Global Recession And Implications For Developing Countries

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The global financial windstorm which has caused the meltdown of the financial system in the US and elsewhere has yet to settle down. Its catastrophic effects have reached out to developing economies in a less intense manner but have increased risks and concerns for the future.

The recession is mainly due to the liquidity crunch and loss in confidence of consumers and investors. Global recession will have serious implications for emerging and developing countries like Pakistan. There are no immediate solutions and short term solutions do not hold much promise.

Making of global recession
During the past few years, the global economy registered an unprecedented growth rate of more than 5.0 per cent. According to the IMF, such a high growth rate was historical and its success was attributed to global trade and the free market economy regime. Free trade, free flow of capital across national borders and the floating of national currencies in the open market to adjust their values through market mechanism created a competitive environment for economic growth.

At the back of free market regime and free global trade stood US capitalism with huge investment banks and insurance groups, a robust economy with a GDP of $14trillion and an extraordinarily large number of consumers feeding themselves on borrowed money as a way of life. Consumerism particularly in the US and elsewhere in the emerging markets of Southeast Asia, China, India and some of the Latin American countries, worked as a vehicle of growth.

Even a small piercing into a balloon of consumerism could adversely affect growth, trajectory that moved global growth upward. Global financial melt down has proved quite severe to keep consumerism going. It is likely to trigger a downturn in the global economy and in all developed and emerging economies that were having a trade surplus with the US.

A financial crisis had earlier hit the market in 1998-99 but remained mostly confined to Southeast Asia. The stocks had then tumbled, currencies depreciated steeply, big business houses that shined on borrowed money collapsed and many banks went bankrupt giving indications of a financial and business collapse.

Unemployment had soured and many wealthy people ended up as paupers. Banks were rescued by infusion of capital from the central bank and IMF. It was presumed that free market and financial system that helped Southeast Asian Tiger economies to flourish was "perfect" and fault lied with the banking system of the affected countries.

There were many loopholes in it and the banking system had not matured vis-à-vis the banking system of the West. The banks had week regulatory system and gone crazy to lend huge amounts without taking cognizance of the fact that big borrowers despite having appetite for investment, would be really able to pay back in case some unexpected events were to rock their business houses.

Lot of studies and literature analyzing the financial crisis of 1998-99 were produced. They suggested making working of banks and stocks, the backbone of free market and US model of capitalism, highly credible, transparent and strong enough to withstand external and internal shocks through tough and stringent regulatory and monitoring system.

Mini financial crisis of Southeast Asia had many lessons to learn not only for emerging and developing countries but by developed economies as well. The latter had earlier passed through such eventualities in their history.

Memories of Great Depression of 1930s are still alive in minds of financial analysts, central bank managers and CEOs of financial institutions having global reach. According to an analysis, "the real cause of the Depression wasn't the stock market crash but a contraction of credit due to an epidemic failure of banks."

Despite all these realities, Bush administration adopted still more de-regulatory policies to let free market regime and banking system be as freer as it could be.

Money lending operations through different financial derivatives were left to the sound judgment of the bankers. Sub-prime lending pulled down the American banks. The major cause of to-day's financial crises is no different from, what was it during Great Depression. The only difference being that this time the governments and central banks are better placed to handle the crises.

But, they certainly can't handle the after effects, economic recession, promptly. It will take its own time and course.

What lies ahead particularly for Asia?
Europe is to stand with America to take the brunt of rocking financial crises. Asia with its emerging and developing economies, too, can't escape. According to an observer," there are few signs as yet of the damaging effect but it will show up soon enough.

We can't escape the contagion." In fact, the contagion is already affecting the Asian economies. Asian stocks have plummeted by more than 30.0 per cent. Fall in exports and credit crunch are likely to affect robust Asian growth negatively. That is why the central banks are loosening hitherto tight monetary policy that was there to control inflation that is likely to decrease because of fall in prices of oil and other commodities, to boost growth.

Around 25.0 per cent of total exports from Asia are destined for America. With consumer spending in America having declined it is but obvious that Asian growth particularly in Taiwan, Vietnam and South Korea that is highly dependent on exports to the US, would decline unless it is partially compensated by increase in domestic consumption.

Chances for such possibility are least bright because Asian people are sensitive to saving rather than spending, for hard times. Slide in property prices and asset values in many of the Asian countries have dented consumer's confidence in emerging economies of China, India and Malaysia. In India, inflations is running around 13.0 per cent and credit card industry that was growing at an average annual rate of 30.0 per cent has declined substantially because banks and consumers have become conscious about looming recession.

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