Its official. Governments say it, and international agencies say it. Global capitalism is in crisis. The spectre of mass unemployment, failing businesses, home repossessions haunts much of the world. The problem is at its most acute in the USA where the crisis first unfolded followed closely by Britain.

Unlike the earlier recessions of 1990 and 1980, the trigger for the present recession was the financial sector. American banks flushed with funds from oil revenues lent unwisely- the so called sub-prime lending. These were mostly home purchase loans given to borrowers on low and unstable incomes. In Britain personal credit had expanded to levels which were clearly unsustainable. At some point these personal debts reached a level where even the interest charges on the debt could not be paid. When sub-prime borrowers were unable to repay loans and banks re-possessed their houses, there was fear and panic amongst those who had lent to banks. The fear was that banks were illiquid and could not repay depositors. The classic case was Northern Rock in Britain which had considerable exposure to the American sub-prime lending market. The domino effect of these bank failures was a credit crunch. Banks simply stopped lending. The impact on the corporate sector was dramatic and immediate. For years the corporate sector had thrived on credit fuelled consumption. Credit to the personal sector was no longer available. Housing repossessions and debt fuelled personal bankruptcy meant that credit to the personal sector was no longer available. Spending on the high street went down and inevitably there were corporate casualties. In Britain, household names like Woolworths and MFI went bankrupt. This spill over from financial profligacy to corporate closures is at the heart of the present crisis. Those companies that survived cannot easily raise funds for new projects, consumers cannot spend as they once did. The inevitable consequence is companies will cut back on their staffing and unemployment will increase.

The response of the British government to the financial crisis fuelled recession has been threefold. Major banks in trouble have been bailed out, most spectacularly Royal Bank of Scotland. The Bank of England has lowered interest rates to unprecedented levels ( currently the Minimum Lending Rate is 1%). And finally, the government has cut VAT from 17.5% to 15%. These measures are of some value but each carries with it a degree of risk. The government bailing out banks has greatly increased public debt-which represents a burden on future generations. Lowering interest rates will indeed help debt ridden companies with a cash flow problem and also put more spending power into the hands of those in the personal sector who have large housing loans. But most of these borrowers are fairly comfortably off and typically have a low marginal propensity to consume. The impact on high street spending will not be massive- unless measures aimed at raising spare incomes of poorer consumers are enacted. Paradoxically at a time when unemployment is rising, a small rise in unemployment benefits might be productive. Finally, the fall in VAT does help both consumers and businesses. However, it does not directly help employment. A cut in national insurance payments of employers might have been more productive in this regard.

In Britain another force which is working towards recovery is the sharp devaluation of the pound caused by the flight of foreign investors who no longer see Britain as a good haven for investible funds. British exporters will be able to capture more foreign markets as the low pound makes British exports cheaper. At the same time, British consumers will divert spending towards British goods as foreign goods appear more expensive. But this is a slow process. Nor can it be a global solution. One country’s devaluation necessarily means other countries have an appreciation of their currency.

For small countries like Sri Lanka, the world recession presents a major challenge. Such countries are very dependent on their exports. How can Sri Lanka maintain exports in this global recession? Traditionally Sri Lanka’s exports have focussed on tea, textiles and tourism. The world recession coupled with the internal terrorist threats have undoubtedly affected tourism. Perhaps a re-focussing of the marketing strategy is what is called for. Most western tourists are nervous about terrorist activity in Sri Lanka. But right on Sri Lanka’s doorstep is a huge potential market which is largely untapped. There is no serious marketing drive aimed at India or Pakistan by Sri Lanka. Why not? These are both countries where citizens are resigned to terrorism. Sri Lanka has many attractions for potential tourists from these countries. A seamless relatively low cost package could be enormously attractive.

Hotels in Sri Lanka are far less expensive than in India or Pakistan. But air fares to Colombo are outrageously high. A good charter service designed to capture the middle income tourist coupled with proper transport facilities within Sri Lanka could easily succeed in generating significant "local" tourism. Similarly a focussed strategy has to be developed for tea and textiles. Such strategies may well require a degree of co-operation between Sri Lankan companies if only to develop the common infrastructure required for success. This is no easy task. But to do nothing is to accept defeat supinely. Time will tell.