Impacts of the global financial crisis

Introduction

The current global financial crisis is still unfolding and no one knows whether the world economy has yet hit the bottom. It is still too early to comprehend the full social implications of the crisis. First, I will briefly look at economic impacts so far. Second, I will compare this crisis to the Asian crisis of 1997 to understand the similarities and differences—because the nature and the responses to a crisis would determine the nature and depth of socioeconomic impacts. Then I will present lessons from past economic crises and emerging trends from this crisis to put in context the enormous socio-economic impacts on the poor and women. Finally, I will discuss what more needs to be done to protect the most vulnerable segments of our societies—within short-term stimulus packages and in long-term policy formulations. The discussion is largely based on data from the Asia-Pacific region. But lessons and policy implications are equally valid to all other developing regions.

Housing crisis turns into a truly global financial crisis

By the third-quarter of 2008, what started as a housing-sector crisis in the United States has turned into a full-blown global financial crisis with far reaching and still unfolding consequences. Equity markets across emerging economies of Asia experienced sharp declines immediately, and property markets promptly followed. Excessive short-term capital inflows , so called "hot money," of the last several years rapidly turned into excessive short-term capital outflows . Since the mid-2008, exchange rates have been depreciating across the board, and foreign exchange reserves, guardedly built and held over the years, were being drawn down rapidly to fight the free fall of currencies. The biggest blow to the region came at the end of 2008, when exports orders started to get cancelled, export financing cut back, and layoffs after layoffs being announced. In the Republic of Korea, exports fell a year-on-year 32.8 per cent in January 2009. In Japan, the drop in December 2008 was 35 per cent and in Taiwan, Province of China, it was a record 41.9 per cent. In China, the engine of much of Asia-Pacific region's growth, exports fell 2.8 per cent just in December 2008, its second consecutive drop and its largest in a decade. Not withstanding the heightened vulnerability by the end of 2008, the developing Asia-Pacific region is estimated to have grown by a robust 6 per cent in 2008—though down from a high of 8.8 per cent in 2007. In 2009, however, the region will feel the full brunt of the global financial crisis, with a projected growth of around 4 per cent—the worst performance since the Asian crisis (UNESCAP, 2009). All sub-regions are expected to slowdown. Small open economies will be affected the most and those that are less reliant on exports may suffer less. Countries that are suffering political instability may see harsher punishment by investors. The slowdown may translate into millions more unemployed and the closure of many factories—posing a grave threat to the gains made in reducing poverty and improving social indicators in the last decade.download