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Chapter I the Global Economic Crisis: Causes and Transmission

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Chapter I the Global Economic Crisis: Causes and Transmission Chapter I The global economic crisis: causes and transmission Impact, response and recovery The recent financial and economic crisis—the worst since the Great Depression of the 1930s—originated in the United States and quickly spread through multiple channels to other industrialized countries, low- and middle-income countries, as well as economies in transition. The result has been the still- unfolding global financial, economic and social crises now often referred to as the “Great Recession”. The global economy contracted by 2 per cent in 2009 in sharp contrast to the several preceding years of high growth in excess of 3 per cent annually (United Nations, 2010c; 2011). While many rich countries experienced economic contraction, the rate of economic growth in developing countries slowed significantly to 2.4 per cent for 2009. In 2009, 52 countries experienced declines in per capita income. In the same year, output in economies in transition as a group contracted sharply by 6.7 per cent as Russian output declined by almost 8 per cent. Also in 2009, economies in Latin America and the Caribbean contracted by 2 per cent, as Mexican output fell by 6.5 per cent. Western Asia was the other developing part of the world experiencing negative growth (United Nations, 2011). Global trade volumes fell from the end of 2008 through the first half of 2009 as a result of declining imports by developed countries, especially in the United States which accounted for 15 per cent of the global total (United Nations, 2009a; 2010b). At the height of the crisis, between July 2008 and April 2009, the value of imports of the European Union, Japan and the United States plummeted by almost 40 per cent and triggered a worldwide collapse in international trade.7 Despite the gradual recovery of the past two years, the value of imports of the three largest developed economies was still about 25 per cent below pre-crisis peaks by August 2010. Global trade is expected to grow by about 6.5 per cent in 2011 and 2012, significantly less than the 10.5 per cent rebound in 2010 (United Nations, 2011). 7 The volume of imports of the three major developed economies fell by about 18 per cent during that period, a situation which was compounded by a decline of about 24 per cent in import prices. 14 The Global Social Crisis The extent as well as manner in which a country is integrated into the global economy has determined the severity of the crisis in different countries. The effects of the crisis spread to developing countries, primarily through declines in trade and commodity prices and reduced access to credit, as lower demand in developed countries hurt the export sectors and slowed growth in developing countries. The plight of many developing countries heavily dependent on the export of primary commodities was especially worsened by falling commodity prices. At the same time, international bank loans and foreign direct investment (FDI) declined. While some of these flows have since recovered, the cost of finance is still high and access to bank loans remains especially tight with stringent implementation of the regulations introduced by the Basel Committee on Banking Supervision. The effects of the crisis also spread through secondary transmission channels, such as lowered remittance flows to some countries and reduced earnings from tourism, of particular importance for many small island States. Sub-Saharan Africa has not been immune to the effects of the crisis despite its marginal role in the global economy. That region has experienced significant slowing of economic growth and poverty reduction but the impacts were less severe there than elsewhere. Although parts of the Asian region have led the recovery, the crisis has reduced the region’s remittance inflows and export earnings. Some countries in Latin America with strong ties to crisis-affected Spain and the United States have suffered quite badly, although overall the region has proven quite resilient (United Nations, 2010b; World Bank, 2010a). Central Asian countries were also relatively less affected, except for Kazakhstan which had fuelled its rapid growth with heavy private sector external borrowings from foreign capital markets. The crisis spread through the operations of the banking subsidiaries in Kazakhstan to other countries in that subregion. The other channel of contagion was the drop in remittances of migrant workers, mostly from Tajikistan and Kyrgyzstan, working in Kazakhstan and the Russian Federation. The worst affected area was Eastern Europe, which suffered heavily because of its exposure to toxic assets in the United States. Almost all countries in that part of Europe experienced declines in real gross domestic product (GDP) in 2009. The most severely affected countries were Estonia, Latvia and Lithuania, where real GDP fell by 15 to 18 per cent in 2009 and did not recover in 2010. The unemployment rate in Latvia rose to 22.5 per cent in 2009 and to 15 per cent in the other two Baltic countries. In 2010, the unemployment rates were 20 per cent in Latvia, 19 per cent in Estonia and 17.3 per cent in Lithuania (Eurostat, 2011). International response averts deeper recession The leaders of major economies came forward and took unprecedented coordinated actions, adopting stimulus packages and furnishing resources to boost the lending capacity of the IMF and multilateral development banks. These actions succeeded in averting a deeper recession. The global recovery has proven 15 The Global Social Crisis to be stronger than had been initially forecast, though it is still uneven and the potential for volatility remains high. The policy response has weakened since 2010, and many Governments, particularly those in developed countries, have shifted to fiscal austerity. Partly as a result of these policy shifts, global economic growth started to decelerate in mid-2010. Government policies are expected to be much less expansionary in the near term, especially as widening fiscal deficits and rising public debt have undermined support for further fiscal stimulus measures. Therefore, slower growth is expected to continue into 2011 and 2012. Recovery: tepid, uneven and uncertain The global economy grew by about 3.6 per cent in 2010. Asia has led the recovery among developing regions, while Europe and the Commonwealth of Independent States are still lagging behind. The United Nations estimates that the global economy will grow by 3.1 per cent in 2011 and 3.5 per cent in 2012. The recovery may, however, suffer setbacks and slow to below an annual rate of 2 per cent, while some developed economies may slip back into recession should several downside risks materialize (United Nations, 2011). Many fundamental causes of the crisis have not been addressed, such as insufficient financial sector regulation, unrealistically high executive compensation (salaries and bonuses), stagnating real wages and consequently rising inequality and debt-financed consumption. Some countries have continued, or even intensified, expansionary monetary policies (low interest rates and “quantitative easing”) to support economic activities while fiscal stimulus measures are being phased out and to help financial sectors return to normalcy. However, these actions have created new risks such as greater exchange-rate volatility among major currencies and a surge of volatile capital flows to emerging economies. These developments have already become a source of economic tension and weakened the commitment to coordinate policies at the international level to deal with the global imbalances and other structural problems. This could harm recovery in the near term and make it difficult to respond to more challenging emerging issues. Background In the years preceding the crisis, most economies experienced high rates of growth, low inflation and monetary stability. Many countries, particularly in Africa, grew at historically high rates not seen for decades, largely as a result of the boom in commodity prices. Developing countries became increasingly integrated into the global economy as liberalization, deregulation, trade and financial globalization spread, with the encouragement of the international financial institutions. This relatively long period of economic growth with low inflation gave rise to a number of dangerous illusions. First was the notion of a “great moderation” in 16 The Global Social Crisis Table I.1 Growth of global output, 2006-2012 Annual percentage change 2006 2007 2008 2009 2010 a 2011 b 2012 b Global output c 4.0 3.9 1.6 -2.0 3.6 3.1 3.5 of which: Developed economies 2.8 2.5 0.1 -3.5 2.3 1.9 2.3 Euro area 3.0 2.8 0.5 -4.1 1.6 1.3 1.7 Japan 2.0 2.4 -1.2 -5.2 2.7 1.1 1.4 United Kingdom 2.8 2.7 -0.1 -4.9 1.8 2.1 2.6 United States 2.7 1.9 0.0 -2.6 2.6 2.2 2.8 Economies in transition 8.3 8.6 5.2 -6.7 3.8 4.0 4.2 Russian Federation 8.2 8.5 5.2 -7.9 3.9 3.7 3.9 Developing economies 7.3 7.6 5.4 2.4 7.1 6.0 6.1 Africa 5.9 6.1 5.0 2.3 4.7 5.0 5.1 Nigeria 6.2 7.0 6.0 7.0 7.1 6.5 5.8 South Africa 5.6 5.5 3.7 -1.8 2.6 3.2 3.2 East and South Asia 8.6 9.3 6.2 5.1 8.4 7.1 7.3 China 11.6 13.0 9.6 9.1 10.1 8.9 9.0 India 9.6 9.4 7.5 6.7 8.4 8.2 8.4 West Asia 6.1 5.1 4.4 -1.0 5.5 4.7 4.4 Israel 5.7 5.4 4.2 0.8 4.0 3.5 3.0 Turkey 6.9 4.7 0.7 -4.7 7.4 4.6 5.0 Latin America and the 5.6 5.6 4.0 -2.1 5.6 4.1 4.3 Caribbean Brazil 4.0 6.1 5.1 -0.2 7.6 4.5 5.2 Mexico 4.9 3.3 1.5 -6.5 5.0 3.4 3.5 of which: Least developed countries 7.6 8.1 6.7 4.0 5.2 5.5 5.7 Source: (United Nations, 2011), p.
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