has manifested in the unemployment challenges confronting developed economies. Opportunities for employment mainly exist for their brightest minds in high-tech and financial services leading to the much lamented ‘jobless economic recovery’.

The colonial gravy train is fast heading into the yard.

Their loose money policy is merely a lazy way of postponing the unavoidable and politically challenging fiscal measures.

The emerging countries, as can be already seen with China, will increasingly take bold steps to protect their economic interests by securing trade routes to ensure access to strategic resources. Obviously, military bipolarity with China on the other end may possibly not be too far away.

Europe and the U.S. have therefore no alternative but to rebalance their economic structure by subjecting their population to painful austerity measures resulting from tight fiscal policies and reduced spending.

This may not be possible without reclaiming their manufacturing activity by reducing input costs and possibly axing at least a part of their liberal public welfare benefits; in addition to opening up immigration to reap the benefits of labour arbitrage.

I would therefore believe that the inevitable shift of growth to Asia will complete the economic circle and from this stems my undeterred faith in India’s long-term growth story.

It’s the difference between teenage growing pains and the tired joint aches of the aged.

The Western economies will have to step down from their pedestal and share the bitter pill of fiscal austerity with emerging economies or else, the credit rating downgrades and packages will become a recurring news feature.

The situation was similar albeit in varying levels of intensity in other parts of Europe.

One comment

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Well expressed Mr. Ghotgalkar, you axed the point in through and through! Now what remains to be seen is how good the UK, and other western nations, humble up to this change in world dynamics by experiencing the frugalities their economic exploitation had put the rest of the world in till now.

The same “Kala Chakra” that had put them at the top of the world is slowly turning to crush them under it now.

Posted by AshokVardhan | Report as abusive