SAARC and world economic crisis

There is an old adage - what goes up must come down. The world economy was on a roll for several years, with many countries recording high growth rates and consumers spending lavishly on homes, cars and luxury goods. This bubble has now burst, with disastrous consequences not only for these countries, but also for the whole world.

The world financial crisis was precipitated by events in the United States and spread rapidly to other parts of the globe. Some of the strongest economies in the world have virtually collapsed, forcing Governments to step in directly with economic revival packages. A prime example for such Government intervention is the US$ 789 billion economic stimulus plan signed by US President Barack Obama. The same scenario is being repeated across much of Europe.

One reason for the global financial meltdown was the free hand given to private capital in developed economies.

The fat pay cheques and handsome bonuses and retirement benefits indicated a malaise in the private sector led economies. It is only now that these countries have realised the ill effects of unbridled capitalism and that State intervention is necessary to save economies.

Sri Lanka has somewhat miraculously escaped the major ill effects of the world economic crisis, thanks to long-term economic planning and prudent policies. In fact, the Government has been able to unveil an economic stimulus package that has benefitted the public at large. The Government is alive to the dangers that the world economic meltdown could pose to Sri Lanka.

Addressing the SAARC Foreign Ministers in Colombo on Friday, President Mahinda Rajapaksa identified the global financial crisis as one of the biggest threats to world order, that can be considered quite similar to the threat caused by terrorism to our societies and to our region. "The effects of synchronised slow-down in developed economies, can reach us sooner than later. And, as the crisis deepens in the developed world, it is likely that protectionist sentiments can spread and even take root." said President Rajapaksa.

SAARC and other Third World nations must take precautions to protect their economies and people from the global financial crisis, which is threatening the present world order, along with terrorism. The depression in the commodity market is adversely affecting many countries already, negating the gains resulting from the declining oil prices. Trade flows, production lines and the service sector are suffering from the domino effect of this crisis, as the President pointed out.

It would be imprudent to think that we would forever be insulated from the effects of the economic crisis sweeping the world. South Asia can take comfort in the fact that their economies are so far functioning well and financial sectors have been well-regulated and stable. But we cannot afford to be complacent at this crucial hour. One way of ensuring the continuity of SAARC economic stability is increasing the level of economic cooperation among the eight SAARC countries. The SAARC Development Fund and the South Asia Free Trade Arrangement are thus steps in the right direction. The greater integration of SAARC economies will enable the region to withstand any economic storm collectively. The SAARC Central Bankers and key economic planners must meet and devise ways and means of protecting the regional economy from the financial crisis. They can take a cue from neighbouring East Asia, which created a network of bilateral swap arrangements and has now created a reserve fund to address liquidity problems in the region.

It is also important that SAARC project a collective voice on the international stage vis-à-vis the world financial crisis. A collective approach in dealing with multi-lateral agencies and international financial institutions will benefit the whole region. Such support will be necessary in the long term as any hiatus in development programs and welfare measures will have an adverse impact on vulnerable sections of the South Asian population.

Sri Lanka has shown the world that terrorism can be contained and defeated, although many military experts had warned that it would be practically impossible to defeat a ruthless terror group such as the LTTE.

Similarly, Sri Lanka - and South Asia - have proved that a negative economic outlook can be defeated.

The world financial crisis has taught us several valuable lessons. The prime lesson is that economies should not be unregulated. State intervention and control is not just necessary, it is essential. Second, sound economic planning will always help avoid unforeseen economic calamities. Third, it is prudent to implement regional initiatives to ward off any ill-effects of the financial meltdown. Fourth, it is essential that economic planners should be alive to the latest trends in the world economy.

It will be sometime before the world emerges battered and bruised from this economic disaster. The nations of the world should take collective action from now onwards to avoid a repetition of this economic catastrophe.