Global economic crisis: implications for trade and development

Introduction and overview

1. The world economy is currently facing a severe global crisis that has spilled from the financial sector to the real economy, including international trade in manufactures, commodities and services. The onset of the present crisis can be traced back to July 2007 with the liquidity crisis due to the loss of confidence in the mortgage credit markets in the United States. At first, there was uncertainty about the possible spillovers to the rest of the economy, and there was also discussion about the risks of contagion and decoupling, that is to say, the capacity of other countries - especially developing countries - to isolate themselves from the problems originating in the United States (which is the largest market for many countries). The hope was that the crisis would be restricted to financial markets, with few repercussions on the real economy and the rest of the world. This hope was shattered in September 2008 as the crisis entered an acute phase, with strong downward fluctuations in the stock markets, substantially reduced rates of economic growth, volatile exchange rates, and squeezes in demand and consumption, leading to falls in industrial production and decreasing flows of international trade and FDI, and causing impacts on related areas such as transfer of technology. The crisis has also been accompanied by increases in unemployment, with concomitant declining incomes and demand. Unemployment could rise by 50 million during 2009, taking the global unemployment rate to above 7 per cent.

2. By virtue of globalization, the moment the financial crisis hit the real economy and became a global economic crisis, it was rapidly transmitted to many developing countries through a contraction in trade finance and a slowdown in demand affecting bilateral trade flows. These transmission channels were particularly visible in sectors composed of global production and supply chains. As most developing countries are heavily dependent on developed country markets, the slump in demand from latter due to the crisis has had an adverse impact on the former.

3. Most developing countries are now closely linked to the global economy by trade and FDI flows. As a consequence of the crisis, the significant reduction of these flows is starting to restrain their development perspectives. Developing countries are currently seriously hurt through falling commodity prices, demand- driven drops in exports exacerbated by the deficit of credit and trade finance, capital outflows, declining remittances, and contracting investment. The prospects are more dire for export-oriented developing countries, especially those with a small domestic economy, where the reduction in international demand is more likely to curtail their exports and raise unemployment. As observed in some developing countries, workers are increasingly shifting out of dynamic export- oriented sectors into lower-productivity activities (and moving out of urban areas back into rural areas).download