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Thursday, November 05, 2009
I am aware that some of your readers are weary of reading me and Dr Ashfaque H Khan disagree with each other. However, may I seek their indulgence once again and urge Dr Khan to stop distorting the facts of economic history (Oct 27)?
After having done his little nauseous publicity gig about how well the economy performed in the period 2000-07, Dr Khan proceeds to describe how things fell apart in 2007-08. He gives the impression that it all happened overnight, in just one year and out of the blue, and was due entirely to external exogenous, non-policy factors, namely, the oil and commodities price surge, the global recession, and so on. This is simply not true. How could the so-called economic managers of the day not know that the economy growing as fast as claimed was clearly under immense strain and overheating? The only way that fast growth would not have ignited inflation and put pressure on macroeconomic imbalances would be if there had been a concurrent sharp upward jump in economy-wide Total Factor Productivity (TFP). There is no evidence of this. While TFP typically rises in an economic upswing, it needs to be a permanent, structural shift, not only a cyclical one, if there is to be sustainable non-inflationary growth with moderate imbalances.
As I have been at pains to point out, the seeds of the economic crisis of 2007-08 were sown during the halcyon days that Dr Khan is so obsessed with. The operative word is 'lags', Dr Khan. The exogenous factors that he describes exacerbated the crisis of 2007-08. They were neither the initiating nor the causative factors of that crisis. A private IMF warning of the dangers of overheating went unheeded. A highly critical IMF report was re-written and the mission chief's name removed from the document. If Dr Khan wishes, I can send him the contact email of the expunged author, provided the author gives me his permission to do so.
Let us stop misleading people because we owe it to them, and ourselves, to be truthful. Even the great guru, Alan Greenspan, in evidence before the US Congress apologised for his mistake in keeping US interest rates too low for too long and creating asset bubbles that popped and almost caused another Great Depression. The world economy is lucky to get away with only a Great Recession. Dr Khan needs to be similarly forthcoming even if he is no Greenspan. Distortions of the truth get us nowhere and we know the old saying about those who do not learn from history being condemned to repeat it.
Dr Meekal A Ahmed
Virginia, US
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