Last week’s column diverted to treat with the recent disclosures about the CL Financial and Stanford International Groups. This week I resume the discussion as to whether there is a credible basis for assuming that the worst of the global economic crisis is behind the developing countries and the global economy. I have argued so far that there is no compelling basis to assume that this is the case for the leading global economy – the United States. Although the global economy is far more differentiated than it was a few decades ago, the importance of the US in global output, trade and finance is so considerable and its contribution to the present global economic crisis so immense that recovery without it is most unlikely.
Writing for this column a year ago, globally, the dominant economic consideration was the explosive rise in food and fuel prices. Compared to 2005, by mid-2008 the price of wheat and corn, the two principal grains consumed globally, had trebled. The price of rice, which is the staple of choice for Guyanese, had risen five-fold. The price of oil was approaching US$150 per barrel. If readers recall this was a period of such considerable suffering around the globe that food riots, strikes, and conflicts were commonplace. Indeed, the World Bank had estimated that by mid-2008 about 130-155 million additional persons were pushed into poverty during the preceding year.
Heaping misery on misery
I remind readers of this, so they can put the present global economic crisis into its true perspective. The misery it is daily producing is being heaped on the misery that resulted from the food and fuel prices crisis of 2007-2008. Not surprisingly, therefore, the present global economic crisis has, by all accounts, already reached epic human and social proportions, especially for the many vulnerable residents of the developing world.
The World Bank, which is not known for scaremongering has warned that several of the Millennium Development Goals (MDGs) are at serious risk. Most of the eight globally agreed-to goals are in danger of not being met by 2015. In particular, it claims, this is true for the goals to 1) reduce hunger; 2) reduce child and maternal mortality; 3) secure educational improvement at the basic level; 4) ensure steady progress in combating HIV/AIDS, malaria and other major diseases; and, 5) halve extreme poverty by 2015 from its 1990 level.
Global data indicate that those who are chronically hungry have reached the staggering figure of over one billion persons. It is also estimated that for this year, 1.4 to 2.8 million children may die if the crisis persists. At present, the numbers in child mortality have been increasing at an annual rate of 200 to 400 thousand.
From all indications, therefore, the 130-155 million persons pushed into poverty because of the rising food and fuel prices crisis over 2007-08, could be added to substantially this year. The World Bank claims that based on the US$1 per day criterion, 45 million additional persons could enter the global poverty pool. And, based on the US$2 per day criterion, an additional 52 million persons could be added to this pool.
The macroeconomy
Macroeconomic projections seem to support this nightmare scenario. First, based on World Bank modelling of the global economy, it is predicted that most developing countries will be negatively impacted by the global economic crisis. The estimate is that 40 per cent of these countries are “highly exposed” to the negative effects of the global economic crisis; 50 per cent are “moderately exposed”; and only 10 per cent face “little risk.”
Second, as the year has progressed, predictions about the effects of the global economic recession have worsened. Thus only three months ago (March, 2009) the World Bank had projected a 1.7 per cent contraction in the rate of growth of global GDP for this year. Its current projection (June, 2009) is for a 2.9 per cent decline this year (2009). Growth is projected at the quite modest rate of only 2 per cent for next year, down from the 2.3 per cent projected in March.
Of course there are other projections, some more pessimistic, others more optimistic. Thus the IMF is projecting a smaller global GDP contraction of 1.3 per cent this year and growth of 2.4 per cent for 2010. Generally, however, most projections indicate that at best the global economy is likely to have a “subdued recovery” during the second half of this year. Third, if as seems likely, global GDP does contract this year, this will be the first contraction in about six-and-a-half decades. It is also projected that world trade will decline by just under ten per cent this year. As we saw in previous columns global growth in GDP is very dependent on growth of trade.
Fourth, since the global economic crisis started in August 2008, industrial production in the developing industrial countries has fallen by an estimated 15 per cent. For the developing countries the fall is estimated at 10 per cent, if China is excluded.
Fifth, private capital flows to developing countries, which represented about 9 per cent of their GDP in 2007 were halved during 2008. This is projected to decline further this year by about 50 per cent.
Sixth, on average the prices of major commodities traded on global markets are about 35 per cent below the record levels attained during the rising food and fuel prices crisis last year. This has put a damper on inflationary pressures for many developing countries, but it also punishes commodity exporters like Belize, Guyana, Suriname, and Trinidad and Tobago in Caricom.
Finally, the developing countries as a group are expected to see their GDP growth rate decline from 5.9 per cent in 2008 to only 1.2 per cent in 2009. Compared to the rich industrialized developed states, they do better as the GDP of this group is expected to contract by 2.5 per cent this year.
Next week I shall continue the discussion from this point.
