Is economic recovery on the way?
People around the world are looking for signs that the worst of the financial crisis is over, and that recovery may be on the way. US leaders said recently they could see “a glimmer of hope.” The financial media are asking whether the dramatic decline in markets has “bottomed-out.” In OECD and IMF circles, the latest “in” term is “green shoots,” like the first signs of life after a landscape has been ravaged by fire. But how realistic is it to talk of economic “green shoots” just yet?
Unfortunately, three reports released recently do not give grounds for optimism. These reports come from the OECD, from the IMF and from the UN. All three global institutions have put out estimates on prospects for the world economy in 2009 and beyond. The estimates vary somewhat, but the general story is the same: The world economy is expected to shrink further. On 27 May, the UN released an update of the regular UN report on the World Economic Situation and Prospects. The world economy is expected to shrink by 2.6 per cent in 2009. The decline comes after an expansion of the world economy by 2.1 per cent in 2008 and nearly 4 per cent per year during 2004-2007. Developing countries are disproportionately hard hit by the crisis. With its increasing impact both in scope and depth worldwide, the crisis poses a significant threat to world economic and social development, including the fulfillment of the Millennium Development Goals. Early recovery unlikely While a mild recovery in growth is possible for 2010, the report says a more prolonged global recession is also possible if the vicious cycle between financial instability and decline in the real economy is not overcome. Developing countries hardest hit The crisis originated in developed countries, but it is now evident that developing countries are being hit disproportionately hard through capital reversals, rising borrowing costs, collapsing world trade and commodity prices, and subsiding remittance flows. The decline of world trade since the end of 2008 has been dramatic, dropping at an annual rate of more than 40 per cent over the last 3 months. The crisis also disproportionately affects migrant workers. After a prolonged period of fast growth, the sharpest declines in international trade have been observed among Asian economies. In China alone, 20 million workers were displaced at the end of 2008. Economies in Africa and Latin America and the Caribbean are being hit even harder. In 2009, GDP growth in Africa is expected to slow to 0.9 per cent, down from 4.9 per cent in 2008. South American economies are expected to shrink by almost 1 per cent on average in 2009, while Mexico and the Central American economies are projected to fall by more than 4 per cent. The UN report estimates that between 73 and 103 million more people will fall into poverty. “Most of this setback will be felt in East and South Asia, with between 56 and 80 million people likely to be affected, of whom about half are in India. The crisis could keep 12 to 16 million more people in poverty in Africa and another 4 million in Latin America and the Caribbean,” says the report. Unemployment will continue to rise A rapid rise in unemployment has taken place since 2008 and is expected to worsen in 2009-2010. Initial projections of 50 million unemployed over the next two years could easily double if the situation continues to deteriorate. “Lessons from past financial crises indicate that it typically takes four to five years for unemployment rates to return to pre-crisis levels after economic recovery has set in,” says the report. Benefits of a coordinated global response The report applauds the global policy response. But it predicts that the crisis, if it continues much further, will have profound consequences on global security and stability. The report says the additional liquidity agreed by the G20, while significant, is still insufficient to give developing countries the resources they need to meet their development needs. Like the IMF, UN economic research suggests that a more balanced and coordinated global stimulus would result in significant growth worldwide. At present we have uncoordinated stimuli being undertaken individually by national governments. So, the stimulus is very unbalanced, with 80 per cent concentrated in industrialized countries, while most developing countries lack the fiscal capacity to act. $500 billion in additional finance is needed for the developing countries. OECD and IMF At the end of March, the OECD projected a decline in the GDP of the 30 member countries of 4.3 per cent. In these industrialized nations the unemployment rate is projected to rise to 8.4 per cent in 2009 and 9.9 per cent in 2010. The OECD makes the same point as the UN and the ILO: that unemployment will continue to rise for some time, even after a recovery begins. The latest IMF estimates, released in April, were slightly more optimistic than those of the OECD and the UN, predicting a 3.5 drop in the GDP of developed economies in 2009, and a worldwide drop of 1.5 per cent in 2009. It is worth noting a presentation at the TUAC Economic Policy Group meeting in Paris this week, showing how the IMF has kept revising its estimates downwards since October 2008. The “green shoots” of recovery All of these reports throw serious doubt on the “green shoots” idea, which is based more on wishful thinking than on evidence. The impact on education As indicated above, the negative impact of a crisis on employment historically continues well after the recovery phase begins. So it is with the impact on public sector budgets, and therefore with the impact on funding for education. In conclusion, we have no assurance yet that any “green shoots” of recovery will survive and thrive. If and when they do, we will have several years of struggle ahead to maintain, let alone develop, investment in people through education.