In our rush towards progress, do not ignore the warning signs

The 2008 financial crisis and the 2020 Covid-19 pandemic have something in common with the recent Odisha train tragedy

One is short of words while writing on the June 2 rail tragedy that happened in Odisha, in which at least 288 people died and more than 800 were injured. The visuals on the television and social media platforms make one numb over how these disasters unfold, and impact society. The crisis led to huge outrage over the apathy in the Indian Railways and other Indian public systems. As I was reflecting on the media debates, my mind drifted towards how the Odisha mishap is similar to two major crises faced in the last few years.

Wall Street Crumbled

The first crisis was the 2008 global financial crisis. The crisis started in the United States financial system and spread across to the world’s financial system. For a long time economists expected the US economy to face a crisis and a deep recession. However, the expected source of US recession was the rising current account deficit, high government deficit, slowing productivity, and so on. But the US financial system? No way!

After all, the US financial system was home to quite a few marquee global brands such as Citigroup, Lehman Brothers, JP Morgan, Morgan Stanley, among others. New York lorded over the other international financial centres. The US Dollar maintained its hegemony over financial transactions and global reserve currency. The US Federal Reserve became the central bank of the world. The US Fed’s then outgoing Chairperson, Alan Greenspan, had achieved superstardom and the ‘Greenspan standard’ became a manual for framing monetary policies.

Given this, how did the US financial system face a crisis? This is where the core argument of hubris and overconfidence comes in the debate. In the hype and frenzy, we ignore the warnings and basics. In the same Jackson Hole conference where Greenspan was celebrated in 2005, then IMF Chief Economist Raghuram Rajan (later appointed RBI Governor) questioned the growth and quality of the US financial system. He was dismissed as a Luddite. Rajan was seen as someone opposing all these glorious financial developments.

We know who had the last laugh as the US financial system crashed in 2008. As people started figuring out the reasons for the crash, it came down to something as basic as high leverage and poor risk management. High leverage means financial entities were keeping low level of capital. One should ideally have solid risk management against these transactions, but this was lacking. How could the marquee brands and iconic regulators miss the very basics of finance!

As early as 1987 Hollywood through Wall Street portrayed how the protagonist who celebrates greed at the heart at the financial system is eventually ruined by it. The reel turned real in 2008 when many ruined their careers and witnessed the financial system crumbling.

The problems were not limited to the financial system and its executives. The common people who had put their life savings in financial assets or relied on small loans took major brunt of the crisis. On top of this, unemployment rates increased as businesses cut down jobs across sectors. People lost both savings and jobs.

Ignoring Warnings, Again

The second crisis was the 2020 Covid-19 pandemic. Just like the US financial system, few imagined that the global health system would fail so spectacularly. After all, we had made tremendous progress in terms of health sciences. But then, the famed health systems, especially in developed countries, cracked and choked. The governments had to impose stringent lockdowns which, in turn, led to the collapse of economies, thereby multiplying the problems for the common person. Why did the pandemic happen? Again, it was because of our hubris and because of ignoring the warning signs.

US businessman and philanthropist Bill Gates and many medical experts who warned of a looming pandemic were ignored. The US security experts had warned that one of the biggest security risks faced by the US was that of a pandemic. Hollywood warned us of the dangers of an air-borne virus through Contagion way back in 2011.

On probing the pandemic-led collapse, the reasons were again clear: neglect of primary healthcare, understaffed hospitals, and so on. In the frenzy of advanced healthcare services and super-speciality hospitals, we ignored both the warnings and the need to strengthen basic healthcare services.

Chinks In The Armour

The above two crises have striking parallels with the rail tragedy. The government since 2014 has made railways as its marquee brand. It started with the promise to get bullet trains from Japan on the Mumbai-Ahmedabad route. Meanwhile, it ran privatised trains, launched the new Vande Bharat trains, and modelled the railway stations as airports. Few imagined that such a tragedy was coming from the railways.

Yet there were warning signs. The Comptroller and Auditor General (CAG) of India in a 2022 report flagged that the Indian Railways face the high risk of derailments. The report had shown that nearly 75 per cent of the train accidents were due to the derailments. The risk control systems were found lacking and steps were not taken for adequate staffing in safety department. It had also found that the Indian Railways did not adhere to the timelines of accident inquiries. The report recommended that the Indian Railways ‘develop a strong monitoring mechanism to ensure timely implementation of maintenance activities by adopting fully mechanized methods of track maintenance and improved technologies.’ These warnings, like the warnings for the financial and health systems, were ignored.

This does not mean that these three sectors are not without merit: the achievements in each of them have changed the lives of millions of people across the world. It just means that in the dash to make progress some warning signs were ignored. The answers on how to improve these systems need to come from within these systems. The financial system, the healthcare system, and the railway network are behemoths, but they all have weak spots which cannot be ignored. These weaknesses have the tendency to question all the progress thus far achieved.

(Amol Agrawal is an economist teaching at Ahmedabad University.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.