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[TRC #2] Global economy worst since Great Depression

March 9, 2009

NEW YORK (CNN) — The world economy is on track to post its worst performance since the Great Depression, with developing countries bearing much of the economic pain, the World Bank said Monday.

Those countries face a credit shortfall of up to $700 billion, the bank said.

“The global economy is likely to shrink this year for the first time since World War II,” the bank said, noting that global industrial production, by the middle of 2009, could be as much as 15% lower than in 2008.

Based on those projections, world trade is on track to record its largest decline in 80 years, with the sharpest losses expected in East Asia.

The World Bank, which helps finance the debt of developing nations, says the financial crisis will have long-term implications for them.

“Many institutions that have provided financial intermediation for developing country clients have virtually disappeared. Developing countries that can still access financial markets face higher borrowing costs, and lower capital flows, leading to weaker investment and slower growth in the future,” the bank said.

“When this crisis began, people in developing countries, especially those in Africa, were the innocent bystanders in this crisis, yet they have no choice but to bear its harsh consequences,” World Bank Managing Director Ngozi Okonjo-Iweala said in remarks prepared for a development conference in London on Monday.

According to the World Bank: “The most affected sectors are those that were the most dynamic, typically urban-based exporters, construction, mining and manufacturing. Cambodia, for example, has lost 30,000 jobs in the garment industry, its only significant export industry. More than half a million jobs have been lost in the last three months of 2008 in India, including in gems and jewelry, autos and textiles.”

The World Bank says stimulus packages for the major economic powers will limit money for the developing world, hindering their economic growth.

“Clearly, fiscal resources do have to be injected in rich countries that are at the epicenter of the crisis. But channeling infrastructure investment to the developing world, where it can release bottlenecks to growth and quickly restore demand, can have an even bigger bang for the buck and should be a key element to recovery,” Justin Yifu Lin, World Bank chief economist and senior vice president, said in remarks prepared for Monday’s development conference in London.

Yin thinks developed countries will enhance their own recoveries if they spend some of their fiscal stimulus in developing countries.

Source: CNN

[Divine’s Commentary]

To be honest, I’m not really that surprised about this. With the current state of the economy, whatever other more optimistic economists are saying, it is unlikely that we will fully recover from this in a year, or maybe even 5 years’ time. Sure, it’s possible to smooth out the problems in the stock market and restore investor confidence by investing in a large stimulus package, but then what? A massive debt will still be left, and that will have to be repaid in future, or even by future generations.

One very significant point made by the article is how the financial crisis is affecting developing countries, who were once merely spectators in the ‘collapse’ of the stock markets. Unlike the US and UK and other developed countries, they can’t afford to spend billions of dollars to revitalise their economy. And, with everyone else looking inwards and fixing their own economies, who is going to be spending in developing countries, and helping to revive THEIR economies? If every country were to adopt the controversial ‘Buy America’ type of policy, then I think it’s safe to assume that (pardon the language) most developing countries are screwed.

So, if you remembered anything at all out of this article, remember this: the key to recovering from the financial crisis lies not just with everyone rebuilding their own economies, but helping out other economies by, believe it or not, spending in them. Let’s hope the various world leaders will catch on to this as well.

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