Wednesday, April 07, 2010

Comment: another view of the economic crisis of 2008-09

A provocative commentary in the journal Foreign Policy debunks some claims about the recent global economic recession. Many were saying that the recession would cause millions of people in the under-developed world to fall back into poverty, it's a claim that we shared many times on this blog.

Instead, Christian Caryl says that those predictions did not come true. Caryl says that the people and the policies in emerging markets helped to keep their economies from shrinking. There was a recent economic event that did add to the numbers of poor however, and that was the food price increases of 2007-2008.

An entirely rational assumption -- except it hasn't turned out that way at all. To be sure, there were far too many poor people in the world before the crisis, and that still remains the case. Some 3 billion people still live on less than $2.50 a day. But the global economic crisis hasn't added appreciably to their ranks.

Just take China, India, and Indonesia, Asia's three biggest emerging markets. Although growth in all three slowed, it never went into reverse. China's robust growth through the crisis has been much publicized -- but Indonesia's, much less conspicuously. Those countries, as well as Brazil and Russia, have rebounded dramatically. The Institute of International Finance -- the same people who gave that dramatically skepticism-inducing estimate earlier -- now says that net private capital flows to developing countries could reach $672 billion this year (double the 2009 amount). That's less than the high point of 2007, to be sure. But it still seems remarkable in light of the dire predictions.

In short, the countries that have worked the hardest to join the global marketplace are showing remarkable resilience. It wasn't always this way. Recall what happened back in 1997 and 1998, when the Thai government's devaluation of its currency triggered the Asian financial crisis. Rioting across Indonesia brought down the Suharto government. The administration of Filipino President Joseph Estrada collapsed. The turbulence echoed throughout the region and into the wider world, culminating in the Russian government default and August 1998 ruble devaluation. Brazil and Argentina trembled. The IMF was everywhere, dispensing advice and dictating conditions. It was the emerging markets that bore the brunt of that crisis.

So what's different this time around? The answers differ from place to place, but there are some common denominators. Many of the BRICs (Brazil, Russia, India, China) learned vital lessons from the trauma of the late 1990s, hence the IMF's relatively low-key profile this time around. (The fund has been most active in Africa, where they still need the help -- unless you count Greece, of course.)

Aphitchaya Nguanbanchong, a consultant for the British-based aid organization Oxfam, has studied the crisis's effects on Southeast Asian economies. "The research so far shows that the result of the crisis isn't as bad as we were expecting," she says. Indonesia is a case in point: "People in this region and at the policy level learned a lot from the past crisis." Healthy domestic demand cushioned the shock when the crisis hit export-oriented industries; the government weighed in immediately with hefty stimulus measures. Nguanbanchong says that she has been surprised by the extent to which families throughout the region have kept spending money on education even as incomes have declined for some. And that, she says, reinforces a major lesson that emerging-market governments can take away from the crisis: "Governments should focus more on social policy, on health, education, and services. They shouldn't be intervening so much directly in the economy itself."

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