Global Financial Meltdown


I take the opportunity to express my profound sense of gratitude and respect to all those who helped me through the duration of the project It was a great opportunity for me to work on this project and learn about the subject. I would like to thank my project guide Mr. Rakesh Dahiya, Assistant Manager, Sharekhan Ltd., who has been a constant source of inspiration for me during the completion of this project. He gave me invaluable inputs during my endeavor to complete this project.


Table of content
1. Introduction 2. Causes of Credit Crisis
Global Transmission of the Crisis

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3. International Response 4. Impact of crisis on trade of goods and services, remittance and tourism and FDI 5. Some Facts and Figures 6. Scale of Crises and Bailouts 7. The financial crisis and wealthy countries 8. Asia and the financial crisis 9. Global Meltdown and its Impact on the Indian Economy  Reform and Resistance


34 44 50 56 59

16.Rethinking economics?



and reflected previous excesses and subsequent incompetence. policies had been conducive to significant improvements in fiscal and external balances. the second largest. as they were even more dependent on credit and high export prices respectively. Surely. There were concerns about the effect of a shallow recession in the United States. and Latin America. the financial crisis which the world is suffering most likely has become the worst in the last fifty years. That crisis was the worst of modern times. and international reserves were at record levels. was strong and there was no serious worry about financing as creditworthiness was solid. demand for manufactured goods is declining sharply all over 5 . Problems were hitting only the United States and a few other developed countries. as well as other regions were doing well. including among emerging market economies. Whereas the conditions in the financial markets have tended to stabilize from the unsustainable position of September-October of 2008. Nevertheless. with a few exceptions. the prospects for Emerging Economies (EE) looked very promising. and the prospects for a fast recovery are more remote by the day. In a wishful way most thought they had ―decoupled‖ from the advanced economies. The previous sense of strength and invulnerability is now gone. but the general perception was that Asia. Although the comparison with the Great Depression is an exaggeration unjustified by the facts. and wealth would grow with few restrictions. Emerging Economies were initially able to absorb the initial impact of the crisis on account of the considerable progress in recent years in consolidating economic performance.Introduction A year ago. Policymakers felt comfortable. the largest regional emerging market group. but more so in Eastern Europe and Russia. In different ways. Since then. Commodity prices have declined by about one half from their peak. foreign demand. the damage caused to the world economy is enormous. Some analysts consider that its intensity is equivalent to that of the Great Depression of 1929-33. Commodity prices were expected to continue going up. The complex and wide-ranging interaction between the financial world and the real economy as a result of the present turbulence already has begun to have serious consequences for the emerging economies. this group of countries is experiencing mounting difficulties. the real economy is weakening and the prospects for a recovery can only be envisaged for late 2009 or early 2010. The difficulties are significant in Asia and Latin America.

The paper also discusses what can be realistically expected in the short and medium term. brewing for a while. 6 . No other region comes close to these two areas in terms of size. and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. the NICs. really started to show its effects in the middle of 2007 and into 2008. as capital flows reversed seeking to find a safe heaven. if ideologues supporting the current economics models weren‘t so vocal.4 trillion. Now they are responding to the challenges caused by the rapidly deteriorating external environment. Governments were reasonably careful with their policies. The problem could have been avoided. Furthermore per-capita income in Latin America is more than double that of Developing Asia both in current and PPP terms.the world. large financial institutions have collapsed or been bought out. This paper reviews the origins of the current crisis and the impact on emerging market economies. but focuses mainly on Developing Asia. which has a GDP of US$7 trillion. somewhat larger than that of China. there are serious economic and political stumbling blocks that may well cause the recovery to be costly and slow to consolidate. as financial volatility and recessionary forces may continue to prevail for a while. However. stock market valuations have declined by about one half or more. and Latin America in the context of the global crisis. with serious effects for their own financial health as well as that of their countries. Around the world stock markets have fallen. and common characteristics in terms of development. influential and inconsiderate of others‘ viewpoints and concerns. will be unfortunately commensurate. On the one hand many people are concerned that those responsible for the financial problems are the ones being bailed out. The loss of financial wealth is enormous. and the consequences for the economies of the world. and about 2/3 of that of developing Asia. according to IMF data. The authorities and economic agents were initially taken by surprise by the collapse. but private enterprises held ―toxic‖ assets to an unexpectedly large extent. while on the other hand. The global financial crisis. While the inclusion of Latin America may seem extemporaneous to some. it is fitting to include it as the region has a GDP of US$4. a global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world. and currencies in many emerging countries have depreciated.

7 . after a period of low economic growth. persistent crises. The adverse terms of trade effect will aggravate the situation. this is shocking for all the regions that had experienced very strong growth from 2002 onward. Inflation declined. Of course. Economic growth in 2009 may decline by half among developing and emerging economies (Table 1). The crisis is now in the open. mainly on account of the resiliency of China. poverty declined. Latin America made a very strong recovery. as the impact on the balance of payments and on domestic activity becomes very serious. Con currently. and much lower growth rates. Asian countries were able to emerge from the serious crisis that had brought many of them down in the late 90s. compounded by a massive loss in financial wealth. not all countries acted in a similarly prudent fashion. It is likely to be well below 1% in Latin America.Recent evolution of the world economic environment Over the last decade. Within this overall positive picture. even though still in the order of 5% in Emerging Asia. a recession among the newly Industrialized countries of Asia (NICs). Under these conditions. and high volatility that extended through the 1990s. policy makers will need to find a balance between the needs of economic stimulus and of financial stability. and to an increasing extent India. and the external accounts were much sounder than they had been in decades. international trade boomed. Helped by the consistent growth of China. the Asia region witnessed a stellar performance. The limited initial impact of the financial crisis gave rise to a false sense of security that has now disappeared. the fiscal accounts and monetary policy showed great strength. and to a lesser extent India.

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However. As stated very precisely by Jack Boorman. These imbalances grew rapidly. Global GDP rose at an average of about 5 percent a year. The US. these trends were further complicated by an increasingly integrated global trading and financial system which magnified and accelerated the transmission process. and aggravated by weak and uncoordinated policy responses to the initial signs of trouble in the financial system – responses that. embarked in consumption binge and a growing fiscal deficit. experienced growing external current account deficits. The most important factor behind the increasing imbalances was the emergence of growing imbalances among the main economies of the world. and commodities had reached new and sustainable heights. inadequate regulation and supervision of national financial systems and fragmentation of global regulation. The value of financial and real assets was growing without a perceptible limit. the US dollar started to weaken in international markets and there were growing signs of impending problems. after a period of extraordinary growth but fraught with dangers that were not anticipated by most even a few months ago. with low rates of savings. China. its highest sustained rate since the early 1970s. Inflation remained generally contained. the value of financial assets rose sharply. entailed a new economic paradigm. as noted below. and to a lesser extent Europe and Latin America. 9 . but markets did not respond significantly before 2007. Japan. About three-fourths of this growth was attributable to a broad-based surge in the emerging and developing economies. For four years through the summer of 2007. even if with some upward pressures. Prosperous stage that using an abused word. These were financed by the surpluses of oil producing countries. Concurrently. in many instances did more to shake confidence than to instill a sense that policy was up to the task of dealing with the banking system crisis and the impact on the real economy. as described in further detail below. the global economy boomed.Genesis of the Present Financial and Economic Crisis The reasons for the current crisis are complex. and are linked to the financial market deterioration of the last 20 months or so. weak surveillance by the IMF and other multilateral organizations.

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we can point to organizations that contributed greatly to the problem and how their role was the catalyst for others to become involved and eventually fail. rather it was multiple decisions and issues involving many actors over time that led us to where we are today. this cancer spread throughout the financial industry. Fannie Mae. A few key elements are critical in understanding how we got to where we are today. The current credit crisis is a complex phenomenon with its roots in a number of places involving a myriad of people and institutions. Freddie Mac. Fannie Mae and Freddie Mac fall into this category. They were the central cancer of the mortgage market. banks. some claim that deregulation is entirely to blame. We need a series of hearings that will focus on the root causes and how we can fix a system in order to avoid financial meltdowns in the future. they need and deserve real. the major private sector credit rating agencies. This is simply not true and more importantly serves to grossly oversimplify a problem whose roots run deep and involve myriad actors and issues. the Securities and Exchange Commission (SEC). In a time of crisis. non-partisan oversight. mortgage brokers. The simple truth is that many share the blame. the Federal Reserve Board. an over-reliance on inaccurate risk assessment and a fractured regulatory system. the Department of Housing and Urban Development (HUD). Key players and institutions include Members of Congress. There is no single issue or decision one can trace as a cause of the current financial crisis. and pointing to just one person or organization does a disservice to the American people.Causes of the Credit Crisis In the midst of the most serious financial crisis in a generation. This minority staff analysis attempts to objectively explore the causes of the financial crisis we are in and how companies like Lehman Brothers and AIG contributed to this crisis. With the help of a loose monetary policy at the Federal Reserve. the American people cannot afford the same old partisan finger pointing. which has now metastasized into the current financial crisis. well-respected members of Republican and Democratic administrations. 12 . However. and consumers.

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The size and growth of Fannie Mae and Freddie Mac leading up to their collapse were nothing short of astonishing.By 2005. and from 2000 to 2008 their employees contributed nearly $15 million to the campaigns of dozens of Members of Congress on key committees responsible for oversight of Fannie and Freddie.8% of the total publicly-held debt of the U. The motivations for Fannie Mae and Freddie Mac to gamble with taxpayer money on bad nonprime mortgage bets was not entirely a matter of good intentions gone awry. These liabilities were equal to 32. placing the total financial system of the future at a substantial risk. Fannie and Freddie combined spent nearly $175 million lobbying Congress. Those who opposed the restructuring of Fannie Mae and Freddie Mac were unwittingly helping to build a house of cards on risky mortgage backed securities. with Democrats viewing any attempt at curtailing their behavior as an attempt at curtailing affordable housing. and their outstanding liabilities grew 980% to $1. From 1990 to 2005.6 trillion.51 trillion. Fannie Mae and Freddie Mac grew more than 944% to $1. The transformation of Fannie Mae and Freddie Mac into the Affordable Housing Center was a laudable goal.64 trillion. Federal Reserve Chairman Alan Greenspan was so concerned that he characterized the concentration of systemic risk inherent in the ever-growing portfolios of Fannie and Freddie as. 14 . but to push predatory subprime lending to unspeakable heights and to encourage questionable lending practices believing housing prices would continue to soar was beyond reason. Between 1998 and 2008. Government. The politicization of Fannie Mae and Freddie Mac over the last decade seriously undermined the credibility of the organizations and prevented their restructuring and reform.S. Greed and corruption were unfortunately part of the equation as well. which in 2005 stood at $4. Recent events have unfortunately proved him right.

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AIG is somewhat different. AIG and the Challenges of Statistical Risk Modelling Lehman Brothers didn‘t cause this mess but it certainly jumped head first into trying to make money on securitizing mortgage-backed instruments. Countrywide. bad management decisions were made in thinking that the mortgage-backed securities and derivatives could be insured. If we understand the initial cause of the cancer at Fannie and Freddie.Lehman Brothers. They followed on the heels of Fannie Mae and Freddie Mac and for precisely the same reasons. and beyond. Yet underlying its bad decisions was the same mistaken reliance on sophisticated but inaccurate computer models. Wachovia. then we can understand how it metastasized to Lehman Brothers. 16 . trusting the rating agencies were accurate and that Fannie Mae and Freddie Mac couldn‘t possibly fail.

mortgage brokers. Deregulation is not the problem. Government needs to design smart regulations that align the incentives of consumers. The words regulation and deregulation are not absolute goods and evils. investment institutions. rather it is the fractured regulatory system that has banks.Regulation and the Credit Crisis Democrats are wrong in insisting that de-regulation is the primary cause of the financial crisis. The problem is a lack of coherent regulatory oversight that has led mortgage brokers and lending institutions to write questionable loans and investment institutions to play fast and loose with other peoples money in purchasing bad mortgage-backed assets. They are political cant used to describe complex policy discussions that defy simplistic categorization. 17 . The key to successfully regulating markets is not to either create more or less regulation in an unthinking way. and insurance companies all being overseen by different and often competing federal and state agencies. lenders and borrowers to achieve stable and healthy markets. nor are they meaningful policy prescriptions.

Credit Rating Agencies and the Practice of Rating Shopping
Some firms that bundled subprime mortgages into securities were engaging in rating shopping - picking and choosing among each of the three credit rating agencies in order to find the one willing to give their assets the most favorable rating. Rating agencies willing to inflate their ratings on subprime mortgage-backed securities lobbied Congress to prohibit notching - the downgrading of assets that incorporate risky, unrated assets - by their competitors, on the grounds this constituted an anti-competitive practice. Unfortunately, the Republican Congress was swayed by this argument and codified it in law.


Mortgage Markets: A Primer
Prospective homebuyers apply for mortgages from primary market lenders such as banks, thrifts, mortgage companies, credit unions, and online lenders. Primary lenders evaluate borrowers ability to repay the mortgage based on an assessment of risk that combines such factors as income, assets and past performance in repaying loans. If a borrower does not meet the minimum requirement, the borrower is refused a loan. Prime mortgages are traditionally the gold standard and go to borrowers with good credit who make down payments and fully document their income and assets. Borrowers with poor credit and/or uncertain income streams represent a higher risk of default for lenders and therefore receive subprime loans. Subprime loans have existed for some time but really took off in popularity around 1995, rising from less than 5% of mortgage originations in 1994 to more than 20% in 2006. Borrowers who fall in between prime and subprime standards who may not be able to fully document their income or provide traditional down payments are sometimes referred to as near-prime borrowers. They generally can apply only for Alternative-A (Alt-A) mortgages. Starting in 2001, subprime and near-prime mortgages increased dramatically as a proportion of the total mortgage market. These mortgages increased from only 9% of newly originated securitized mortgages in 2001 to 40% in 2006.

Subprime borrowers, in addition to being below the standard risk threshold lenders traditionally deemed creditworthy for mortgages, were increasingly taking advantage of socalled alternative mortgages that further increased the risk of default. For example, low- or

zero-down payment mortgages permit borrowers who cannot afford the traditional 20% down payment on a house to still receive a loan. Instead some mortgages allow them to pay 10%, 5%, or even 3% of the purchase price of the home. The riskiest loans even allow borrowers to pay no money down at all for 100% financing. Another option is to allow borrowers to take out a piggyback or silent second loan - a second mortgage to finance the down payment. This is possible because the larger first mortgage means some lenders give borrowers a more favorable rate on the second mortgage. Interest-only mortgages are another alternative type that allows borrowers to for a time pay back only interest and no principal. However, either the duration of the mortgage must be extended or the payments amortize the remaining principal balance over a shorter period of time, increasing the monthly payment, and ultimately the total size of the loan, a borrower must repay. Negative amortization mortgages are even riskier, allowing borrowers to pay less than the minimum monthly interest payment, adding the remaining interest to the loan principal and again increasing the payments and size of the loan. Adjustable rate mortgages (ARMs) are the most common of the alternative mortgages. ARMs offer a low introductory mortgage rate (the cost of borrowing money for a home loan; it is generally related to the underlying interest rate in the macro economy) which then adjusts in the future by an amount determined by a pre-arranged formula. There are different formulae used to determine the new mortgage rate on an ARM, but in general one can think of these new rates as being related to the performance of the U.S. economy. If interest rates go down during the introductory period of the ARM, the adjusted mortgage rate will be lower, meaning the borrowers monthly payment will go down. If interest rates go up, the borrowers monthly payment will be larger. The prevalence of ARMs as a percentage of the total mortgage market increased dramatically during the housing bubble, from 12% in 2001 to 34% in 2004. Unlike other alternative mortgages, however, there are sound reasons for borrowers to take out ARMs, under certain macroeconomic conditions. In 1984, for example, 61% of new conventional mortgages were ARMs. However, this was a rational response to the very high interest rates at that time. High interest rates translate into high mortgage rates. This meant that borrowers at that time were willing to bet that when their mortgage rates adjusted, they were likely to adjust downward due to falling interest rates. This was a sensible bet and one that turned out to be correct.

2001. however. however. as long as they were confident that housing prices would continue to rise. Some other force was clearly at work.and long-term interest rates during this period. However. alternative mortgages were marketed as affordability products to lower income and less sophisticated borrowers during the housing boom. at least until about 2004. interest rates were abnormally low because the Federal Reserve led by Chairman Alan Greenspan lowered rates dramatically to pump up the U. By 2005 short-term interest rates were actually rising faster than long-term rates.From 2001 to 2004. The persistence of nontraditional terms could be evidence that some borrowers intended to sell or refinance quickly . economy following the attacks of September 11. Borrowers responding only to these macroeconomic conditions would have been wise to lock in these rates with a traditional 30-year fixed-rate mortgage. relates in part to the abnormally wide disparity between short.S. yet ARMs remained very popular. Low short-term rates until 2004 are only part of the puzzle. the report goes on to note that. Since ARMs tend to follow short-term rates. relatively low by historical standards. plan on refinancing before their ARMs adjusted upward. mortgage rates on 30-year fixed-rate mortgages were around 6%. 21 . In the words of a report by the Congressional Research Service. Correspondingly. By 2006 housing prices had started to slow significantly and yet introductory periods remained popular. borrowers could get these mortgages at even lower costs indicator of speculative behavior. The continuing popularity of ARMs. from 2004 to 2006. in addition to speculation.

primary lenders may choose to hold a mortgage until repayment or they may sell it to the secondary mortgage market.S. Ultimately. Fannie and Freddie may have purchased or guaranteed up to $1 trillion of risky nonprime mortgages. This increase in the funding available to mortgage lenders to lend was the goal behind the creation of Fannie Mae and Freddie Mac. Fannie Mae morphed into a private company. a government-sponsored enterprise (GSE). with no federal funding by 1970. there was no national U. leaving broad swaths of the country unable to afford home financing. Prior to the existence of the secondary mortgage market. After a number of legislative iterations. 22 .The Role of Fannie Mae and Freddie Mac in Creating the Credit Crisis Successive Congresses and Administrations have used Fannie Mae and Freddie Mac as tools in service to a well-intentioned policy to increase the affordability of housing in the United States. Government created an incentive structure for Fannie and Freddie to facilitate the extension of risky nonprime and alternative mortgages to many borrowers with a questionable ability to pay these loans back. in the National Housing Act of 1934 as a purely public agency. the U. has contributed perhaps more than any other single factor to the growth of the subprime housing bubble from 2005 to 2007. it can use the proceeds from the sale to make additional loans to other homebuyers. mortgage market. along with a healthy dose of unethical and corrupt behavior by the management of Fannie Mae and Freddie Mac. If the primary lender sells the mortgage. the mortgage industry was mainly concentrated in urban centers. Congress created the Federal National Mortgage Association. In the mortgage market. In response.S. In the process. or Fannie Mae. which in turn was the root cause of the current financial crisis. Instead. This.

others followed quickly. Some banks didn‘t need to rely on savers as much then. all wanted in. Collateralized Debt Obligations. As BBC‘s former economic editor and presenter. mortgages. buying them in order to securitize them and then sell them on. (even more complex forms of securitization) spread the risk but were very complicated and often hid the bad loans. especially in the US. or CDOs. thus off loading risky loans on to others (For banks. selling and trading risk. not content with buying. as long as they could borrow from banks and sell those loans on as securities. Evan Davies noted in a documentary called ‗The City Uncovered with Evan Davis: Banks and How to Break Them (January 14. no one wanted bad news. millions can be made in money earning loans. etc without the right controls and management. and trading risk. got into home loans. buying. banks turned to the poor. rating agencies were paid to rate these products (risking a conflict of interest) and invariably got good ratings. selling.   Some banks even started to buy securities from others. bad loans would be the problem of whoever bought the securities. the riskier loans. So they turned into securities. Subprime and ― self-certified‖ loans (sometimes dubbed ―liar‘s loans‖) became popular. even if it went beyond their expertise. High street banks got into a form of investment banking. Securitization was seen as perhaps the greatest financial innovation in the 20th century). Investment banks. Rising house prices led lenders to think it wasn‘t too riski. Some banks loaned even more to have an excuse to securitize those loans. For Example.  Banks borrowed even more money to lend out so they could create more securitization. Running out of whom to loan to.Securitisation and Subprime crisis The sub prime crisis came about in a large part of financial instruments such as securitisation. the subprime.    Some investment banks like Lehman Brothers git into mortgages. but they are tied up for decades. Starting in Wall Street.encouraging people to take them up. bad loans ment repossessing high-valued property. the banker off loads the risk. The security buyer gets regular payments from all those mortgages. While things were good.2008)‘. With soaring profits. Where bank would pool their various loans into sellable assets. 23 .

it is far from perfect. experts such as economists and psychologists say that markets suffer from a few human frailties. This will be very hard to do. such as confirmation bias ( always looking for facts that support your view. Amongst other things. as all have admitted for many years. Despite the benefits of a market system. or better than the average and can make good decisions all the time). because of the interlinked investments. Derivatives revolutionized the financial markets and mitigating risk. 24 . rather than just facts) and superiority bias ( the belief that one is better than the others. Trying to reign in these facets of human nature seems like a tall order and in the meanwhile the costs are skyrocketing.Derivatives didn‘t cause this financial meltdown but they did accelerate it once the subprime mortgage collapsed.

Global Transmission of the Crisis 25 .

Global Transmission of the Crisis The financial crisis that erupted in August 2007 after the collapse of the U. intensifying solvency concerns triggered a cascading series of bankruptcies. and public interventions in the United States and Western Europe. When the real estate bubble busted in the US and Europe (the UK and Spain come to mind). where experts expected a continuous increase in prices. In the second half of the year commodity prices declined by some 45%. Most dramatically. These developments badly shook confidence in global financial institutions and markets. investors moved to commodities. with a subsequent collapse. forced mergers. The commodity bubble peaked in mid 2008. that only decelerated by the end of the year. 26 .S. subprime mortgage market entered a tumultuous new phase in September 2008. which eventually resulted in a drastic reshaping of the financial landscape. in particular losses were large in the case of metals and oil (Chart 1).

27 .Chart 1: Evolution of commodity Prices (2005=100) Source: IMF: Commodity Prices. .

International Response 28 .

Mexico. newly industrialized economies.7 The creation of the G-20 Summits is another noteworthy development. for countries seen as generally good performers. The IMF has already indicated that it will show greater lending flexibility and can mobilize significant resources. again to support the currencies of those countries in the face of continued pressures in foreign exchange markets at least through end-2008. South Africa. Up to now. In the past. The G-20 includes the G-8 and the largest emerging. However. including China. and Russia. and make IFIs more relevant. at the ministerial level. many decisions had been taken at the level of the G-7/G-8. Korea. over-represented Europe and others will need to accept the realities of the new world and shift their voting power to the ―new‖ countries.International Response The national rescue operations have been followed by major swap transactions between the Federal Reserve of the US and a number of other central banks of industrialized economies. More recently. 29 . And conditions would be fewer and more targeted than in the past. and Singapore. India. Brazil. The IMF would now provide assistance on the basis of fewer conditions. access to the International Financial Institutions has also become imperative. This forum reflects better the growing importance of the emerging world and may also open the door to a more representative governance system at the international financial institutions (IFIs). the important group formed by the largest advanced economies. any borrowing had to be based on what was seen as burdensome conditions. With high financing requirements. It follows a group formed in the 1990s to discuss international financial issues. and in Latin America. Korea. this was extended to the Central Banks of Brazil. in order to provide sufficient liquidity in response to a steady demand for US dollars. Mexico and Argentina.

Impact of crisis on trade of goods and services. remmitace and tourism and FDI 30 .

and will have more difficulty in correcting imbalances as their domestic economies may find a lower productive base to provide for their imports. tempered by the much lower but growing ratios for China (31%) and India (12%) which were clearly dominated by domestic developments. will be temporary. but to some extent also some real depreciation of their currencies. It may be the case that they will experience a significant short term loss. trade volumes are expected to decline for the first time in many years—as a minimum by 3% according to IMF estimates. even if large. with a marked transformational impact. and with the understanding that the losses. which have become highly integrated with the rest of the world.Impact of crisis on trade of goods and services. However this should be viewed in a broader light. But this is taking place from the vantage point of much higher gains in the past. or about double the rate of world output. Developing Asia recorded a ratio of 55%. Asian exports have grown at a rate of 10% and those of Latin America and the Caribbean by some 7%. adjusted for their size8. the more open traders may benefit from a more flexible productive structure that allows them to adjust more efficiently. Countries that opened more vigorously to trade grew the fastest. it would be easy to suggest that the countries that have been most open to international trade may be subject to the greatest shock on account of reduced world demand. as is being observed in Taiwan Province and in Korea. The NICs. remmitace and tourism and FDI Developments in Trade of Goods and Services As part of the significant slowdown/decline in world activity. Latin America which had become much more open in the 1990s. 31 . More closed economies. registered a stable ratio of exports to GDP of 21% notwithstanding the impact of a strong real appreciation. recorded an average ratio of Exports to GDP of 71% for the period 2002-07. as export volumes increased significantly over the period. and benefitted more from global prosperity. More significantly. Under these conditions. Over the last quarter century the volume of world trade had grown at an average rate of 6%. In Asia the ratio of exports to GDP reflected increased volumes of trade. thus justifying protectionism. may be more dependent on a few commodities. The impact will be very different in various areas of the world.

the impact of the consequent remittances to their home countries have helped increase prosperity and reduce poverty.Remittances and Tourism Two other areas that can be expected to show the impact of the slowdown are remittances and services. Tourism is another area of concern. with adverse consequences for the well being of many millions of households among developing countries. and the Middle East. However. with near US$110 billion to Asia. Remittances over the last fifteen years have become a major channel of prosperity. Central America and the Caribbean. remittances started to fall in 2008. and acted as a countercyclical force in the receiving countries. India and some other countries in South and South East Asia. The prospects for 2009 are equally dire. Europe. they are highly sensitive to economic conditions in the countries of employment. With many emigrants working in the US. Mexico and the Philippines being the largest recipients of workers‘ remittances. Remittances amounted to some US$280 billion in 2008 (some 2% of GDP of the receiving countries). 32 . and some countries in South America. and Mexico. With emerging economies.India. These flows have been very stable. The merits of increased mobility of large numbers of workers to well-paying jobs in prosperous destinations may be subject to debate. like tourism. for the first time in a quarter century.9 However. tourism from the richer countries has fallen and will continue to do so. particularly in Asia and Latin America. Maldives. particularly for Thailand. also entering into recession the prospects for this segment of economic activity look particularly grim for the near future. Receipts from tourists are also a significant source of income. and US$70 billion to Latin America. arguably the most dynamic segment of international tourism. Even though transportation costs are declining.

the countries of the CSIS and of Eastern and Central Europe began to receive increasing flows. The information is particularly interesting as it shows the large sums of capital outflows from Emerging Economies. both Asia and Latin America became increasingly important. which allowed for a sharp increase in available capital within the private sector. Net flows are projected to decline by 80% from their 2007 peak for Emerging Asia. table# 2 presents the cumulative inflows and outflows of FDI and portfolio investments for Developing Asia and Latin America for the period 1998-2007. Most interesting was the change in the composition of these flows. By early 2008 capital flows to developing countries had started to slow down. even with some volatility in the case of Latin America. 33 .Foreign Direct Investment Foreign Direct Investment (FDI) will also suffer in the short run. reflecting both the emergence of new countries as origin and destination of capital flows. The Institute of International Finance estimates that net private flows to emerging economies declined from a record US$930 billion in 2007 to below US$470 billion in 2008 and to projected flows of only US$165 billion in 2009. as they became increasingly important investors. with sharp declines both in Asia and Latin America. and by 75% for Latin America. and these flows fell sharply in the second half of the year reflecting the financial crisis. (Table 2) Also. While total FDI directed to developed countries retained the lion‘s share of the total inflows (70% of the total). as opposed to the previous experience when these outflows reflected capital flight. and resulting in a decline in lending by International Financial Institutions or IFIs. This will complicate economic management. and rapidly evolving capital markets. as countries deal with weakening external accounts. In the end. FDI stocks and flows grew at a very fast rate in recent years. 10 As an illustration of the size of inflows and outflows. cumulative flows for the year were only about one half of those registered in 2007.

Some Facts and Figures 34 .

ECLAC.Some Facts and Figures Chart 1 Growth of GDP in Developing Asia. 35 . IMF. . Latin America and the World (Annual percent) Source: WEO.

IMF. 36 . ECLAC.Chart 2 Inflation (in %) Source: WEO. .

Chart 3 External Current Account. Exchange Rates and Terms of Trade Developing and Emerging Asia 37 . Fiscal Balance.

Chart 4 38 .

Chart 5 Foreign Direct Investment: Recipient regions stocks (US$ billions) 1980 World 551 1990 1779 1414 80 365 9 2388 2000 5810 4031 69 1708 17 7948 2006 11999 8454 71 3156 14 11999 Developed Economies 411 Share in Total 75 Developing Economies 140 Share in Total World FDI Stock 9 859 Memorandum Items Capital Flows (US$ billion.1998-07)2/ FDI Inflows FDI Outflows Portfolio Inflows Portfolio Outflows Dev Asia 841 -151 127 -102 LATAM 728 -142 170 -103 1/ Adjusted by world export prices 2/2007 values for Asia are estimates Source: UNCTAD. World Investment Report (2007). 39 .

ECLAC 40 . Latin America and the World (Annual percent) Source IMF.Chart 6 Growth of GDP in Developing Asia.

ECLAC. 41 . IMF.Chart 7: Inflation (in %) Source: WEO.

Chart 8 Selected Countries-stock Market and Exchange Rate changes June-Dec 2008 Stock Market Changes % Exchange Rate Changes % China Hong-Kong India South Korea Argentina Brazil Mexico Japan Euro Area USA(S&P500) Sources: Bloomberg. market data -48 -40 -41 -36 -51 -49 -29 -36 -37 -36 1 1 -13 -20 -13 -31 -26 18 -11 -- 42 .

2 1.8 16.2 1.1 3. Eurostat 43 .6 5.2 4.7 1. 2008) -30 2 5 11 37 1 6 46 18 46 38 128 64 41 1/Estimated expenditure in 2009. net of International Reserves US Billion.2 6.1 1.5 2.3 1. Number in parenthesis reflects announced total package Sources: National data.1 0. IMF. Press Releases.3 3.0 3. annual China Singapore Indonesia South Korea India Peru Chile Argentina Mexico Brazil USA Japan Germany Great Britain 300 (586) 1/ 6.2 1.0 5.Chart 9 STIMULUS PACKAGES: Selected Countries Country Announced Amount of Stimulus Gross Debt Public Public Debt.7 2.2 2.3 10.1 18 92 17 32 58 31 19 59 26 57 38 153 67 44 (% of GDP.8 8.0 800 (1150) 1/ 250 102 30 7.8 10.


More is expected Many banks were taking on huge risks increasing their exposure to problems. no secure retail funding. the governments of the wealthiest nations in the world have resorted to extensive bail-out and rescue packages for the remaining large banks and financial institutions. The world‘s largest insurance and financial services company. according to Bloomberg. AIG alone had credit default swaps of around $400 billion at that time. so some collapsed quickly and dramatically of criticism for betting n the things going badly. Others have been bought out by their competition at low prices and in other cases. for example. Any problem. was enormous.8 trillion in October 2009. Some investment banks were sitting on the riskiest loans that other investors did not want. On the other hand more it continued the more they could profit. It was also poorly regulated. driving down their prices.5 trillion. Assets were plummeting in value so lenders wanted to take their money back. The trade in these swaps created a whole web of interlinked dependencies: a chain only as strong as the weakest link. confidence fell quickly. From a world credit loss of $2. which of course went downhill. such as risk or actual significant loss could spread quickly. Hence the eventual bailout (now some $150 billion) of AIG by the US government to prevent them failing. The total amounts that government have spent on bailouts have skyrocketed. Furthermore . which were encouraging borrowing beyond people‘s means. or 33%.The scale of the crisis: trillions in taxpayer bailouts The extent of the problems has been so severe that some of the world‘s largest financial institutions have collapsed. and so did AIG. of the value of the world‘s companies has been wiped out by this crisis. But some investment banks had little in deposits. The market for credit default swaps market (a derivative on insurance on when a business defaults). In the recent crisis they were criticized for shorting on banks. 45 . hedge funds may have been signalling an underlying weakness with banks. many of AIG‘s credit default swaps were mortgages. The UK and other European countries have also spent some $2 trillion on rescues and bailout packages.7 trillion in bailout packages and plans. Some countries temporarily banned shorting on banks. $14. US taxpayers alone will spend some $9. In some regards. exceeding the entire world economies output of $50 trillion by summer 2008.When people did eventually start to see problems. A lot of exposure with little regulation.

46 .

‖ Kanaga Raja. As more and more evidence is gathered and as the lag effects are showing up. 2008 47 . Economic Outlook Gloomy. the bursting of the housing bubbles in the US and in other large economies. we are seeing more and more countries around the world being affected by this rather profound and persistent negative effects from the reversal of housing booms in various countries. September 4. that ― The global economy is teetering on the brink of recession.The effect of this. The downturn after four years of relatively fast growth is due to a number of factors: the global fallout from the financial crisis in the United States. Third World Network. as summarized by the Third World Network. Risks to South. increasingly restrictive monetary policies in a number of countries. say UNCTAD.The fallout from the collapse of the US mortgage market and the reversal of the housing boom in various important countries has turned out to be more profound and persistent than expected in 2007 and beginning of 2008. the United Nation‘s Conference on Trade and Development says in i ts Trade and Development Report 2008 is. soaring commodity prices. and stock market volatility.

There seems to be little sympathy—and even growing resentment—for workers in the financial sector. In a number of European countries. the encouragement such practices have given in the past. when they complained to the Western governments and International Monetary Fund (IMF). In other cases.A Crisis so severe. Some governments have moved to make it harder to manipulate the markets by shorting during the financial crisis blaming them for worsening an already bad situation. without success that currency speculators— operating through hedge funds or through the currency operations of commercial banks and other financial institutions—were attacking their currencies through short selling and in doing so. blaming it on their own economic mismanagement instead. those responsible are bailed out Some of the bail-outs have also been accompanied with charges of hypocrisy due to the appearance of ―socializing the costs while privatizing the profits. as they are seen as having gambled with other people‘s money. they dismissed the claims of the Asian governments.) In the meanwhile. 48 . is what has angered so many people. Asian nations affected by short-selling complained.‖ The bail-outs appear to help the financial institutions that got into trouble (many of whom pushed for the kind of lax policies that allowed this to happen in the first place). governments have tried to increase or fully guarantee depositors‘ savings. while getting fat bonuses and pay rises for it in the past.) Other governments have moved to try and reassure investors and savers that their money is safe. bringing the rates of the local currencies far below their real economic levels. Although in raw dollar terms the huge pay rises and bonuses are small compared to the magnitude of the problem. for example. However. potentially. (It should be noted that during the debilitating Asian financial crisis in the late 1990s. and hence lives. banks have been nationalized (socializing profits as well as costs. as well as the type of culture it creates. smaller businesses and poorer people rarely have such options for bail out and rescue when they find themselves in crisis.

it is not just the wealthy that will suffer. the value of their homes are likely to fall in value leaving them in negative equity. things like a credit crunch can ripple through the entire economy. many sectors may find the credit crunch and higher costs of borrowing will lead to job cuts. yet other businesses will struggle to survive leading to further fears of job losses. For any recent home buyers.A crisis so severe. or remortgaging could become expensive. banks with little confidence to lend may lend with higher interest rates. For example. People may find their mortgages harder to pay. As people will cut back on consumption to try and weather this economic storm. the rest suffer too There is the argument that when the larger banks show signs of crisis. 49 . With an increasingly inter-connected world. but potentially everyone. Many industrialized nations are sliding into recession if they are not already there. In the wider economy. The real economy in many countries is already feeling the effects.

The financial crisis and wealthy countries 50 .

as former Nobel prize winner for Economics. This illustrates how serious this problem is for such an ardent follower of free market ideology to do this (although free market theories were not originally intended to be applied to finance. starting with Britain. the US capitulated and the Bush Administration announced that the US government would buy shares in troubled banks. but to preserve it. The US House of Representatives initial rejected the package as a result. Eventually. argued.‖ Professor Ha-Joon Chang of Cambridge University suggests that historically America has been more pragmatic about free markets than their recent ideological rhetoric suggests. the Bush Administration offered a $700 billion bailout plan for the US financial system. former Chief Economist of the World Bank and university professor at Columbia University. institutions and ideologues that pushed for the policies that caused the problems are found. The US resisted this approach at first. or partnationalize some failing banks to try and restore confidence. the plan ―remains a very bad bill:‖ In Europe. However.The financial crisis and wealthy countries Many blame the greed of Wall Street for causing the problem in the first place because it is in the US that the most influential banks. It took a second attempt to pass the plan. sending shock waves around the world. This bailout package was controversial because it was unpopular with the public. Joseph Stiglitz. a number of nations decided to nationalize. which could be part of a deeper root cause of the problem). a charge by many in developing 51 . Perhaps fearing an ideological backlash. Bush was quick to say that buying stakes in banks ―is not intended to take over the free market. The crisis became so severe that after the failure and buyouts of major institutions. seen as a bailout for the culprits while the ordinary person would be left to pay for their folly. but with add-ons to the bill to get the additional congressmen and women to accept the plan. as it goes against the rigid free market view the US has taken for a few decades now.

‖ (Interestingly. This. By February 2009. to stimulate and develop its internal market. according to the government. former Assistant Secretary of the Treasury Department in the Reagan administration and a former associate editor of the Wall Street Journal. This also reflects how the crisis has spread from the financial markets to the ―real economy‖ and consumer spending. such as some notion of land reform. Paul Craig Roberts also argues that the bailout should have been to help people with failing mortgages.7 trillion. And that would restore the value of the mortgage-backed securities that are threatening the financial institutions [and] the crisis would be over. 52 .) Despite the large $700 billion US plan. is the defaulting mortgages. So there‘s no connection between the government‘s explanation of the crisis and its solution to the crisis. China seems to be contemplating more capitalist ideas. the total US bailout is $9. not banks: ―The problem. banks have still been reluctant to lend. while Europe and US consider more socialist-like policies. For example. and perhaps the sign of the times. China hopes. could be one way to try and help insulate the country from some of the impacts of the global financial crisis. This led to the US Fed announcing another $800 billion stimulus package at the end of November.countries that rich countries are often quite protectionist themselves but demand free markets from others at all times. Enough to pay off more than 90 percent of America‘s home mortgages (although this bailout barely helps homeowners). according to Bloomberg. such as some form of nationalization. others echo Stieglitz‘s concern above. While the US move was eventually welcomed by many. so the money should be directed at refinancing the mortgages and paying off the foreclosed ones. About $600bn is marked to buy up mortgage-backed securities while $200bn will be aimed at unfreezing the consumer credit market.

October 1. The BBC also asked if the US‘s superpower status was shaken by this financial crisis: The financial crisis is likely to diminish the status of the United States as the world‘s only superpower. is over… The American free-market creed has self-destructed while countries that retained overall control of markets have been vindicated. The political philosopher John Gray.‖ he went on. it will be harder for it to argue in favor of its free market ideas.‖ — Paul Reynolds. and is now stretched financially. BBC. evidenced by its challenges in Iraq and Afghanistan. in Afghanistan and Iraq. in which the balance of power in the world is being altered irrevocably. 53 .‖ ―How symbolic that Chinese astronauts take a spacewalk while the US Treasury Secretary is on his knees.A crisis signaling the decline of US’s superpower status? Even before this global financial crisis took hold. ―Even its debt can be overcome. the US is already stretched militarily. On the philosophical level. Some see this as a pivotal moment. others argue that it may be too early to write of the US: The director of a leading British think-tank Chatham House. On the practical level. ―The era of American global leadership. who recently retired as a professor at the London School of Economics. some commentators were writing that the US was in decline. reaching back to the Second World War. Dr Robin Niblett … argues that we should wait a bit before coming to a judgment and that structurally the United States is still strong. 2008 Yet. Asia and elsewhere. ―America is still immensely attractive to skilled immigrants and is still capable of producing a Microsoft or a Google. US superpower status is shaken. wrote in the London paper The Observer: ―Here is a historic geopolitical shift. if its own markets have collapsed. It has enormous resilience economically at a local and entrepreneurial level. and its declining image in Europe.

BBC. India has huge internal contradictions. 2008 54 . Russia is not exactly a paper tiger but it is stretching its own limits with a new strategy built on a flimsy base. Europe has usually proved unable to jump out of the doldrums as dynamically as the US. decline relative to who? China is in a desperate race for growth to feed its population and avert unrest in 15 to 20 years. October 1. US superpower status is shaken.‖ — Paul Reynolds. ―But the US must regain its financial footing and the extent to which it does so will also determine its military capacity. it will have fewer forces.―And one must ask. If it has less money.

The plan is supposed to help restore consumer and business confidence. This may include guaranteeing 100% of people‘s savings or helping broker deals between large banks to ensure there isn‘t a failure. Others needed rescuing. Shore up employment. public dissatisfaction at the way the government was handling the crisis meant the Iceland government fell A number of European countries have attempted different measures (as they seemed to have failed to come up with a united response). some nations have stepped in to nationalize or in some way attempt to provide assurance for people. economic problems have hit them hard.Europe and the financial crisis In Europe. getting the banks lending again. 55 . The banking system virtually collapsed and the government had to borrow from the IMF and other neighbors to try and rescue the economy. The EU is also considering spending increases and tax cuts to be worth € 200 billion over two years. In Iceland. In the end. where the economy was very dependent on finance sector. For example. and promoting green technologies. a number of major financial institutions failed.

Asia and the financial crisis 56 .

However. there was increased foreign investment in Asia.1%. as that would have a knock-on effect of reassuring foreign investors and helping ease concerns in other parts of the world. Asia has not had a subprime mortgage crisis like many nations in the West have. Japan. it is very dependent on exports. Asian products and services are also global. Asia has had more exposure to problems stemming from the West.Asia and the financial crisis Countries in Asia are increasingly worried about what is happening in the West. While their banks seem more secure compared to their Western counterparts. Japan is so exposed that in January alone. this crisis has shown that in an increasingly inter-connected world means there are always knock-on effects and as a result. Many Asian nations have witnessed rapid growth and wealth creation in recent years. In addition. similarly has also experienced a sharp slowdown and its growth is expected to slow down to 8% (still a good growth figure in normal conditions). Japan‘s industrial production fell by 10%. This lead to enormous investment in Western countries. 57 . the biggest monthly drop since their records began. Many Asian countries have seen their stock markets suffer and currency values going on a downward trend. which has suffered its own crisis in the 1990s also faces trouble now. even that has not been enough to shield it from the effect of the global financial crisis. India and China are the among the world‘s fastest growing nations and after Japan. A number of nations urged the US to provide meaningful assurances and bailout packages for the US economy. Both have poured billions into recovery packages. the speed at which it has dropped—the sharp slowdown—is what is concerning. mostly from the West. China. Much of it is fueled by its domestic market. for example. Many believed Asia was sufficiently decoupled from the Western financial systems. and a slowdown in wealthy countries means increased chances of a slowdown in Asia and the risk of job losses and associated problems such as social unrest. From 2007 to 2008 India‘s economy grew by a whopping 9%. Although this is a very impressive growth figure even in good times. However. are the largest economies in Asia. and it is expected that in data will show that by March 2009 that India‘s growth will have slowed quickly to 7. China also has a growing crisis of unrest over job losses. However.

to give up its veto power at the International Monetary Fund and European countries to give up some more of their voting rights in order to make room for emerging and developing countries. too. What seems to be emerging is that Asian nations may have an opportunity to demand more fairness in the international arena.‖ Whether this will happen is hard to know.‖ Asian nations are mulling over the creation of an alternative Asia foreign exchange fund. Similar calls by other developing countries and civil society around the world. It would of course be too early to see China somehow using this opportunity to decimate the US. which at the moment mostly affects the rich West. as IPS also noted in the same report. as Inter Press Service (IPS) reported. China is a country with scarce capital funds and it is hardly the time for us to export these funds and pour them into a country profuse with capital like the U. finance and investment talks. which would be good for other developing regions. for years. the financial crisis could mean the US is less influential than before.‖ For example. this coordinated response is dependent on the entry of Asia‘s emerging economies into global policy-setting institutions. This time however. 58 .S. This time. a major meeting between the EU and a number of Asian nations resulted in a joint statement pledging a coordinated response to the global financial crisis.‖ They also added. ―And we want America to lower its protectionist barriers allowing an easier access to its markets for Chinese and other developing countries‘ goods. but market shocks are making some Asian countries nervous and it is not clear if all will be able to commit. Asian leaders had called for ―effective and comprehensive reform of the international monetary and financial systems.Towards the end of October 2008. economically.S. Asian countries are potentially trying to flex their muscle. however. have come to no avail. as it has its own internal issues. a well respected Chinese academic) notes ―Relatively speaking. A side-story of the emerging Chinese superpower versus the declining US superpower will be interesting to watch. This is very significant because Asian and other developing countries have often been treated as second-class citizens when it comes to international trade. However. While the Western mainstream media has often hyped up a ―threat‖ posed by a growing China. maybe because they see an opportunity in this crisis. the World Bank‘s chief economist (Lin Yifu. one of the Chinese state-controlled media outlets demanded that ―We want the U.

Global Meltdown and its Impact on the Indian Economy 59 .

an intraday loss of 200 points. This huge withdrawal from the India‘s stock market was mainly by Foreign Institutional Investors (FIIs). Rs. Perhaps this has saved Indian economy from being swayed over instantly. market is closely regulated by the government. Impact on stock market The immediate impact of the US financial crisis has been felt when India‘s stock market started falling. The Sensex lost 1000 points on that day before regaining 200 points. Because of worker‘s remittances. in India. 1. Unlike in US where capitalism rules. Impact on India’s export With the US and several European countries slipping under the full blown recession. Manufacturing sectors like 60 . NRI deposits.(Sivaraman. FII investment and so on.Global Meltdown and its Impact on the Indian Economy Impacts of the US Financial Crisis on India Though in the beginning Indian official denied the impact of US meltdown affecting the Indian economy but later the government had to acknowledge the fact that US financial crisis will have some impact on the Indian economy. then we may head for another 1991 crisis like situation. and participatory-notes.000 crores was wiped out on a single day bourses of the India‘s share market. Impact on India’s trade The trade deficit is reaching at alarming proportions. the foreign exchange reserves of the country has depleted by around $57 billion to $253 billion for the week ended October 31. On 10 October. Further. since October. if our foreign exchange reserves depletes and trade deficit keeps increasing at the present rate. 250. 2008) 3. But if the remittances dry up and FII takes flight. Indian exports have run into difficult times. the current deficit is at around $10 billion. The US meltdown which shook the world had little impact on India. because of India‘s strong fundamental and less exposure of Indian financial sector with the global financial market. 2.

Around 50. running and widening monthly trade deficit over $10 billions. 2008). Further. creating widespread unemployment in this sector (Chandran. With the global economy still experiencing the meltdown. India‘s rupee depreciated approximately by 20 per cent against US dollar and stood at Rs. Indian tourism sector is badly affected as the number of tourist flowing from Europe and USA has decreased sharply. 4. 2008) from $12. Indian exports fell by 9.6 per cent in 2007-08.7 billion a year ago. IT-BPO sector The overall Indian IT-BPO revenue aggregate is expected to grow by over 33 per cent and reach $64 billion by the end of current fiscal year (FY200). showed that exports had dropped to $1. while imports grew by $6. an increase of about 375000 professionals over the previous year. 49 per dollar at some point. when the impact of declining consumer demand in the US and other major global market. (Sivaraman.1billion to $21. So the meltdown in the US 61 . direct employment to reach nearly 2 million. jewelry export and tourism Again reduction in demand in the OECD countries affected the Indian gems and jewellery industry.9 per cent in November 2008. gems and jewellery have been hit hard because of the slump in the demand in the US and Europe. 6.leather.5 billion in November this fiscal year. 5. Further India enjoys trade surplus with USA and about 15 per cent of its total export in 2006-07 was directed toward USA. Impact on India’s handloom sector.5 per cent towards India‘s total export.000 artisans employed in jewellery industry have lost their jobs as a result of the global economic meltdown. creating panic among the importers. textile. with negative growth for the second month. Over the same period. Exchange rate depreciation With the outflow of FIIs. Official statistics released on the first day of the New Year.5 billion. the crisis had affected the Rs. 3000 crores handloom industry and volume of handloom exports dropped by 4. IT sectors derives about 75 per cent of their revenues from US and IT-ITES (Information Technology Enabled Services) contributes about 5. handloom and tourism sectors.

Further.5 billion. Though the Indian economy would be able to withstand the crisis without any major difficulty. 7.3 billion in 2008 (April-September). Conclusion From the above argument it can be noted down that the ‗Financial or Subprime Crisis‘ was the shear consequences of ‗greed‘ and to make ‗too much profit‘ on the part of Wall Street Firms and Investment Banks.5biilion in 2007-08 to $19. FII and FDI The contagious financial meltdown eroded a large chunk of money from the Indian stock market. 62 . but the crisis is still causing mayhem all over the world. However. if Fortune 500 hundred companies slash their IT budgets. Due to global recession. Indian firms could adversely be affected. which will definitely impact the Indian corporate sector. whereas the inflow of foreign direct investment (FDI) doubled from $7. This crisis also shows the failure of capitalist market economy.will definitely impact IT sector. the money eroded will hardly influence the performance real sector in India. FIIs made withdrawal of $5.

63 .

They also agreed to meet at the end of March 2009 to follow up. It has full EU support for being present at this meeting as well as support from a number of Latin American countries. This will be hard to predict. 2 percent went to emerging countries and 1 percent to other developing countries. And tensions. But others argued that the meeting outcome seemed more vague than concrete and only these principles seemed to have been agreed without anything more concrete. the US has not invited Spain to a financial crisis summit for mid-November. to tighten lax oversight of markets. in April 2008. Spain. this is still not that much and this crisis shows that more is needed in a more deeper and meaningful way. Those who benefit from a system are less likely to be receptive to change. power and greed politics always ruin good ideas. to resist protectionism. The eventual outcome of the G20 meeting seemed mixed. however. it wants to see in-depth reform of the global financial system and focuses on IMF reform as well as giving more representation to emerging nations. For example. sometimes (incorrectly) equating calls for regulation with protectionsim. Like France. For example. or want to steer change in a direction that will be good for them. even amongst the more powerful nations are already showing. They agreed to use government spending to fight a spreading recession. but that may not mean good for everyone. However.Reform and Resistance Will any of these changes occur in an effective way? In recent months these institutions have warmed to changes in these areas. The call to resist protectionism has been a prime concern from the Bush Administration. and to revive stalled negotiations for a new global trade pact. If history is any indicator. it was decided that rich countries at the IMF would give in 3 percent of the votes. Developing countries also got more assurances about increased say at international financial institutions through promises of reform at the IMF and World Bank. The calls for regulation have typically been to make companies more transparent and ensure the financial 64 . a meeting of the G20 (G7 plus some developing nations) sees Spain (the world‘s 8th largest economy) missing out of either classification. As the world‘s eight largest economy and home to 2 of the world‘s top 16 banks. sees this as US retaliation for the country withdrawing its troops from Iraq.

The APEC trading bloc. Most member states are generally industrialized. any way: G20 governments. APEC nations have agreed to resist protectionist measures. Perhaps partly because of lack of mainstream media attention.‖ — International economic architecture: cleaning up the mess?. Bretton Woods Project. 65 . president of the UN General Assembly said: ―Only full participation within a truly representative framework will restore the confidence of citizens in our governments and financial institutions. Nonetheless. The promise of rearchitecting the global financial system more fundamentally seemed to wither away slightly. the Doha conference also resulted in weak pledges and disappointment. were never going to be able to reach a consensus on deeper reforms within the few weeks taken to prepare the summit. Critics argue that the G20 can never tackle this agenda alone. Whether that actually happens and to what extent those with power are willing to truly share power is something that we will find out in the course of the next year.mess created can be avoided in the future. History has shown that once economies mature they benefit from less protectionist measures (but also shows that nations on early stages of development may also benefit from it). the more democratic alternative was the Doha conference on financing for development meeting at the end of November in Doha. As the Bretton Woods Project noted. Reform of the IMF and World Bank.‖ He continued. ―Solutions must involve all countries in a democratic process. other regions around the world agree that generally free trade is desirable over protectionist policies. November 27. swept off their feet by the financial crisis. will be crucial for much of the world. held by the United Nations General Assembly. however. Paul Krugman suggests that protectionism may be necessary for a while as these are not normal conditions where the case for protectionism may be on weaker grounds. the G20 had little time to effect much and could not do it alone. represents almost half of all world trade. at least for industrialized nations. so as a group. As Miguel D‘Escoto. Qatar. for example. 2008 Hardly mentioned in the mainstream media by comparison.

October 27. Democracy Comes to World Institutions. is worse. A financial crisis of this proportion may signify the beginnings of such a shift. The most powerful international institutions tend to have the worst democratic credentials: the power distribution among countries is more unequal. Slowly. — John Vandaele. And so. 66 . it is perhaps only at a time of crisis that more fundamental rethinking of the entire economic system can be entertained. and hence democratic control. as Vandaele also finds. and the transparency.More generally. Inter Press Service. 2008 Although history often shows that those with agendas of power tend to win out. history also shows us that power shifts.

67 .

an even freer form of capitalism is needed. and thereby lessening the sale of their good both at home and abroad.Rethinking economics? During periods of boom. people do not want to hear of criticisms of the forms of economics they benefit from. but capitalism nonetheless. produce compelling ads and do whatever it takes to maintain options that ensure they benefit. Others argue that capitalism is so flawed it needs complete doing away with. It is perhaps ironic to quote. They complain only of those of other people. especially when it brings immense wealth and power. It may be that during periods of crisis such as now. it only needs minor tweaking to correct it and make it work for everyone. and will be able to lobby governments. usually quite supportive of the dominant neoliberal economic ideology entertains thoughts that economic policies and ideas need rethinking. notes how throughout recent decades. regardless of whether it is good for everyone or not. This will also attract ideologues of different shades. given he is held up as the leading figure of the economic ideology they promote: ― Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price. the political spectrum and thinking on economics has narrowed. They are silent with regard to the pernicious effects of their own gains. Harvard professor of economics. Even mainstream media. leading to both wider discussion but also more entrenched views. 68 . What seems clear is that at least for a while. limiting the ideas and policy options available. at length. They say nothing concerning the bad effects of high profits. the time comes to rethink economics in some way. debate will increase in the mainstream. a more compassionate capitalism. Those with power and money are less likely to agree to a radical change in economics where their power and influence are going to diminish. for example. Stephen Marglin. a warning from Adam Smith. Others may yet argue that the bailouts by large government will distort the markets even more (encouraging bad practices by the big institutions) and rather than more regulation. Some have been writing for many years that while the current economic ideology is flawed.

The interest of the dealers. (Everyman’s Library. pp. both deceived and oppressed it. Book I. is always the interest of the dealers. but with the most suspicious attention. are commonly exercised rather about the interest of their own particular branch of business. however. To widen the market may frequently be agreeable enough to the interest of the public.‖— Adam Smith. is always in some respects different from. Additional paragraph breaks added for readability) 69 . It is by this superior knowledge of their own interest that they have frequently imposed upon his generosity. Sixth Printing. and can serve only to enable the dealers. an absurd tax upon the rest of their fellow-citizens.Merchants and master manufacturers are … the two classes of people who commonly employ the largest capitals. as in their having a better knowledge of their own interest than he has of his. however. and who by their wealth draw to themselves the greatest share of the public consideration. they have frequently more acuteness of understanding than the greater part of country gentlemen. 1991).The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution. but to narrow the competition must always be against it. to levy. and ought never to be adopted till after having been long and carefully examined. from a very simple but honest conviction that their interest. that of the public. As their thoughts. was the interest of the public. and not his. than about that of the society. 231-232 (Emphasis added. The Wealth of Nations. by raising their profits above what they naturally would be. their judgment. As during their whole lives they are engaged in plans and projects. 87-88. for their own benefit. even when given with the greatest candour (which it has not been upon every occasion) is much more to be depended upon with regard to the former of those two objects than with regard to the latter. It comes from an order of men whose interest is never exactly the same with that of the public. in any particular branch of trade or manufactures. not only with the most scrupulous. and even opposite to. and persuaded him to give up both his own interest and that of the public. To widen the market and to narrow the competition. Their superiority over the country gentleman is not so much in their knowledge of the public interest. who have generally an interest to deceive and even to oppress the public. upon many occasions. and who accordingly have.

70 .

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