The impact of the Global Economic Crisis on Developing States - Essay Example

THE IMPACT OF THE 2007 GLOBAL ECONOMIC CRISIS ON DEVELOPING S The Impact of the 2007 Global Economic Crisis on Developing States Introduction The global economic crisis of 2007-2008 was the greatest recession since the Great Depression of the 1930s.Many reputed financial institutions in the world were collapsed, while some sustained only with massive domestic aid and support. The global financial crisis of 2007 affected the global trade and the most of financial hubs in the world more significantly than any other economic recession in the past. Between 2003 and 2007, the developing states were enjoying a massive economic boom with almost 7% of growth rate per year. Extraordinary financing, massive flow of remittance in developing states, and high commodity costs were the fundamental components of the economic boom. Though extraordinary financing and high commodity prices were identified in previous financial booms, the combination of the three was never experienced in the past. However, these positive circumstances quickly changed in mid-2008 as the aftermath of economic turmoil that sparked in mid-2007 in the United States. The global financial crisis (GFC) initially trembled the banking systems in North America and Europe. Even though the GFC was erupted in developed countries, it quickly escalated in developing states through various means and transmission channels and severely affected their economies. The first developing states to face the crisis were those which had its majority of financial sectors linked with the global market. Next, it caused impact on domestic and international trade as prices and volumes of manufacturing and commodities felled across the world. Low workers like, street vendors, garbage pickers along with blue-collar workers affected mostly due to job-and pay-cuts. As remittances from migrant workers from the North America and Europe hit badly, large population in developing and poor states, which were highly dependent on it, was significantly affected. Finally, the GFC caused the impact on government spending in developing and poor states, affecting socioeconomic standards of these states and raising the poverty rates even further. Based on the research and available data, the paper will examine the impact of the global financial crisis of 2007 on developing states. In order to evaluate the overall effects of it, the paper will analyze the economic situations during the crisis in major developing countries in Asia, Africa, Latin America, and Eastern Europe. Further, the paper will highlight the relationship between the 1997 Asian financial crisis and the global financial crisis of 2007. Macroeconomic Effects of Crisis on Developing States GDP Growth Due to the global financial crisis of 2007, developing and emerging economies in all over the world faced a drastic drop in output growth. As shown in fig. 1, the aggregate real GDP growth in developing and emerging countries remarkably fell from 8.4% in 2007 to 6.0% in 2008 and merely 2.5% in 2009. Compare to the Middle East and North Africa (MENA) and sub-Saharan Africa, the real GDP drop in the developing Asia, Commonwealth of Independent States (CIS), the Western Hemisphere, and the central and Eastern Europe (CEE) countries was more significant. In order to evaluate the effects of the crisis on developing states, GDP growth between 2003 and 2007 can be compared with that in 2008, 2009, and 2010. According to the reports of the Institute for Public Policy Research, the aggregate GDP growth in developing states was 1.4% lower than expected in 2009, 5.1% in 2009, and 1.2% in 2010. Fig.1 Real GDP Growth in Developing Regions (%). The aggregate GDP growth decline in the newly industrialized and emerging Asian economies such as, Singapore (17.9%), Hong Kong (10.9%), Malaysia (9.9%), and Korea (9.2%) was larger compare to that in the developing economies of Central and Eastern Europe such as Russia (14%), Turkey (9.6%), Poland (7.3%), and Hungary (4.3%). Among the Asian countries, Singapore had the greatest GDP growth decline followed by Hong Kong and Malaysia, while Indonesia (3.7%), India (4.7%), and China (6.6%) had the least GDP growth decline among the Asian developing countries. In case of Africa, the aggregate GDP growth of the region disproportionately present the impact of the crisis on a particular state as Angola, Nigeria, and South Africa constitute over 65% of Africa’s combined GDP. The decline of GDP growth was more sever in oil-exporting and middle-income countries like, South Africa, Angola, Cameroon, Nigeria, Sudan, and Botswana as it was over 4% in 2009, while in low-income and fragile countries like, Ethiopia, Mali, Senegal, Uganda, Ivory Coast, Liberia, and Republic of Congo showed the decline of 1-3% in 2009. Also, the middle-eastern states were the least affected by the crisis due to low market capitalization (for instance, Lebanon and Jordan) and availability of surplus liquidity from the oil revenues (e.g. Saudi Arabia and Qatar). The aggregate GDP growth decline among the Arab states was merely 0.3-0.5% in 2009. (ilo 3-4). In Eastern and Central Europe, Lithuania (18.2%), Lativia (18%), and Estonia (13.6%) had significant GDP growth, while in the Western Hemisphere, Mexico, Venezuela, Paraguay, Antigua and Barbuda had over 10% of GDP growth decline in 2009. Trade and Exports The crucial channel through which the global financial crisis of 2007 affected developing states is trade and exports. The significant drop in demand in developed countries caused the collapse of global trade and massive decline in exports. According to the estimation of the International Monetary Fund (IMF), annual export growth in developing countries was expected around 9-10% between 2008 and 2012. However, overall export growth was just 4% in 2008, and decreased by over 8.2% in 2009. Furthermore, the aggregate exports from developing states were about 20% lower than was being estimated in 2007. It reflects the significant losses in exports and trade suffered by developing countries. (ip 5-6). As shown in fig. 2, the aggregate decline in annual export growth was the largest in the Central and Eastern Europe (CEE) countries (10.82%), followed by CIS (9.51%), Western Hemisphere (8.31%), developing Asia (8.0%), sub-Saharan Africa (7.0%), and MENA (6.41%) in 2009. Fig. 2 Export Growth in Developing States (%) As Latin American and CIS states were depend on Europe and North America for their trade and export businesses, developing states in these regions suffered by the largest export and trade loss among all developing states in the world. Among the major developing states in Asia, i.e., China, India, Korea, Singapore, Hong Kong, Indonesia, Philippines, Malaysia, Thailand, Indonesia, Malaysia, and Philippines, the decline in exports and trade was about 48%. Besides major developing states, least developed countries (LDCs) suffered the export loss depending on their trade specialization. For instance, Cambodia, Bangladesh, and Bhutan have over 72% of their total exports in the form of labor-oriented manufacturing products in footware, clothing, and textiles. As demand for such products significantly dropped from Europe and North America, these states faced massive export and trade loss of over 60% in 2009. Also, African countries, which are mainly depended on primary commodity exports, suffered badly due to over 20% decline in prices of coffee, sugar, oil, copper, and cotton. For instance, coffee revenues of Burundi fell by 37% in the late-2008, while Angola’s export earnings dropped from $68 billion in 2008 to mere $22 billion in 2009. Remittances and Capital Inflows The effect of lost remittances varies from region to region. The depth of the financial crisis is the key factor explaining these different regional trends. The more heavily a ‘destination’ country and sector of work has been affected by the crisis, the greater the drop in remittances. So, remittances from workers in North America and Europe and in industries such as construction have been worst hit. According to the reports, remittances sent from the Gulf Cooperation Council (GCC) countries to Bangladesh dropped much less dramatically than those sent from the United States. Fears of a slump in remittances and large-scale return of migrants have proved largely unfounded. The overall number of migrants going overseas from Indonesia actually increased by 54% (quarter to quarter) between September 2008 and December 2008 and the government has identified increasing migration and remittances as a recovery strategy. The increase in migration has been female as markets for domestic work and service industries have remained strong. (Continue) Bibliography Alcorta, Ludovico, and Frederick Nixson. “The Global Financial Crisis and the Developing World: Impact on and Implications for the Manufacturing Sector.” United Nations Industrial Development Organisation (UNIDO). Last modified 2011. http://www.unido.org/fileadmin/media/documents/pdf/Publications/110905/WP062010_Ebook.pdf. Arieff, Alexis, Martin A. Weiss, and Vivian C. Jones. “The Global Economic Crisis: Impact on Sub-Saharan Africa and Global Policy Responses.” Congressional Research Service. 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