Tuesday, August 16, 2011

Socio-political Warning

For those of us familiar with country ratings based on fiscal situation and fiscal politics of emerging and developing countries the downgrade of US rating by S&P was surprising only to the extent that a US rating agency dared to be even handed and dared to apply to the US, the same rules and procedures that they had always applied to emerging economies (EMs):  That political inaction or gridlock about fiscal reform  is not a valid argument against a rating downgrade.  Nevertheless this downgrade is warning not only to the political systems of the US and the Euro area/European Union, but also for the emerging economies and developing countries.  That is, to use the relative good economic situation that still prevails in these countries to reduce fiscal deficits and put sovereign debt: GDP ratios on a downward trend, before the heightened risk of a European crisis triggers a double dip in the US and affects the EMDCs.  Such a crisis, however low the probability, will leave little room for manouver for those EMs that do not take pre-emptive action to reduce deficits, remove domestic bottlenecks to growth and undertake reforms to activate growth drivers.  For instance, the Indian economic survey 2008-9 (DEA, MOF) give a menu of 6 boxes, including fiscal reforms, that should be carried out to ensure that the growth rate does not decline below the potential of 8.5 to 9%.  Unfortunately these warnings the pace of reforms has slowed below the average trend seen in the previous two decades.  If the pace of reforms is not restored back to its trend, the rate of growth is likely to decline gradually, given the dire global economic outlook and heightened global risks

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