Pain and suffering
Over the past year, the full-blown effects of the global financial and economic crisis, have led to unprecedented pain and suffering across the global economy. The damage to poor countries has been particularly severe. As a result most experts say that a full-blown crisis of human development has emerged. This is a circumstance that every reader of these columns should be concerned about.
In Guyana the authorities have tried their best to downplay the negative impacts of the crisis on our economy. A year ago they were boasting that the economic and financial systems of Guyana were well “insulated” from traumatic global shocks. Subsequent developments, including financial contagion, shortfalls in export earnings from goods and services (tourism), the shortage of trade credit, declines in remittances inflows, official development assistance and foreign direct investment (FDI) have exposed such idle boasting. Projecting a rate of growth for the overall economy in this year’s National Budget, which is substantially in excess of that for 2008, I have already described as preposterous and likely to do more harm than good. The basic wisdom is that it never pays for authorities to exaggerate economic forecasts to the point of losing the public’s respect and confidence.
In this regard Caricom’s response has been hardly better. A year after the full-blown crisis emerged, there is still no coordinated Caricom response to it, despite the seemingly endless number of task forces that have been created to address the problem and produce solutions.
With this inaction, inertia has overtaken the process and one by one Caricom countries have reverted to the IMF and World Bank for assistance and solutions. In the same year that the United Nations Conference on the Global Financial and Economic Crisis has sought to reassert United Nations authority over the anti-development policies of these institutions, Caricom countries are lining up to seek their assistance!
Optimism!
Meanwhile, among economic analysts there is more and more talk of a possible turnaround of the US economy, beginning in the last quarter of this year. Providing there is no ‘double-dip,’ it is expected that most of 2010 will be a year of US recovery, and hopefully from this a start to global recovery as well.
Why this optimism? Several economic indicators seem to be tending in this direction. First, following on the stress tests held a few months ago, the US financial system seems to be stabilized. Financial stocks are leading the bold resurgence of stock markets, as stock market indexes achieve record highs for the crisis period. As I hinted in earlier articles, however, the European and Asian banks have not completed similar stress tests so we do not know what, if any, surprises many lie ahead of us.
Second, private housing prices have shown gains, albeit very modest, (0.5 per cent), for the first time in the crisis period. Third, while unemployment remains quite high, there was a modest decline from 9.5 per cent in June this year to 9.4 per cent in July. The numbers of jobs lost in July was about a quarter-of-a-million. A few months ago it was as high as three-quarters of a million.
Third, there has been an increase in inter-firm orders, although consumer confidence still remains weak. Much of this weakness is attributed to the slow turnaround in new jobs. In general the creation of jobs is always a lagging indicator during periods of economic recovery. Indeed, the historical data suggest that a growth in jobs does not begin to occur until the economy achieves a growth rate in the range of 2.5 to 3.0 per cent per annum.
Perhaps the most telling indicator of trends in the US economy is the behaviour of the real GDP growth rate over the past four quarters. This has displayed an unmistakeable V shape. In Q.1 the GDP fell by (-2.7 per cent). In Q2 this worsened to (-5.4 per cent). In Q3 it further worsened to (-6.7 per cent). And, by Q4 it was only (-0.1 per cent)!
The continued slide
US recovery, along with that in parts of Europe and Asia (mainly China and India) will no doubt help to stop the global slide. The truth is, however, that the poor countries of the developing world will continue to slide and suffer immensely from the negative impacts of the global crisis well after full recovery in the rich industrialised nations. This has always been the pattern. The poorest invariably fare the worst.
The question, which I hope to address starting next week in these Sunday columns is whether coming out of this unmitigated disaster for human development, any policy lessons can be drawn for Guyana and Caricom about coping with economic crises. I shall engage this issue from three basic standpoints. First, I ask the question: are there lessons to guide future fiscal and monetary responses to economic crisis?
Stimulus packages have gained worldwide currency but, as we shall come to see, these contrast starkly with the policy responses of poor countries in contending with past crises.
Second, global development agencies, as well as individual development practitioners have claimed highly successful innovations in framing and executing social safety nets and protection policies and programmes to cope with unexpected economic crises, social distress, and the situation of the poor. What are these innovations?
Third, as we have shown time and time again, the present performance of the global economy is inextricably linked to opportunities for expanding global trade. So much so, that the greatest fear in recent years has been that there would be a stampede to global protectionism. If this had happened, the global crisis would have deepened and the damage become incalculably greater. I shall explore in this regard, the general prospects for global trade and the World Trade Organisation (WTO) negotiations.
Next week I shall begin with a consideration of the first of these three questions.