Impact of Glabal Recession in Developing Countries

8/7/2019 Impact of Glabal Recession in Developing Countries

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IMPACT OF GLOBAL RECESSION INDEVELOPING COUNTRIES


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Acknowledgement

It was really a nice experience while working with this term paper. At the time of

completing different parts of the report like collecting information, about specific types of

Recession effects, then finding out their effects recession as in developing countries was

interesting, and getting the conclusion, these few works helped us a lot for understanding the

real concept of development economics and we got to learn a lot about the other economical

prospects.

This report is a required term paper for our Development Economics course. But it

would not be possible to prepare such a report without help of some people like our course

teacher, who gave all sorts of help those were required to prepare this term paper within a

short time.


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Table of Content

Contents Page

Title Page.........i

Letter of Transmittal ..ii

Acknowledgement ....iii

1.0 Introduction....1

2.0 Background .......2

3.0 Global Slowdown and Bangladesh Economy.......4

4.0 Analysis.......7

5.0 Conclusion....12

6.0 Reference..13


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Introduction

Globalization has made economies closely connected with each other so that there is

hardly any scope for countries to escape from adverse impacts of economic mismatch in

another country . The present global economic crisis originated in the US financial market in 2007

which engulfed the world economy within a short time. Although the developed industrial economies

were the first victims, the crisis has transmitted to the emerging and developing economies by 2008. It

is now apprehended that the year 2009 would experience the first contraction of the global economy.

For the developing economies , the impact of the crisis has been mainly through finance, trade,

and investment channels affecting the performance of the real economy. The social impact of the crisis

is also unfolding in terms of rising vulnerabilities in economic and social life especially for the poor and

the vulnerable through job losses, wage reductions, lower consumption, cuts in health care and

education expenditures, and insecurity in livelihoods.

Although the Bangladesh Economy has shown considerable resilience against financial and real

economy vulnerabilities of the global crisis and not much effect was visible till the last quarter of 2008,the situation started to change as the advanced economies entered into deeper recession by end-2008.

The Bangladesh economy has now been showing signs of slowdown; and consequently, the countrys

growth and other macroeconomic projections have been revised downwards. However, one of the

major concerns that remain for Bangladesh is the social impact of these developments especially on

poverty, health, education, and other social development outcomes. It reviews the nature of impact of

the present global economic crisis in terms of selected social indicators in Bangladesh, including

possible implications for poverty and other deprivations.


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Background

What is Global Recession?

A global recession is a period of global economic slowdown. The International Monetary Fund (IMF)

takes many factors into account when defining a global recession, but it states that global economic

growth of 3 percent or less is "equivalent to a global recession".

In economics, a recession is a general slowdown in economic activity over a long period of time, or a

business cycle contraction. During recessions, many macroeconomic indicators vary in a similar way.

Production as measured by Gross Domestic Product (GDP), employment, investment spending,capacity utilization, household incomes, business profits and inflation all fall during recessions;

bankruptcies and the unemployment rate rises.

Defining a global recession is more difficult, because developing nations are expected to have a higher

GDP growth than developed nations. According to IMF, the real GDP growth of the emerging and

developing countries is on an uptrend and that of advanced economies is on a downtrend since late

1980s. The world growth is projected to slow from 5% in 2007 to 3.75% in 2008 and to just over 2% in

2009. Downward revisions in GDP growth vary across regions. Among the most affected arecommodity exporters, and countries with acute external financing and liquidity problems. Countries in

East Asia have suffered smaller declines because their financial situations are more robust. They have

benefited from falling commodity prices and they have initiated a shift toward macroeconomic policy

easing.

The IMF estimates that global recessions seem to occur over a cycle lasting between 8 and 10 years.

During what the IMF terms the past three global recessions of the last three decades, global per capita

output growth was zero or negative.


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World Economic Recessions

World econo-mic recession is going on from 2007. It is the result of fall of world's financial and capital

market. The main reason of this recession is the crisis of mortgaged loans in the USA. It started in the

housing sector. The economists identified two prime reasons for this recession: one is subprime lending

and the other is uncontrolled credit default.

At the start, this recession hit America. Here job market was contracted most. About 600, 000 thousand

and 51 thousand people lost their jobs in February 2008 and in January, this number was 6, 55, 000.

To face this problem, many companies cut jobs. Almost 10 million people of the world lost their jobs in

2008.

The effect of this recession is coming in for small companies, too. On 26 January 2009, heavy

machinery company, Caterpillar, Medicine Company, Pfizer, Telecom Company Sprint Nextor

Corporation and Infrastructure Company Home Dipo took decision to cut jobs. Many other companies

also declared job cuts.

The number of bankrupt companies is increasing in the USA. The export market of China has fallen

because of banking crisis. So, many people are losing work in Japan, Spain, England, Russia,

Germany, Mexico, and Latin American and within Caribbean countries.


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The Global Slowdown and Bangladesh Economy

Bangladesh is not free from this recession. Three million people might lose their job in Bangladeshin this year, so here poverty is increasing. This recession affected our export. According to ExportPromotion Bureau in seven months, the exporting of raw jute decreased by 15.20 per cent, jute goodsby 19.80 per cent, leather goods by 31.80 per cent and frozen food by 5.0 per cent.

The BGMEA said readymade garments (RMG) export decreased in January by 4.98 per cent and inFebruary by 17.58 per cent as our cloth mostly goes to the USA and Europe. So it has greatly affectedour industry. This recession greatly affected our manpower export, as well. In the meantime, many of our workers have come back from Malaysia, Kuwait, Dubai, and Saudi Arabia. Malaysia cancelled thevisas of 55 thousand workers. All the countries that import our manpower are going to cut the jobs of our manpower at overseas.

The Table 1 shows how projections of growth, export, import and remittance of Bangladeshhave been revised for 2009 and the next two years as a result of the impact of the global crisis. Allgrowth projections are now lower compared with their pre-crisis projections.3 Likewise, the projectedremittance inflows in 2009 and afterwards are lower than their pre-crisis projections.

With the intensification of the financial crisis and its spread to the real sector, the global economy hasslipped into painful recession. The global economic activity, which grew by 3.1 percent in 2008, isprojected to decline by 1.4 percent in 2009, before rising modestly by 2.5 percent in 2010. Whileeconomic activity in major industrial economies has been declining (e.g. the US economy is likely tocontract by 2.6 percent in 2009 compared with 1.1 percent growth in 2008 and might rise by 0.8 percentin 2010); the emerging and developing economies are also experiencing the burden of the crisis withgrowth slowing down to 1.6 percent in 2009 from 6.1 percent in 2008, which could recover partly to 4.0percent in 2010.


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Imports and exports by both advanced and developing economies are projected to decline sharply in2009 with some recovery in 2010. Overall, a depressed and uncertainty-clouded outlook for the globaleconomy remains in 2009 and 2010. There also remain several downside risks that could further worsen the current dismal global outlook and trade and growth prospects. There are signs of emergingprotectionism especially in the worlds major economies that could further affect the trade dependent

developing countries.

Flow Channels of Global Crisis to Bangladesh Economy

There are several flow channels through which the impact of the global economic crisis may affectthe Bangladesh economy (Figure 1). We group them under two broad heads

(i) Financial channels; and (ii) trade and remittances channels.

Impact on Exports and Imports of BangladeshIn 2009, exports of RMGs comprised nearly 80 percent of the countrys total export earnings. It

may be added that the RMGs sector employs around 3 million workers (90 percent of whom arefemales) showing that a total of 15 million people are dependent on the RMGs sector for their livelihoods. In addition, a large number of people are engaged in various support services catering tothe sector including banking, transport, packaging, labeling, and other activities.


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During 2009, although Bangladeshs overall export grew by more than 10 percent (whereasexports of most of the developing Asian countries are projected to contract), its monthly growthperformance shows fluctuating and declining performance with sharp fall in growth rates sinceNovember 2008 (Figure 2). The quarterly export of major commodities shows rising adverse effects of global recession especially on frozen food (mainly shrimp), leather and jute goods (Table 2).

Effects on Remittance Inflows in Bangladesh

Remittances have been a key driver of poverty reduction in Bangladesh. There exists a

strong positive correlation between foreign remittances and household expenditures. Householdshaving migrant workers tend to have higher per capita expenditures, both on food and non-food items,as well as on consumer durables. Households with migrant members also save a good amount of their remittance receipts. Thus lower growth of remittances would tend to adversely affect the growth of household expenditure along with lower household savings affecting both household welfare andupward mobility.

As the world recession affected our manpower export, it would impact our remittance earnings. Theremittance income would decline particularly from the Middle East.


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Analysis

The crisis is hitting developing countries hard

Though it began in rich countries, the crisis is hitting developing countries hard through trade andfinancial market channels. While transmission channels may differ, both emerging market and low-income countries will be severely affected.

o With contracting world trade, slowing domestic demand and sharply reduced access toexternal financing, emerging market growth is expected to decline sharply to 1.5 percentin 2009, from 6.1 percent in 2008. This is the weakest growth rate since the 1990s.

o In general, low-income countries have been less affected by the financial contagion, butslowing exports and falling prices for commodity exporters will increasingly affect growth

prospects in 2009. Growth in Sub-Saharan Africa, for instance, will drop to 1.7 percentfrom 5.5 percent in 2008.

Overall, fiscal positions inemerging and developingeconomies are weakeningbecause of slowing domesticrevenues, increased spendingon social programs in responseto the crisis, and deterioratingterms of trade for commodityexporters.

While some recovery of accessto finance for sovereignborrowers has become visiblesince early 2009, fundingconditions for the corporatesectors of developing countriesremain extremely difficult.

Net private capital flows toemerging market economies fellfrom 7.3 percent of GDP in

2007 to 4.9 percent in 2008, and are projected to turn negative in 2009. Remittances to developing countries slowed down in the third quarter of 2008. These flows are

projected to fall between 5 percent and 8 percent in 2009. Total foreign exchange receipts by poor countries will drop sharply in 2009, resulting in an

additional financing need of at least $25 billion.


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In January the quantity of RMG export orders declined by 4.98 percent compared to thecorresponding period of the previous year. The decline was 17.58 percent in February. In addition tothis, the prices of exportable garment itemsdeclined by 20 percent and for some factoriesprices declined by 30 percent due to the global

recession. Three major buyers of Bangladesh'sRMG products, including UK-based Woolworth,became bankrupt recently, which indicateslooming hard times for the sector.

Commenting on the adverse affect on countrysforeign exchange earnings, which will ultimatelyhit the economic backbone, economists aresuggesting urgent measures to be initiated bythe present government in Bangladesh in order to cope with the crisis.

It may be mentioned here that only readymadegarments sector employs more than 2.7 millionworkers in the country. Global recession maycause in loss of jobs for huge number of readymade garment workers, especially thefemales, which will not only put a tremendouseconomic adversity in the society, but may alsoforces thousands of unemployed female workersin entering illicit profession just because of

poverty and necessity.

Bangladesh, being one of the Least DevelopedCountries [LDC] deserves special attention fromthe rich nations in addressing such seriouseconomic disaster. Moreover, the governmentshould also give strict instruction to financialinstitutions in simplifying the banking procedures.

Port authorities and Customs should also be puton special alert to make all out efforts inextending all possible cooperation to theexporters and business community in escapingloss of time due to undue bureaucratic red-tapism.

Recession Impact on the Economy


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Recession is definitely bad for economic growth and development. It slows down the economy.Investors hesitate to invest, and producers are unable to churn out products. Consumer lacks thenecessary money due to unemployment and cannot therefore buy goods available in the market.

Slump in the market Goods and services are difficult to be sold as the purchasing power of the

people comes down. Stock prices come down Investment suffers. The industrial production is badly affected as

investors avoid investing in companies that might suffer losses during recession. Bigger companies

are able to withstand the setbacks but smaller companies have a tough time and some may end up

closing down. Increase in unemployment People are thrown out of jobs. They are left in the lurch. They are

unable to meet both ends. Many goods and services are not within their reach. Depression Recession causes depression if it persists for a long time. Negative trends are visible

in the stock market and rapid unemployment is there. Companies need to be bailed out by the

government. Public spending suffers a setback. National debts on the rise Increase in national debts means less money can be spent by the

government on development. Money gets diverted in bailing out companies. The recent recession

in the U.S. indicates how banks have to depend upon federal aid for their survival. Taxpayers

money is being spent in giving these banks a boost.

Government Responses towards Global Recession

Governments usually respond to recessions by adopting expansionary macroeconomic policies,such as increasing money supply, increasing government spending and decreasing taxation.

Most mainstream economists believe that recessions are caused by inadequate aggregate demand inthe economy, and favor the use of expansionary macroeconomic policy during recessions. Strategiesfavored for moving an economy out of a recession vary depending on which economic school thepolicymakers follow.

Monetarists would favor the use of expansionary monetary policy, while Keynesian economists may

advocate increased government spending to spark economic growth. Supply-side economists maysuggest tax cuts to promote business capital investment. Laissez-faire minded economists may simplyrecommend that the government not interfere with natural market forces.

Solution to Combat Global Recession


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In a particular meeting, Government with the Finance Minister made the followingrecommendations and demands that will help to combat the effects of Global recessions inBangladesh:

The Finance Minister has given thanks for formulating district budget from the next year for whichSUPRO has been campaigning for the last few years for proper representation of grass rootspeople like as poor farmers, marginalized and disadvantaged community of Bangladesh as well asbudgetary formulation reformation process.

Bangladeshs foreign debt needs to be cancelled without any conditions because the interest of foreign loan is outsourcing public money from essential services

The global development assistance should be increased and the government should play animportant role in this regard.

To reduce the distinctions of education between rural and urban areas, it has to be introduceduniformity of education system in Bangladesh.

In order to ensure accessibility of poor and marginalized people towards education and healthfacilities, Primary, Secondary Education and Health Sectors have to be excluded from Public-Private Partnership (PPP).

The production and supply of electricity should be at the hand of government for accessibility of poor and marginalized people.

For womens empowerment, their roles and responsibility should be clearly outlined andgovernment should pay attention to rural disadvantaged women.


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Conclusion

Although the impact has not been as severe as in many other developing countries, Bangladesh

has been experiencing the adverse impact of the global economic crisis where the most obvious areas

are exports, remittances, and economic growth affecting social equity and poverty. Much of the

sensitivity resulted from the export-led development strategy that the country follows creating a

situation of slackened export-related production and investment as well as softened domestic demand.

So far Bangladesh has successfully coped with the crisis through appropriate adjustments in monetary

policy supported by an expansionary fiscal policy stance focusing on boosting domestic demand and

promoting more competitive markets.

The strategic thrust of the governments policy is on spending more on education, health care,social protection and social safety nets that would not only help boost domestic demand but also

support broader social objectives like inclusive growth and poverty reduction.

The analysis of social impacts shows that the global economic crisis has adversely affected

Bangladeshs progress toward achieving poverty reduction and social development goals including the

MDGs. This highlights the need to re-launch more determined efforts in achieving the stipulated goals.

Bangladesh thus faces difficult and complex challenges. Along with providing stimuli to growth, the

government must also make efforts to strengthen safety nets and ensure that poverty reduction and key

social development gains are not reversed. While the government is the key actor, a shared paradigm

is necessary in which global and regional partnership could foster technology diffusion and capacity

building for inclusive and sustainable growth. Also this is the time for the developed countries to keep

their commitment to share required resources for achieving the MDGs from which the developed

countries have as much to gain as the developing countries like Bangladesh.


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Impact of Glabal Recession in Developing Countries

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