GLOBAL ECONOMIC CRISES

AROOJ ASGHAR (Arooj.asghar@hotmail.com)
Mar 9 - 15, 2009

The world economy has undergone an upheaval since September 2008. The crisis which began as a reversal of the real estate market in the United States has taken global proportions today and has spread far and wide now. Many economists believe that the crisis appears in the history as the most serious crisis since the Great Depression of the 1930s.

Commenting on the issue, the UN Secretary General said last year, "We are facing a financial crisis of unprecedented scale in a world that has never been so interdependent. The consequences are global. The situation is unstable. The current financial crisis is rapidly being transformed into economic crisis and could lead to a social crisis in many countries".

HISTORY REPEATING ITSELF

Last year, the US and the world had watched unfolding of the biggest crisis since the Great Depression - a crisis that has changed the landscape of the U.S. financial and economic system. The housing bubble was ruptured, the stock market tumbled, and number of global banks either went bankrupt or merged in to each other.

The US government bailed out Fannie Mae and Freddie Mac, the two mortgage giants; AIG, the nation's biggest insurer; and most recently Citi Bank. The rescue plan struggled and was initially rejected in the Congress before it was finally passed. Still the market slump continues, financial markets are frozen, the credit crunch has begun to hurt the real economy, pessimistic predictions about the future prevail on, and panic spreads over the whole society. Moreover, the crisis has spilled over to the EU, Asia, Middle East, and around the world. Naturally, pundits are looking for culprits to blame for the shambles of the U.S. financial markets.

This crisis looks familiar and calls to mind the unhappy precedent that took place 10 years ago in Asia. With the collapse of the Thai baht market, the shock quickly spread into neighboring Southeast Asian countries, to South Korea, and to Russia and Latin America. A huge portion of financial institutions was imploded or merged into others, stock markets lost up to 70 percent of their value in a short period, and economies plunged into recession.

The panic permeated quickly into society and the following political turmoil led to changes of governments in some Asian countries. At that time, the US and international organizations blamed the crisis on intrinsic problems of Asian countries and claimed that the crisis was punishment for Asian sins. The problems cited by those critics included: too much indebtedness of firms and financial institutions, hardboiled capitalism, irrational exuberance, lack of appropriate regulation and supervision, illicit connections between the governments and business sectors, and so on.

GLOBAL IMPACT

The real economy is rapidly affected, with its social impact related to surging unemployment. For the up coming year, until recently, the world GDP growth rate for the developing countries was projected around 6.4%. After the crisis, the growth rate has been revised. Now the World Bank has forecasted a meager growth rate of around 4% for the developing countries. The bank further said that the economies of high-income countries, many of which are already in recession, will shrink by 0.1% during the coming year. In late October 2008 alone, about $25,000 billion went up in smoke as a result of global stock market tumble.

USA: According to the IMF, owing to the financial crisis, the US economic growth should drop to 0.1% in 2009. The US economy is sinking deeper into the economic doldrums, and it's likely to stay there for a long time. On March 5, 2009, Dow Jones ended at 12-year lows, fell 281.40, or 4.1 percent, to 6,594.44, its lowest close since April 1997. Investors besieged with more disheartening economic data new concerns about General Motors that has bowed down to financial crisis and relentless uncertainty about the financial system.

EUROPEAN UNION: While the United States and the EU are heading towards a recession, the forecast is deteriorating rapidly for many emerging countries. The economic outlook for Germany is also not very much promising. Germany will experience a recession for the whole of 2009, with its GDP declining by 0.8%. The international financial crisis should also drag France into recession in 2009 with a GDP decline of 0.4%, significantly widening the public deficit.

While the UK will also sink into recession in the full next year. Taken together, the 30 OECD countries should experience a recession of 0.4% next year, then a recovery of 1.5% in 2010, according to an estimate. The economic surroundings of Ukraine and Hungry are also horrendous. Belarus also approached IMF for financing. Turkey is seriously considering further intervention of the international institution.

LATIN AMERICA: For the first time in several years, Latin America expects a deficit in the balance of payments. Moreover, GDP growth for the whole region may also fall in 2009. In Mexico, remittances have already decreased and the central bank is forced to support the Mexican peso. Foreign exchange reserves have shrunken immensely. The Brazilian stock market index registered a substantial fall and major investment projects were postponed.

ASIA: China, the locomotive engine of the world economy, has begun to take influence of global economic meltdown. The tremors of financial crisis have been felt seriously in China now and the experts have forecasted a lower GDP growth rate for coming years. In addition, the exports of China to the United States, which accounted 20% of its total exports, have been projected below 8% for 2009. The annual GDP growth in India is expected at about 7%. Even if these growth rates remain favorable, they can cause serious consequences for both countries and the whole region. Asian internal trade is likely to deteriorate because of declining demand from China. Japan is threatened with a return of deflation from mid-2009.

PAKISTAN: Pakistan faces a severe economic crisis after a series of internal and external pressures. In a context of political turmoil, energy shortage, and insecurity, the economic climate of the country is continuously deteriorating. Before the IMF bailout package, Pakistan was facing with massive outflows of capital led to rapid decline in foreign exchange reserves and fall of rupee. Even today with the unnecessary adventure in Punjab Province, economic prospect for Pakistan seems very much bleak. Almost all the investors have put all the investment proposals on hold and are following wait-and-see policy, which is effectively damaging the whole economic scenario. In these circumstances, it will be harder to bridge the growing deficit in the balance of payments.

AFRICA: The repatriation of income from abroad, grants and private funding, including foreign direct investment, should be exhausted in several African countries. The grim economic outlook led to an unprecedented drop in raw material prices.

MIDDLE EAST: The economic crisis is also felt in the Middle East. The stock markets fell down; regional banks are facing liquidity withdrawing pressure and the real estate market in Dubai has collapsed. The rapid deterioration in sentiment in the UAE has caught even the most pessimistic of observers by surprise. Unshakable real estate market in the emirates, particularly in Dubai, was set for a slowdown despite the repeated assurances of senior Dubai officials that the market's onward march would not be deterred. The first wave of redundancies at developers is now under way and project work is already slowing on some of Dubai's signature developments. By pulling credit lines to employees at some of Dubai's biggest companies, Emirates National Bank of Dubai (NBD), the region's biggest bank by assets, has signaled that it expects the market will continue to fall.

As the emirate's economic growth decelerates, more layoffs will certainly be announced. The number of new workers arriving in the emirates will also dwindle, putting further downward pressure on real estate in the emirates. The other problem in the market is the inability or unwillingness of many banks to provide loans to businesses. Despite the optimism sparked by the Dubai bailout, companies and banks across the emirates need to adjust to the new economic reality and the far lower growth levels expected for the remainder of this year and possibly 2010.

FINAL WORDS

This is a crisis of the developed world. Loose credit extension in the years since the dotcom bubble burst in 2001 and large fiscal deficits in the US have increased the debt of households and governments alike. These debt levels have become unsustainable. The popping of these bubbles has had and will continue to have a large global impact. There seems to be no end to the US financial crisis. Its effects are now spreading to the global real economy.

Considering the banking crisis, it is now apparent that the attempt to recapitalize UK and US banks through public money has failed. It is also realized that the real problem has been misdiagnosed as the illiquidity crunch rather than the insolvency of banks due to the holdings of toxic assets and sub prime mortgages.

With the US and UK housing markets continuing to fall like a stone, the value of these mortgage-based securities keeps declining, reducing the capital of the banks, and worsening their balance sheets. As it will take some time for the housing market to stabilize, it is necessary to remove the toxic assets from their balance sheets, before the banks can be restored to health.

The proposed nearly trillion dollar stimulus package of US contains measures like the proposed tax cuts and financial aid to the states, along with numerous handouts to various rent seekers as well as long-term infrastructure projects which should be justified in terms of their long-term net economic benefits and not as a means to smoothen the trade cycle.

There is a little dispute that a large fiscal stimulus is needed but at the same time stimulus is not the ONLY solution and will not guarantee to restore the investors' confidence. The world at large must resolve all their disputes or at least put them on hold, stop further spending on arms and ammunition and allocate all the available resources to the betterment of global economy.