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Weekly UpdatesWE are daily reminded by the mass media that the current financial crisis is the worst in our life time, the worst since the Great Depression in the 1930s. To get a better feel of how the situation is, it may be useful to look at the following:
* The bailouts in the crisis so far are the biggest in the history of bailouts.
* It is the first crisis of globalisation. It is a downturn is that is unusually synchronised around the world.
* It is "once-in-a-half-century, probably once-in-a-century type of event" as described by former chairman of United States Federal Reserve, Alan Greenspan.
Based on the total real gross domestic product, GDP, the year 2009 is projected to experience the first contraction in global economy since 1960, according to the International Monetary Fund World Economic Outlook released in April 2009.
For the first time the Federal Reserve Bank (US central bank) has become a direct lender to business firms and consumers. It is the first international financial crisis in which the IMF has stayed away from trying to tackle the causes of the problem and has played only a secondary part in managing its consequences.
The Dow Jones Industrial Average dropped by more than 50 per cent from 14,165 (highest) at the close on 9 October 2007 to 6,547 at the close on 9 March 2009. Britain has experienced the first bank-run since the 1870s. Unemployment in the USA is almost 9 per cent and the Organisation for Economic Cooperation and Development, OECD, predicts that it will reach 10.3 per cent in 2009.
The list can go on with more superlatives and records. This article will discuss the first two features and their implications.
Size of Rescues and Likely Consequences
Of the special features listed above, the most striking is the amount of money committed to deal with the crisis. Below are the figures for the USA and Britain. In early 2008, such figures would have been unimaginable. The figures are almost surreal.
Jim Bianco of Bianco Research provides some of the big ticket items in American history, the figures have been inflation adjusted.
* Louisiana Purchase. Cost: $15 million, Inflation Adjusted Cost: US$217 billion
* Marshall Plan. Cost: US$12.7 billion, Inflation Adjusted Cost: US$115.3 billion
* Race to Land on the Moon. Cost: US$36.4 billion, Inflation Adjusted Cost: US$237 billion
* Savings & Loans Crisis. Cost: US$153 billion, Inflation Adjusted Cost: US$256 billion
* Korean War. Cost: US$54 billion, Inflation Adjusted Cost: US$454 billion
* The New Deal. Cost: US$32 billion (estimated), Inflation Adjusted Cost: US$500 billion (estimated)
* Invasion of Iraq. Cost: US$551 billion, Inflation Adjusted Cost: US$597 billion
* Vietnam War. Cost: US$111 billion, Inflation Adjusted Cost: US$698 billion
* National Aeronautics and Space Administration. Cost: US$416.7 billion, Inflation Adjusted Cost: US$851.2 billion.
Total: US$3.92 trillion.
The present bailout schemes cost US$5.8 trillion, more than the cost of World War II at US$3.6 trillion, adjusted for inflation.
Bearing in mind such figures, we are in a better position to understand the gloomy picture painted by economist Paul Krugman. In an interview with the BBC on 3 June 2009, he said that any recovery would be "so slow it would feel like a recession". The economic slowdown could last five to 10 years and cost trillions of dollars, warned the newly-minted Nobel economics laureate.
There are at least two other pieces of data to support such a pessimistic assessment. There are about one million excess housing units which is a product of the US housing boom during the height of the subprime borrowing binge. It takes some time to work away this excess. Even more disturbing is that the US Federal Government has financial liabilities equivalent to US$483,000 per household, largely in the form of unfunded commitment to provide the ageing population with healthcare and pension.
For USA to get out of the crisis, it has to save more, to import less, and to export more. It may have to be pragmatic to drop its opposition to exporting to China high technology products such as semiconductor production lines.
For countries like Singapore and Malaysia which traditionally rely on USA as the major export market, they have to recalibrate their export strategies and perhaps even their economic strategies.
Globalisation's First Crisis
The international financial system in its present form is a product of deregulation, globalisation and advanced information technology. It is also the most advanced aspect of globalisation. It is a major factor propelling globalisation, both in its beneficial form in promoting trade and investment as well as a transmitter of the financial crisis.
The current economic crisis is the first crisis of globalisation that hits both the advanced industrial economies and the emergent economies. The peso crisis of Mexico in 1994 affected the nation though it threatened to engulf other Latin American countries. The Asian financial crisis of 1997 was much bigger in magnitude and scope but it did not seriously affect western Europe and USA. In its World Economic Outlook report released in April 2009, the IMF says that this downturn is unusually synchronised around the globe. Recoveries from globally synchronised recessions take 50 per cent longer than other recoveries.
The crisis provides a unique occasion for us to look at the European Union and the euro as a phenomenon of globalisation. Both the EU and the euro have withstood the test very well. No EU member has shown any tendency to leave the Union. Similarly, the crisis increased the appeal of the euro. Most EU members that remain outside the euro zone are keen to join the monetary union. Moreover, the euro is set to play a greater role as an international reserve currency, even though it still has a long way to go to displace the greenback as the main international currency.
Finally, the crisis is testing the resolve of the rich countries to hold on to their proclaimed belief in free trade. There are voices calling for protectionist measures as a way to cope with the crisis. Though their governments show a tendency to listen to such voices, so far they have by and large stuck to their commitment to promote free trade and investments.
Michael Heng Siam-Heng is a researcher at the East Asian Institute, National University of Singapore. This article is based on a talk at the launch of the book Management Challenges: Solving Real-life Cases.
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