Global Economic Crisis: Global Perspectives and Experiences

1
Global Economic Crisis Global Perspectives and
Experiences

• Prof. J Lungu
• Copperbelt University
• Edinburg Hotel, Kitwe, 18th-19th May 2009.

2
Introduction

• Development thinking revolves around three major
  themes
• Centralised View-Direct state intervention
• Neo-classical view-Application of standard
  economic analysis
• The Transactions Cost Model- Examines market
  imperfections and implications on government
  policy

3
Introduction Continued

• All these approaches do embrace growth
• Development is however about providing the basic
  needs-food, shelter, education, health care and
  jobs
• These enable people to realise their full
  potential
• These are normally threatened in a downturn
• Structure (Source, effects, Required responses,
  role of Institutions, conclusion.)

4
Global Economic Crisis Genesis

• There have been Three other financial crisis
  affecting the world economy
• Mexican Peso Crisis-Devaluation of peso (15),
  sent shivers and affected Latin American Stock
  exchanges and capital flight
• East Asian Crisis (1997) (1994) caused by huge
  external deficits, property market and stock
  market bubbles
• Major problem arising from inadequate banking
  regulation and supervision

5
Continued

• With weak balance sheets, the reaction from
  Japanese banks was reduce credit to other banks
  in order to improve own capitalisation
• Thailand got the shock first followed by
  Indonesia and the Philippines
• At the time these countries had also liberalised
  their capital accounts a measure to attract
  FDI-But also attracted HOT MONEY
• The money flew out as soon as there was a problem
  

6
Continued

• In 1998 the Russian financial crisis started
• The rouble depreciated and Russia experienced
  serious Capital outflows reducing Russian foreign
  currency reserves
• These Crisis however had limited contagion
  effects mainly due to the sizes of these economies

7
Continued

• leading the FED reserve to reduce interest rates
  from 6.5 to 3.5. By 2003 the rate was 1
• This low rate led banks to advance cheap loans to
  firms and individuals leading to the Real Estate
  bubble
• Mortgage lenders relaxed the rules and developed
  new ways of passing on risks

8
Continued

• This raised property values by over 50 because
  of high demand
• Loans were also advanced to non-credit worthy
  customers NINJA loans
• Risky mortgages were restructured into
  collateralised debt obligations (CDOs)
• Assets secured by sets of assets usually
  comprising of bank loans, bonds and credit
  default swaps (CDSs)

9
Continued

• In the US economy, CDSs grew to US43,000
  billion compared to the stock market
  capitalisation of US18,000 billion and the value
  of treasury stocks and bonds of US4,500 billion
• Watch the gap between real resources and
  financial or paper resources
• The financial economy overrides the real economy

10
Continued

• Thus speculation is the real cause of the crisis
  Lehman brothers files for bankruptcy
• American Government takes 80 shares
• Banks become risk averse and reduce lending the
  credit Crunch
• Firms react by reductions in production due to
  reduced demand
• They also lay off workers-Transmission to real
  sector

11
Effects on World Economies

• All economies in the world are affected
• Gravity of impact depends on How firmly
  integrated a country is in the world economy and
  how diversified its production structure
• For most Sub-Saharan States dependency on export
  commodities especially minerals
• In some countries 50 of revenue dependent on
  exports

12
Economic Down turn and effects on Zambia

• Source is the collapse of the sub-prime housing
  market in the US
• The effects are everywhere not Zambia alone
• Primary producers with small domestic market are
  seriously affected
• This is where jobs depend on the export sector
• Export sectors very important in some countries

13
Effects Continued

• Consequences of low commodity demand is a
  collapse in prices
• Copper price and other commodities are examples
• This has led to low profitability
• The other major consequence is loss of Jobs
• Unavailability of credit especially in the
  developed countries is another consequence

14
Effects Continued

• Lack of Credit has affected Foreign investors
• It has also led to de-investment by Foreign
  investors putting the Kwacha under pressure and
  so the deterioration
• It is important for the central bank to take
  necessary measures
• Because of deterioration of local currency
  imported good are becoming expensive

15
Required Policy Responses

• All countries are required to take measures US,
  UK, Europe have started the Process. Stimulus
  Packages
• Developing countries need to take their own
  measures
• International financial Institutions also need
  to do the same
• Developing countries with positive balances stand
  a better chance (hope windfall tax are)

16
Measures Continued

• Take systematic measures to avoid bank failures.
• Macroeconomic tools-Monetary and Fiscal Policy
• We can engage still in credit financed investment
  (marshal resources for this)
• Fiscal side- Public investment in infrastructure
• Social protection and human development

17
Specific Measures for Zambia

• Restructure government expenditure.
• Reduce on recurrent expenditure
• Free resources by coming up with a wages policy
• Freed resources can go into infrastructure
• Devise incentives not only for the mining
  industry to prepare for diversification
• Consider increasing local participation

18
Measures continued

• Local participation in mining too
• Government should consider taking up equity in
  mining. It is happening in the US and Europe to
  reduce heavy dependency on foreign investment
• Zambias vulnerability has been demonstrated by
  the current crisis
• We need a new focus on agriculture

19
Measures-Long-term

• In the long-term we need to diversify the economy
• There have been attempts in the past-FNDP, SNDP
  and TNDP
• Mistake was IS Industrialisation and being inward
  looking
• We can Do Better

20
Role of Other Institutions

• Must help prevent job losses
• Mandate to protect the welfare levels of members
  and the public at large
• Can have influence on type of investors (some
  investors are not talking about job losses
• Need for a wages policy
• Diversification of the economy

21
Role of other Institutions

• Engage the central bank on the need for stable
  exchange rate
• Urge political parties to work together
  especially during a crisis like this. Need for an
  acceptable economic agenda

22
Conclusion

• In a down turn growth declines. This becomes a
  challenge to govt revenue
• Need for governments to react by restructuring
  their budgets
• Urge for long-term diversification of the
  economies (Agriculture and other sectors)
• Urge policies that will enhance local investment

23
Conclusion

• END and THANK YOU