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Why This Recession Is NOT The Worst (And Why It Will Not Follow A Similar Pattern) Ray Hammond, March 4th 2009 The world’s economists, politicians and media pundits have been busy telling us that the current recession is ‘the worst since the Second World War’ or ‘the worst since the Great Depression of the 1930s.’ One senior British politician has even been foolish enough to declare that it is ‘the worst for one hundred years’. All such declarations are mistaken and show little understanding of issues outside of economics and politics. These pundits and politicians are like blinkered generals; they are always keen to fight the last war over again. There are several key reasons why this recession is unique and why no lessons about its progression can be drawn from studying previous downturns in global economic history. The first, and most glaringly obvious reason, is that this is the first recession since the new phenomenon of globalization started to happen; indeed, it might be thought of as the first recession of the new global economic era. Once this is fully appreciated, it becomes easy to see why the progress of this recession will be different from all previous recessions. Over Two Billion People Are Busy Getting Rich Although global trade began millennia ago, mass global trade only began in the mid 1990s. This new phenomenon was fostered by several independent developments: 1. Political change in China, Russia, South East Asia and parts of Latin America 2. Success in opening the world’s markets through successive trade agreements 3. The rapid spread of the internet and the collapse of telecoms costs 4. The arrival of low cost passenger travel and sea and air freight
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As these events were developing, many corporations in the economically developed world saw huge opportunities for ‘off-shoring’ manufacturing and service functions. They invested in developing economies, usually to the mutual benefit of both the corporation and the local economy. Then the developing economies themselves started to invest heavily in building infrastructure, manufacturing facilities and service centres.The result is that about one third of the world’s population is now on fast-track towards ‘rich country’ status. This momentum cannot be stopped. Since China joined the World Trade Organization in 2001 almost 50 million Chinese people have been lifted out of poverty – according to World Bank figures. Similar national and individual enrichment has occurred in India, Russia, other countries in Asia and regions in the Middle East, in Africa, in East Europe and in Latin America (notably Brazil). As this current banking system collapse took hold in 2007 just over two billion people in the developing world were working to improve their lives; to educate their children, to buy cars, to buy homes and to take holidays abroad. The phenomenon of two billion people around the world all working to get rich at the same time has never existed in any previous recession and this is the main reason why its progress will be unlike all others. Of course there have been reports of factories in India, China and other countries closing. As consumers in the developed world became alarmed at the depth of the banking crisis, and as credit for large-ticket consumer purchases dried up, sales of these items suddenly collapsed. But the two billion people intent on becoming rich have not gone away – neither has the rich world’s (and the developing world’s) core demand for cars, televisions, clothes and other consumer products and services. In a recession consumption is halted temporarily; it does not disappear for ever. In the second half of 2009 consumption will start to regrow in most parts of the developed world (it has already started to regrow in some areas during the first half of 2009). The developing world also has large and growing internal markets and although the descent into global recession was sudden during 2008 (caused by the artificial element of credit scarcity) the 2.4 billion people in the developing world who are keen to improve their lives are likely to pull the world out of recession as quickly as it was plunged into temporary downturn. Ends |