Transcript PROSPECTS FOR THE DEVELOPING COUNTRIES

WORLD ECONOMIC CRISIS,
DEFLATION, RECESSION AND THE
COMING SHIFT IN THE BALANCE OF
GLOBAL ECONOMIC POWER
1
OUTLINE
•
•
•
•
Nature of crisis
Sources of crisis
Actual and future policy responses
Prospects for the advanced
countries
• Prospects for the developing
countries
NATURE OF CRISIS
General Nature of the Crisis
• Financial
• Economic
• Global
Financial crisis
• Bursting of housing bubble
• Liquidity crunch – shortage of
cash
• Credit crunch – lending activity
ceases
• Global crash of stock markets*
• Collapse of major financial
institutions
Beginnings of an Economic Crisis
and Recession
• Fall in Industrial Production and
GDP
• Rise in unemployment
• Collapse in consumer and
business confidence
US Industrial Production, Jan 1989
– Sept 2008
8
6
4
% change
2
0
31-1-89
-2
-4
-6
-8
31-1-92
31-1-95
31-1-98
31-1-01
31-1-04
31-1-07
SOURCES OF CRISIS
Perceived Sources Of Problems
• Burst housing bubble (sub-prime
mortgages) which spilt over into other
sectors
• Greedy bankers and speculators (shorttraders)
• Misguided policy makers
The Actual Sources
• Long business cycle
– Long period increases and falls in
economic growth, employment and inflation
alongside rises and falls in profits, real
wages, and interest rates
– ….resulting from major changes in the
technological base of production
• Shift in global power
LONG WAVE
LONG CYCLE DATING
trough
1790
1848
peak
1814
1872
1893
1917
1940
1975
2000
2030
trough duration hegemonic power technology
1848
58
Britain
canals
1893
45
Britain
railways, steam (steam
engine)
1940
47
Britain
steel, combustion engine,
electricity, chemicals,
telephone
2000?
60
United States electronics, plastics,
aerospace, nuclear energy
2050
50
United States computers, biotechnology,
robotics
Source: Goldstein 1988 (modified)
What Happens in The DOWNWAVE –
i.e., 1980-Present
•
•
•
•
•
Rise of Neo-liberal/Neo-classical type ideology
Fall in inflation*
Fall in growth rates of advanced economies*
Fall in interest rates
Rise of financial sector and speculative activity
– repeated “asset bubbles” (1)(2)*
• Illusion of prosperity
US Inflation Period Averages 19502007
12
10
percentage
8
6
4
2
0
1950-59
1960-69
1970-79
Williams
1980-89
Official
1990-99
2000-2007
US Long-Cycle Average Growth Rates:
Official vs Williams
5
Williams
Official
4
percentage
3
1.1%
2
2.6%
3.6%
1
0
1950-59
-1
1960-69
1970-79
1980-89
1990-99
2000-mid
2008
US TOTAL Debt as % of GDP
330%
In % of GDP
2003
264% 1933
260
220
180
140
100
1926 35
45
55
65 75
85 95 03
Source: US Federal Reserve and Financiële Strategie
Derivatives Growth
Outstanding
derivatives
contracts
As percentage of
World GDP
1997
2007
$75 trillion
$600 trillion
250%
1100%
Source: Bank for International Settlements
Relative Decline of The US Economy
Using Published Data
US share of world economy
60
50
percentage
40
30
20
10
0
1950
1960
1970
1980
1990
2000
2006
INTO THE NEXT LONG
UPSWING?
What Is Needed For The Upswing To
Start And Progress?
•
•
•
•
A major crisis and a shift in global economic power
Destruction of debt (1)
Elimination of excess capacity
Restoration of productive profit rates from;
– Lower costs of capital
– Relocation of production to lower cost areas
– Less competitive environment
• Change in dominant economic thinking and policy making
(towards Keynesianism) (2)
• More transparency in and regulation of the financial system
• Recognition and elimination (or at least reduction) of fraud in
economic data computations (3)
• New international financial system
• New international trading system
ACTUAL AND FUTURE POLICY
RESPONSES
Actual responses
• Fixing the financial sector
– Injections of liquidity (money) into the system
(1)
– Bail-outs of banks
• Purchase of “toxic assets” (2)
• Nationalisations and capital infusions
• Guarantees of deposits
– Talk about tightening financial regulation
• Sharp reductions in interest rates
Proposed Responses
• More interest rate cuts
• Massive increases in budget
deficits (1)(2)
• Bail-outs of certain sectors
• “Nuclear option” (3) - Economist
PROSPECTS FOR THE
ADVANCED COUNTRIES
Short-term (1-2 years)
• More turmoil in the financial system –
insurance companies and pension
funds
• Bankruptcies in the productive and
non-financial service sector (1)
• Fall in GDP to zero or below zero*
• Rise in unemployment
• Threat of deflation (2)*
World Growth Forecasts
Deflation Coming – Economist primary
Commodity and Metals index, Jan 1989end Oct 2008
350
300
Index 2000=100
250
200
150
100
50
0
31-1-89
31-1-92
31-1-95
31-1-98
All
31-1-01
Metals
31-1-04
31-1-07
Longer-term (1)
Stagflation (2)
or
Depression (3)
PROSPECTS FOR THE
DEVELOPING COUNTRIES (1)
Short-term
• Balance of payments and exchange
rate weakness problems
• Exchange rate/inflation vicious cycle
• Sharp falls in economic growth
• Worst affected will be those countries
where Neo-liberal ideology still
dominates policy making (1-3)
Balance of Payments and US Dollar
(and Yen) Shortage Problems
Current account problems(1)
• 80 developing countries have current account deficits of
more than 5% of GDP
• Turkey (-6.4%), Pakistan (-8.7%), South Africa (-7.7%),
Bulgaria (-25%) Ukraine (-10%), Hungary (-5.5%),
Poland (-4.9%), Baltic states (-6% to -15%)
Swap facilities with US (2)
• Brazil, South Korea, Singapore and Mexico
Yen debt problems
• Affecting South-East Asian countries that borrowed in
Yen – so-called “carry trades”
…..Possible Short-term Silver Linings
• Benefit from expansionary policies in the
advanced countries and richer developing
countries
• Relocation of capital from the advanced
countries and high cost developing
countries
• Lower international borrowing costs
The Long-term – Shift in Economic
Power to The Non-OECD Countries
• Non-OECD countries have more flexible production
bases
• Many developing countries will benefit from increases in
primary product prices
• Relocation of capital from advanced to developing
countries
• Increasing South-South cooperation
• The rise of Asia and the advent of an Asian currency
bloc
• Hypocrisy of Neo-liberal development and stabilisation
policy prescriptions become apparent
The Long-term – The Potential
Dangers
• Policy makers still steeped in Neoliberal/Neo-classical thinking or jumping
into Keynesian follies (1)
• New development policy thinking – poverty
alleviation and Aid-based infrastructure
development
• EPAs, Doha Multi-lateral trading round
and Breton Woods II