Global economy predicted to shrink 0.6 per cent in 2009 and a further deterioration of 0.5 per cent compared to the January growth forecast. Every region, except Asia is expected to show negative growth, says International Monetary Fund, in the IMF update published on 19th march 2009.
In popular perception, the collapse of Lehman Brothers on September 15th, 2008 will remain as the trigger for the GLOBAL CRISIS. However, if only we look a little deeper, we will trace the origins of the crisis to the build up of global imbalances during the 90s and this first decade of this century.
First, there was the globalisation of labour. Emerging Asia added nearly three billion to the world pool of labour as it integrated into the world through the 90s. What this did was to reduce production costs at the aggregate level and increase Asia's comparative advantage. Asia produced and America consumed.
Asian economies ran up huge surpluses on their trade accounts which were mirrored by current account deficits in the US. This is because Emerging economies typically have younger populations with a higher marginal propensity to save. Conversely, advanced countries with ageing populations have a higher marginal propensity to consume. Therefore if the demand for, and supply of, savings at the global level is not structurally so well matched, how can we prevent a recurrence of global imbalances.
Second, most factories that shut down in 2008 did so because of the global economic crisis and resulted in a huge number of job cuts.
Third, Subprime mortgages which accounts for less than 1% of the world's debt stock caused the greatest financial crisis. The sub-prime mortgage crisis that erupted in August 2007 has become a systemic financial crisis whose epicentre is no longer just in the US, but rather has...