November 21st, 2008
Economic Crisis in a Globalized World

Our world today is so interconnected that the collapse of the subprime mortgage market in the U.S. has led to a global financial crisis on a scale not seen since the Great Depression. Here’s a round-up of how the countries around the world are dealing with the economic meltdown.


The 15-country eurozone is officially in recession for the first time since its formation in 1999. From French President Nicolas Sarkozy’s newly announced economic summit to Iceland‘s collective sigh of relief over a bailout (the International Monetary Fund’s first loan to Western Europe since Britain got a helping hand in 1976), Europe is struggling with its own brand of turmoil as the financial crisis tears through the continent.

But in the German cities of Eisenach and Bochum, residents are feeling a special empathy for the U.S. Both are home to Opel car plants, shut down as parent company General Motors pleads with Capitol Hill for a loan.

Opel has approached the German government in an attempt to secure liquidity should GM go bankrupt. German Chancellor Angela Merkel agreed to consider a loan, but immediately faced resistance even within her own party from lawmakers concerned that funds might find their way back to Detroit to prop up the ailing American parent company. All this comes at an inopportune time for Opel. Their Insignia model just won the title of European Car of the Year for 2009 — the first time in 22 years that a GM car has taken top honors. Perhaps the Insignia is a bit more stylish than 1987’s Opel Omega

As the head of Europe’s second largest economy, French President Sarkozy announced a $25 billion investment fund yesterday. The bailout is part of a plan launched last month aimed at protecting French companies from foreign take-overs. Despite payback clauses and caps placed on executive pay, the bailout has angered France’s powerful unions who are staging massive strikes this week in air and rail travel, and postal and telecom services.

Sarkozy, who currently holds the rotating presidency of the E.U., has been so vocal about the excesses of laissez-faire capitalism and the necessity for better market regulation, that The Economist semi-jokingly questions whether the global financial crisis has turned him into a “closet socialist.” Sarkozy was instrumental in arranging the recent G-20 summit, but returned from Washington disappointed by its outcome. On Tuesday, he announced that he and former British Prime Minister Tony Blair will co-host another meeting of world leaders and financial experts in January 2009 in Paris to continue looking for ways out of the crisis.

In 2001, two-fifths of Turkey’s banks failed after an irresponsible lending spree. Taking over the banks and restructuring them cost the state a crippling 30 percent of GDP and plunged the economy into a deep recession, triggering one of the I.M.F.’s biggest-ever loans. At the G-20 summit in Washington last weekend, Turkish Prime Minister Reccep Tayyip Erdogan announced his country may be close to reaching an agreement to receive yet another emergency loan from the I.M.F. But Prime Minister Erdogan has warned the Turkish business community not to expect a government bailout this time: “Nobody should expect everything from the government. It’s not like the government is going to inject cash into the emptied safes of companies. Let me put it clearly, such a thing is out of the question.”


After months of avoiding the global financial crisis and years of excess money in the banks, Japan has also slipped into a recession. The world’s second largest economy has seen a recent appreciation of the yen and consequently, a decline in the demand for exports, especially among its most loyal customers. In the United States, the world’s largest auto market, the price of Japanese vehicles is rising and sales are dropping. Japanese car manufacturers Honda, Nissan and Toyota are reporting steep declines in sales and profits. Sony is also predicting a 59 percent plunge in profits due to deteriorating sales of gadgets and flat-screen TVs.

Prime Minister Taro Aso announced a $51 billion stimulus package last month, which included 2 trillion yen ($20.3 billion) in special benefits to all households. Aso hoped to encourage domestic consumption by distributing $600 to each family of four. Some economists predict that the worst is yet to come in Japan, but the bleak outlook hasn’t stopped Japanese consumers from snatching up an entire stock of diamond-encrusted mobile phones. Studded with 537 diamonds – a total of 18.34 carats – and a price tag of 13 million yen ($134,000 dollars), the line of 10 phones sold out within three days.

South Koreans have begun to fear a repeat of their 1997-1998 economic collapse, when the I.M.F. had to step in with a $58 million bailout. The government of South Korea responded to the current downturn by setting up a $30 billion currency swap with the Federal Reserve of the United States, which was designed to alleviate the pressure on the country’s banks. On November 14th, China and Japan also agreed on a currency swap with South Korea, contributing $4 billion and $15 billion respectively.

Despite a slowdown in garment exports and tourists, Cambodian Prime Minister Sun Hen sees the silver lining. At a summit with Thailand and Vietnam earlier this month, Sen said, “’The rich people in Europe, the buyers in America, will not buy expensive clothes produced in Europe anymore but the cheaper goods produced in Cambodia and Vietnam.”

In the first weeks of the global financial crisis, China — the world’s fastest growing economy and largest holder of foreign-exchange reserves — was hopeful the slowdown would pass it by. But figures released in mid-October showed growth dipping to its lowest in five years, down from 11.9 percent last year to 9 percent this quarter, confirming that no nation is immune. With foreign exports and investments shrinking, Chinese unemployment is on the rise, and could reach up to 2.7 million laid-off workers by January 2009. Time Magazine calls it “China’s worst nightmare,” due to the labor unrest that might result. This week, Chinese authorities issued an order to companies in the big manufacturing regions of Shandong and Hubei provinces: they must now seek government consent in order to fire more than 40 people at a time. To shore up domestic growth and market confidence, on November 9 President Hu Jintao announced a 2-year $586 billion stimulus package — four times as large as America’s current bailout plan — focused on tax reform, increased spending on education, health, and housing, and major infrastructure projects such as roads, railways, airports, and the power grid.

China suffered from two major recessions in the past 30 years, in the aftermath of the Tiananmen uprising in 1989 and during the Asian financial crisis in the late 1990s, when it last adopted a big stimulus plan. The Economist argues that this time China might “genuinely avoid a hard landing: the underlying economy, while far from perfect, is in better shape, and the government has more room to boost its spending… [M]ost economists think the stimulus package will be enough to keep growth at 7.5-8 percent for the year as a whole. If so, of the world’s eight biggest economies, China will be the only one to enjoy any growth next year.” Chinese consumers may help keep the rest of us afloat.

As the West increasingly relies on China to help it weather the storm, geo-political compromises may be in the offing. The U.K. is rumored to have secured a Chinese donation to the I.M.F. by agreeing to reverse its century-old position on Tibet: since late October, Briatin no longer recognizes Tibet as an autonomous entity but rather as a part of the People’s Republic of China.

The Middle East and Central Asia

Iranian hardliners have hailed the economic crisis as divine punishment for the perceived greed and corruption of the West and its allies. “The oppressors and the corrupt will be replaced by the pious and believers,” according to Iran’s firebrand President Mahmoud Ahmadinejad, who sees the downturn as signaling “the end of capitalism.”

He’s not the only one to see this crisis as a turning point in the culture war between East and West. Dubai’s once-booming economy has been hit hard, but some see the downturn as a chance to save the local culture. Traditional Bedouin culture has been all but lost in Dubai’s rush to become an international center of business, media and tourism. “The city needs to slow down and relax,” says Abdul Khaleq Abdullah, a political science professor at United Arab Emirates University. “It’s good for the identity of our country.”

The U.S. is expected to spend close to $200 billion on the ongoing wars in Iraq and Afghanistan this year alone. With the economic crisis wreaking havoc in the homeland, something has to give. Peter Beinart, a Senior Fellow at the Council on Foreign Relations says that “the economic environment is making a speedy drawdown of U.S. troops [in Iraq] more likely.” That might sound like good news to some. But experts warn that the financial crisis might fuel instability in fragile nations from the Middle East to Pakistan. On November 15th, a struggling Pakistan reluctantly accepted a $7.6 billion loan from the I.M.F. But still, there is fear that economic troubles will hinder Pakistan’s ability to fight the Taliban insurgency in the country’s tribal regions.


Last month, former U.N. secretary general Kofi Annan said that we cannot use the global financial crisis as “an excuse for inaction” in combating poverty and food shortages in Africa. In times of financial crisis governments often renege on promises of financial aid. In fact, the U.N. Food Agency reported that only a tenth of 22 billion euros in food and agriculture assistance pledged to the U.N. for 2008 has actually been paid.

But there are some who feel the time is ripe for Africa to excel as an economic force. Kuseni Dlamini, the South African head of the multinational mining firm Anglo American, said that now is the “great era of opportunity for Africa to rise and shine in the global scheme of things and be met as an economic giant.” Kuseni cited Botswana as a “shining example” of a country that has managed its natural resources (diamonds) in a responsible way, which has delivered long term benefits in education, infrastructure and healthcare to the country. John Simon, U.S. ambassador to the African Union has called Africa “the new frontier” in the global economy.

According to Antoinette Sayeh, director of the I.M.F.’s African Department, growth in sub-Saharan Africa, the continent’s poorest region, will remain strong. Sub-Saharan Africa experienced one of its highest growth rates in decades in 2007, growing at a rate of 6.5 percent. In the midst of the global financial crisis, the I.M.F. projects that growth in sub-Saharan Africa will fall by only half a percent in 2008 and 2009. However, Sayeh warns that sub-Saharan Africa’s economic growth could weaken with a lower inflow of capital, i.e. through foreign aid, and a reduction in commodity pricing. The I.M.F. has also identified eight sub-Saharan African countries — Botswana, Ghana, Kenya, Mozambique, Nigeria, Tanzania, Uganda and Zambia – as having enough growth and investment to be considered emerging markets.

Latin America

With oil dropping below $50 a barrel, the Venezuelan economy may be at risk. More than 90 percent of export revenue and more than half of the government’s budget derives from oil. With these economic risks come political risks for a government whose extensive social programs are funded with oil revenues. Venezuela holds regional elections on Sunday, November 23, and economic troubles could reduce outspoken President Hugo Chavez’s hold on power. Among other challenges, Chavez allies will have to compete with Chavez’s ex-wife, Marisabel Rodriguez (she has since married her tennis coach).

Like Venezuela, Mexico relies heavily on oil revenues. The country also relies on remittances sent home by Mexican migrants abroad. Both have declined in response to the international financial crisis. In August, the collapse of the U.S. housing market (which employs many Hispanic immigrants in construction jobs) and increased illegal immigration raids contributed to a 12 percent drop in remittances, the largest monthly drop on record. Fortunately, September figures were more optimistic. Mexico receives the third-largest amount of remittances worldwide, and receives by far the largest amount coming from migrants based in the U.S. Interestingly, the decline in remittances has not been seen (pdf) in other Latin American countries that rely on them.

Mexico is also strongly connected to U.S. investment, which could prove problematic in weathering the financial crisis. Colombia, perhaps the strongest U.S. ally in South America, is less entangled with investments, but will be affected now that U.S. banks are reducing loans to developing countries. In addition, a trade agreement that would open some areas of trade between Colombia and the U.S. could be threatened by the the recent U.S. election. One outcome of the 2008 U.S. election was the ascendance of legislators advocating “fair trade” platforms, as opposed to “free trade” platforms. President-elect Obama, for example, has advocated for stronger labor protections in the Colombia agreement, citing violence against Colombian labor leaders. President Bush and out-going Republicans, however, have pushed for the deal to be signed as soon as possible.

The Planet

There may be some surprise winners and losers in the financial crisis, but the outlook for the planet seems to teeter back and forth between the two poles. U.N. climate honcho Yvo de Boer fears renewable energies and conservation will suffer from sinking oil prices, while countries will spend less money on protecting the environment as they fork over cash to rescue banks. Validating his concerns, at a recent E.U. summit, some Eastern European countries talked about backing away from CO2 emissions targets, citing the expense. Italian Prime Minister Silvio Berlusconi added, “We do not think that now is the time to be playing the role of Don Quixote, when the big producers of CO2, such as the United States or China, are totally against adherence to our targets.”

But what’s bad news for some may actually make climate change activists pleased. With high rates of unemployment and foreclosure, populations are commuting less and shifting away from areas of suburban sprawl. Until the economic downturn, California was not set to meet its ambitious and trend-setting greenhouse gas emissions target. Now it seems as though they’re back on track. Less consumer demand likely translates into lower energy use – fewer road trips, fewer flights and a greater willingness to utilize public transportation. And, as the Christian Science Monitor reports, “One silver lining of the financial crisis is that investment decisions may not be as short-term as they have been.” Renewable energy and green technology projects might attract investors as safer bets for the long term.

WIDE ANGLE has also reported on the economic crisis in Ireland and Argentina.

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