Societal actions to sustain ‘deserved trust’ essential for growth

Evidence is mounting that the ongoing global economic crisis is the severest in over seven decades.

In spite of growth projections of around 5% for India and China, global economic growth is expected to be negative in 2009; and world trade is expected to also decline significantly. Global loss of livelihoods may approach 50 million, with Asia accounting for half the total.

There are fears that the export-led model of economic development, so successfully pursued by countries in East Asia and elsewhere, will require a major rethink. Sluggish global trade in turn has increased the importance of shorter, simpler, and geographically proximate logistics and supply chains for production and distribution.

While the causes of the crisis are complex, involving interplay between excessively loose monetary and credit policies for a prolonged period, unwarranted national regulatory forbearance concerning systemic risk of unprecedented globalisation of finance, and unsustainable global macroeconomic imbalances, an important factor has been the simultaneous widespread loss of deserved trust across the world.

This has involved institutions well respected until recently, including the central banks and the finance ministries, and many prominent individuals in finance, industry and academia around the world.

The role of finance-oriented media, with its pronounced aversion to complexity and uncertainty, and its penchant for focusing on money-making tips, even from otherwise discredited “experts”, has also come under critical scrutiny.

In India’s case, a stunning betrayal of trust by the promoters of
Satyam, reportedly abated by politicians, media and other establishment figures, is having painful repercussions for the whole society.

Internationally, Barnard Madoff’s cold-hearted embezzlement of around $50 billion represents a new depth in human depravity and gullibility.

The loss of trust has led to severe credit squeeze, with major banks refusing to lend to even each other. Much of the economic and social interaction depends on trust. Effective nationalisation of much of the financial sector of the industrial countries represents a resounding no-confidence in the notion that major banks and insurance companies will act responsibly to ensure that their ability to generate systemic risk is kept in reasonable check.

The widespread hankering for so-called magic bullet in the form of a single person (such as US president Barack Obama) or in the form of single policy initiative (fiscal stimulus packages) while understandable, is not going to be helpful in addressing the root causes of the crisis.

There are two main limitations of the fiscal stimulus packages. The first is the doubtful macroeconomic efficacy of spending large amounts in a short period of time, particularly in countries with already large fiscal deficits and low capacity to translate budgetary outlays into effective outcomes, as is the case for India. The second is the apparent neglect microeconomic efficiency considerations in the pursuit of aggressive fiscal and monetary policies designed to sustain short-term economic activity. If stimulus packages are targeted at businesses, which are unlikely to be competitive, future
growth prospects may be adversely affected.

India has used the external sector as one of the pillars of economic growth for the last two decades. But its growth strategy has emphasised relatively balanced approach between domestic and external sectors, and between private and public sector development. Its strong entrepreneurial base, and favourable demographic phase in which share of working age to total population is still rising, provides it with an opportunity to utilise the crisis to further strengthen its fundamentals, emphasise making money by meeting social needs.

For India, the priority should be to ensure that the global economic crisis does not lead to a social crisis in the country.

It is in this context that the poor performance of the agriculture sector in recent years needs to be urgently reversed. Global inflation in food is likely in the near future. Food security and affordability are for India’s social cohesion and maintaining favourable growth environment.

But without societal actions to sustain “deserved trust”, the full potential of India’s fundamentals will not be realised.

There are three elements to generating “deserved trust” by individuals and organisations. First is competence. The challenges facing modern societies are complex, requiring considerable investment in building human capacities and in ensuring that there is positive attitude towards learning and applying knowledge to address everyday problems. Merit therefore is an essential criterion for leadership positions at all levels in rising India of the 21st century.

The second element is integrity. This involves individual and social norms, which emphasise notions of what socially responsible behaviour is and what is not. There are individuals and organisations who are competent but do not possess the requisite degree of integrity; there are those who have integrity but do not possess requisite competence; and there are those who have both competence and integrity.

In the current period, when there has been widespread loss of “deserved trust”, individuals and organisations can acquire a competitive edge if they are both competent and possess the requisite degree of integrity.

These qualities cannot be hereditary. They require considerable effort to acquire and sustain over a prolonged period. Only those who merit “deserved trust” should be entrusted with positions of public trust, whether in private, public, not-for-profit sectors, and broader civil society.

History has taught us, and ongoing global economic crisis is the latest example of this, that a society cannot fully rely on competence and integrity of individuals and organisations. The third element of “deserved trust” therefore is a system of informal checks and balances (such as social norms and customs), and formal regulatory structures in which individuals have confidence. These require transparency and accountability.

The financial sector regulators in the industrial countries have acknowledged that the assumption on which they practised “light regulatory touch” over a prolonged period, and on which they validated financial sector excesses were erroneous. But it will not be easy to structure a more viable alternative to the brief era of financial capitalism, which has just ended, particularly with potential shifts in geo-economic and geo-strategic balances.

To manage the current crisis and to sustain its growth, India must improve on all three of the above elements of “deserved trust”, namely competence, integrity, and regulatory structures and institutions. These should be coupled with better standards of transparency and accountability at all levels of society.

The writer is professor of public policy, National University of Singapore, and can be reached at mukul.asher@gmail.com. Views are personal.