There are two dangers in this generalization. First, growth of the kind that requires hawkish central bank tightening may not be happening. The employment, consumption and earning numbers that have been coming from US and Europe do not support a clear revival in growth yet. Japan’s rate increase has come with the clear indication that the pace of further hikes will be slow, depending on growth numbers. The lessons of 1991 are too hard to forget. Second, global influences on inflation as well as growth are much higher today, so that demand side machinations of Central bankers may not address the problem entirely.

The global story today has several facets. The surge in cross-border trade and movement of labour and capital have created arbitrages not fully exploited earlier, and dependencies not known earlier. The ability of emerging economies to produce goods and services at much lower costs and sell them to the world has meant that these economies can use their cost-advantages to actually bring about a global disinflation in the goods and services they offer. They are able to attract capital flows from the world by being able to offer better investment opportunities and higher gains. Their GDP growth then is fuelled by higher levels of exports to the world, and the surge in consumption for their goods and services. Therefore even as the larger economies are worried about slower growth, there are several emerging economies that have been enjoying robust and sustained growth.

At a romantic level, then, it would seem that the shift, or more equitable distribution of growth and prosperity across the world, would mean that larger economies give up their dominance of the world to the newer economies that would grow in size over time. China is already there in terms of size and influence over the world, and there is widespread expectation of India, Brazil and Russia getting there over time. At a more realistic level, is sustainable growth for one section of the world feasible even if a larger segment slows down? The answer does not seem to be a resounding yes, and that is where the risks lie.

... contd.