ANATOMY OF THE CRISIS

GLOBALIZATION AND COMPETITIVENESS

Author: Julio César Botero Robayo/ Translation and update: Johana Paola Hoyos
 INDEX
1. ANATOMY OF THE CRISIS
1.1 Origins and Causes
1.2 Response to the crisis
1.3 Impact of the Crisis on Development

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INTRODUCTION
In this primer will be reviewed the global financial crisis of 2008, the anatomy of the crisis, the
origins and causes of this global crisis that affected all countries in a greater or lesser extent. The
United States experienced a financial crisis that led to the most serious recession since the Second
World War. Both the financial crisis and the downturn in the U.S. economy spread to many
foreign nations, resulting in a global economic crisis.
The crisis affected many countries simultaneously and led to a global economic crisis unseen since
the Great Depression. It was triggered by a proliferation of financial products linked to risky
mortgage loans. The crisis seriously called into question financial globalization, which to a certain
extent amplified risks linked to banking activities and financial markets and brought about
financial imbalances among leading economic powers. The question of what rules should apply
to global financial activity is crucial in channeling the risks inherent to globalization.

ACADEMIC RECOMENDATIONS
● To read each one of the primers of the course.
● To review the support materials and supplementary readings.
● To perform a research of the concepts described for each week.
● To build your own reading records with key ideas, own analysis and bibliographic
reference source.
● To review the schedule of activities and evaluation criteria.
● To participate on the activities and to comply with expected deliveries.

GLOBALIZATION AND COMPETITIVENESS 3

 THEMATIC DEVELOPMENT

ECONOMIC CRISIS OF THE UNITED STATES AND THE EUROPEAN UNION

1. ANATOMY OF THE CRISIS

United Nations Conference on the World Economic Crisis and its impact on development

Figure 1. Crisis

Source: Dzmitry Sukhavarau (s.f)

The world is confronted with the worst financial and economic crisis since the Great Depression.
The evolving crisis, which began within the world’s major financial centres, has spread throughout
the global economy, causing severe social, political and economic impacts. This crisis is negatively
affecting all countries, particularly developing countries, and threatening the livelihoods, well-
being and development opportunities of millions of people. (United Nations, 2009 )
Developing countries, which did not cause the global economic and financial crisis, are severely
affected by it, among other things, by a weaker trade, tighter financing terms worldwide and
lower remittances. Poverty and hunger are increasing and may look a total change in the hard-

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earned progress towards the Millennium Development Goals Children, women, the working poor,
migrants and people and disadvantaged are the most vulnerable. There is an increased risk of
accelerated environmental degradation and social tensions are increasing.

1.1. ORIGINS AND CAUSES

Figure 2. Financial crisis

Source: Hafakot (s.f)

Many of the main causes of the crisis are linked to systemic fragilities and imbalances that
contributed to the inadequate functioning of the global economy. Major A/RES/63/303 4
underlying factors in the current situation included inconsistent and insufficiently coordinated
macroeconomic policies and inadequate structural reforms, which led to unsustainable global
macroeconomic outcomes. These factors were made acute by major failures in financial
regulation, supervision and monitoring of the financial sector, and inadequate surveillance and
early warning.
The pre-crisis years were characterized by a high global growth and a relatively stable and low
inflation in most countries. Growth was fueled by substantial increases in productivity in many
countries which, combined with the increased integration of developing countries into the world

GLOBALIZATION AND COMPETITIVENESS 5

 economy and a strong expansion of trade, also allowed prices to remain relatively unchanged for
several years.
This pattern of growth, combined with poor regulation, eventually led to an inability to pay by
financial institutions, companies and households, which proved unsustainable. The persistently
low interest rates caused investors to seek higher returns in stocks, housing and commodities, as
well as in riskier financial instruments. The prices of assets were promoted through a wide variety
of industrialized and emerging economies and many developing countries benefited from high
commodity prices.
The global search for higher performance was accompanied by an increase in international
financial imbalances. The high savings rates in Asia and oil surplus countries financed high rates
of consumption in the United States and some other industrialized countries.
When global confidence in over-leveraged financial institutions and complicated asset structures
began to break down in 2008, these imbalances began to unwind. In a highly integrated global
economy without adequate regulation, a breakdown in one part of the system has huge
repercussions elsewhere, as we are witnessing today. (United Nations, 2009)

Figure 3. Down

Source: Milosh Kojadinovich (s.f)

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 1.2. RESPONSE TO THE CRISIS

Figure 4. Recovery

Source: Sharon Leelaratne (s.f)

The global economic crisis presents an opportunity for strengthened multilateralism. A global
crisis requires concerted, global solutions.
Member States have mobilized resources on a massive scale, including $18 trillion (almost 30 per
cent of world gross product, or WGP) to recapitalize banks, nationalize financial institutions and
provide guarantees on bank deposits and other financial assets; and fiscal stimulus plans that by
April 2009 amounted to $2.7 trillion (about 4 per cent of WGP), to be spent over 2009–2011.
Leaders of the Group of Twenty (G20) also pledged US$1.1 trillion in financing at their London
Summit in April, of which $50 billion is for social protection, trade and development in low-income
countries.
The Policy directions gaining broad international support include:
● Early warning surveillance systems to identify and respond to finance-sector risks, as well
as monitoring of Member States’ debt sustainability.
● Strengthened international tax cooperation, to rein in tax evasion and to boost
governmental fiscal capacities.
● Reforms related to the credibility, accountability and efficacy of the international financial
institutions.

GLOBALIZATION AND COMPETITIVENESS 7

 ● Commitments to fight protectionism and to reach agreement on the Doha development
round of trade negotiations.
The UN system is pooling its multiple assets to assist countries and vulnerable populations
through:
● Additional financing through jointly designed World Bank-UN system mechanisms,
including the World Bank’s Vulnerability Fund.
● Strengthened programmes to feed the hungry and expand support to farmers in
developing countries; • aid for trade and finance for trade.
● Promoting investment in long-term, climate friendly environmental sustainability. • A
global jobs pact to boost employment and decent work for all.
● Emergency action on humanitarian, security and social stability.
A new UN Global Vulnerability Alert will work to make sure that the international community does
not overlook the fate of the poorest and most vulnerable while formulating its response to the
crisis. Developing countries are particularly adversely affected by the systemic flaws in the global
financial system, but most are not in a position to respond with countercyclical measures. At
lower levels of development, they are less resilient and thus more vulnerable to fluctuations in
world markets. With fewer resources, they are typically forced to pursue pro-cyclical monetary
and fiscal policies, adversely affecting economic performance and long-term growth. (United
Nations, 2009)

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 1.3. IMPACT OF THE CRISIS ON DEVELOPMENT

Figure 5. Crisis impact

Source: Martin Gerner (2008)

External financing for developing countries has dried up. Net private capital flows to developing
economies declined by more than 50 per cent during 2008, dropping from the peak level of more
than $1 trillion registered in 2007 to less than $500 billion.
External financing costs for emerging economies and developing countries have surged. The risk
premium on lending to these countries soared, on average, from 250 to about 800 basis points
within the space of a few weeks in the third quarter of 2008. Even though spreads narrowed to
500 basis points in April 2009, they remain very high relative to normal market conditions.
The shortage of affordable financing could have major repercussions for infrastructure spending,
which is critical for longer-term growth. Investments in public and private infrastructure projects
in subSaharan Africa and Latin America declined substantially after various crises and fiscal
adjustments in the Policy directions, while infrastructure investment also dropped substantially
after the financial crisis of the late 1990s in East Asia and had not recovered to pre-crisis levels by
2008.
The increased cost of external borrowing will also affect debt sustainability in many countries.
Some $3 trillion of external sovereign debt, together with well over $1 trillion of external private-
sector debt, will mature in 2009. These debts will need to be rolled over at much higher costs
than those that prevailed on the original financing. Debt sustainability for many developing
countries will be affected further by falling growth rates and reduced export earnings. As foreign

GLOBALIZATION AND COMPETITIVENESS 9

 debt is denominated in major currencies, the debtservicing ability of countries is highly sensitive
to exchange-rate shifts.
Deteriorating external conditions and the appreciation of the United States dollar since August
2008 have put downward pressure on the currencies of many developing countries. Depreciations
have made external debt service much more expensive in terms of local currency and are already
affecting budget positions of governments and businesses. These factors are putting debt
sustainability under severe stress in low-income as well as middle-income countries.
Trade flows worldwide sharply declined from the end of 2008 and have continued to decline in
the first quarter of 2009 at an annual rate of more than 40 per cent in the three months up to
February 2009. The World Trade Organization (WTO) projects that the volume of world
merchandise trade could plunge by 9 per cent for 2009 as a whole, while the United Nations
World Economic Situation and Prospects expects an even steeper fall of 11 per cent, the largest
decline since the Great Depression of the 1930s.
Sharp declines in commodity prices are compounding the adverse impact for many developing
countries, especially economies heavily dependent on primary exports. From 2002 to mid-2008,
many countries gained from the upward, albeit volatile trend in the prices of oil and non-oil
commodities. The intensification of the global financial crisis since mid-2008 has led to a sharp
reversal in this trend.
Oil prices have plummeted by more than 70 per cent from their peak levels of mid-2008. Prices
of metals dropped by 50 per cent, while prices of other commodities also declined significantly.
Among net exporters of commodities, low-income countries are being hit hardest by plunging
world market prices as primary exports comprise, on average, 70 per cent of their total exports
and also a high share of government revenue comes from these exports.
Remittance flows to developing countries appear to be moderating. Totalling more than $300
billion in 2008, almost three times the amount of annual official development assistance (ODA)
to developing countries, remittance flows have become an important source of income support
to sustain household consumption and investment in many developing countries. In earlier crises,
remittances tended to be counter-cyclical, rising to compensate for economic downturns in home
countries, but the parallel declines during the current global crisis appear to be limiting such
remittances.
Remittance flows are also at risk because of rising immigration controls, forced expulsions of
migrant workers and further reduced job security for such workers. With rising unemployment,
many host countries have tightened immigration controls and introduced tougher requirements
for migrant workers. Also, migrant workers tend to lose their jobs more quickly than other
workers as a consequence of national policies or public pressures.
Aid flows may come under pressure in view of declining incomes in the major donor countries.
The global economic slowdown of the early 1990s produced large fiscal deficits in donor countries

10 POLITÉCNICO GRANCOLOMBIANO
that led to deep cuts in ODA, which fell from 0.30 per cent of their gross national incomes (GNI)
in 1992 to 0.22 per cent in 1997. Many donors target annual aid flows as a share of GNI, such that
the value of aid will fall with national income even if the share stays fixed.
Most developing countries are likely to experience severe balance-of-payment problems. The
World Bank estimates that 98 of 104 developing countries are expected to fall short of covering
external financing needs, with an estimated external financing gap that could rise to $268 billion
in 2009 alone, but may well be as high as $700 billion under an envisaged scenario of further
declines in private capital flows and increased capital withdrawal. For low-income countries
alone, the IMF estimates that the balance-ofpayments shock could amount to $140 billion in
2009.
One of the biggest risks is that of a prolonged labour market recession. The ILO estimates that,
because of the crisis, at least 50 million more people worldwide could become unemployed and
hundreds of millions may join the ranks of the working poor. Higher unemployment rates may
persist for some time.
The global economic and financial crisis comes on top of the 2008 food crisis, which is not over.
According to the FAO, higher food prices pushed an estimated 115 million people into hunger in
2007 and 2008, raising the global total to close to one billion people. Moreover, prior to the
current crisis, two billion people already suffered from micronutrient deficiencies.
Previous economic and financial crises have shown that economic downturns put a
disproportionate burden on women. Women, especially in developing countries, have a higher
probability than men of finding themselves in vulnerable employment situations or of being
unemployed. Existing evidence also shows that the various economic and financial crises in Latin
America, South Asia and Eastern Europe of the 1990s increased women’s domestic burdens. In
many cases, women were forced to absorb the impact of cuts in public spending on healthcare
and education that were made in response to those crises. Cuts in social spending also tend to
disproportionately affect women’s and girls’ access to education and health services.
Reduced investments in environmental protection, energy efficiency and renewable energy,
water and land management, and forestation measures could slow efforts to make development
more sustainable and to address climate change. Investments in low-carbon infrastructure and
technologies may weaken along with the global decline in investment, Lower oil prices have also
reduced the incentive to substitute cleaner technologies for fossil fuels.
Prolonged recession and insufficient attention to social needs could cause problems of social
unrest, rising criminality and weakening governance. Failing to adequately address expected
setbacks in achieving poverty reduction targets and the other MDGs. (United Nations, 2009 )

GLOBALIZATION AND COMPETITIVENESS 11

 Figure 6. United Nations

Source: Timur Arbaev (s.f)

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REFERENCES

Texts

United Nations. (2009 , July 09). United Nations. Retrieved from Outcome of the Conference on
the World Financial:
http://www.un.org/ga/search/view_doc.asp?symbol=A/RES/63/303&Lang=E

United Nations. (2009, May). united nations conference on the world financial and economic
crisis and its impact on development. Retrieved from ANATOMY OF THE CRISIS:
http://www.un.org/ga/econcrisissummit/docs/Anatomy_26May_EN.pdf

List of figures

Dzmitry Sukhavarau (s.f) la crisis financiera mundial [Foto de archivo] Recuperado de

http://es.123rf.com/search.php?word=10162578&imgtype=0&t_word=10162578&t_lang=es&o
riSearch=58376007&orderby=0&srch_lang=es&mediapopup=10162578

hafakot (s.f) Ilustración de procesamiento de título "La inestabilidad financiera" en una cuenta
de dólar como fondo. Concepto de negocio [Foto de archivo] Recuperado de
http://es.123rf.com/search.php?word=60258423&imgtype=0&t_word=60258423&t_lang=es&o
riSearch=10162578&orderby=0&srch_lang=es&mediapopup=60258423

Milosh Kojadinovich (s.f) crisis financiera, el dólar diagrama de [Foto de archivo] Recuperado de
http://es.123rf.com/search.php?word=12557665&imgtype=0&t_word=12557665&t_lang=es&o
riSearch=60258423&orderby=0&srch_lang=es&mediapopup=12557665

Sharon Leelaratne (s.f) Recesión y el inicio de sesión de recuperación [Foto de archivo]

Recuperado de
http://es.123rf.com/search.php?word=8115788&imgtype=0&t_word=8115788&t_lang=es&oriS
earch=12557665&orderby=0&srch_lang=es&mediapopup=8115788
Martin Gerner (2008) Una foto de una serie alegóricos se ocupan de la crisis bancaria en los
EE.UU., septiembre de 2008 [Foto de archivo] Recuperado de

GLOBALIZATION AND COMPETITIVENESS 13

 http://es.123rf.com/search.php?word=Foto+de+archivo+Derecho+de+autor+%3A+Martin+Gern
er+&imgtype=0&t_word=File+photo+of+copyright+law%3A+Martin+Gerner&t_lang=es&oriSear
ch=3617073&orderby=0&srch_lang=es&sti=o7fh20u72xcsdpflg3|

Timur Arbaev (s.f) Naciones Unidas en el foco. sigla pixelado de las Naciones Unidas de los
píxeles cuadrados de color amarillo sobre un fondo negro de la matriz. 3D ilustración imagen
[Foto de archivo] Recuperado de
http://es.123rf.com/search.php?word=52989034&imgtype=0&sti=%7Co7fh20u72xcsdpflg3&t_
word=52989034&t_lang=es&oriSearch=Foto+de+archivo+Derecho+de+autor+Martin+Gerner&o
rderby=0&srch_lang=es&mediapopup=52989034

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