Term 2 Lec 2 FC Impact on Can & DW
What caused the crisis?
• Market failure?
• Policy failure?
What caused the crisis?
• Market failure?
• Policy failure?
• Since 1990s deregulation of financial markets: risk pricing replaces
prudential supervision. Rise of derivative “assets” with opaque markets and
few players. Bank loans replaced by bonds, etc.
• Huge US fiscal deficit, monetary expansion (“Greenspan put”), low savings
led to a US mortgage boom/bust (non traded sector) and a huge current
account deficit (traded sector).
• Mortgage bubbles (e.g. 1992 in UK) are familiar with obvious political costs;
join recurrent bubbles in past decade (dotcoms, LTCM, Tequila etc);
• But this is by far the most serious systemically because it threatens the global
banking system itself as creditor, and whole US electorate as debtor.
Financial Times, 20 Sept 2008
• “…bank boards and bank executives have failed to understand complex
mortgage-backed banking products, as have central bankers, regulators and
credit rating agencies.”
• “…a reward system that has granted huge bonuses to those who peddled
toxic mortgage-related products….”
• “Almost as absurd has been the degree of leverage racked up by investment
banks.”
Rapid (and massive) US & EU government response
•Monetary expansion by the country’s central bank , e.g. Fed Reserve in the US
• Fiscal expansion (Govt)
• Bank bailouts (Govt)
Topic 1: Global Impact of the 2008 Financial Crisis (FC): Comparing Canada and the
Third World Countries.
Thesis based on WST:
• The endless accumulation of capital is the cause for financial crises in the
global economy.
• Economic development through globalization is guided by the Washington
Consensus: “privatization of state productive enterprises, reduction of state
expenditures, opening of the frontiers to uncontrolled entry of commodities
and capital, and the orientation to production for export (Wallerstein, 2011:
4)”.
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•
However, since 1970s, the capitalists’ shifted from production to financial
speculation for their continued accumulation of capital As a result, the
world-system went through a series of speculative bubbles of which the FC
of 2008 is one, that has lead to serious global rise in indebtednesses.
Comparing AICs with DW:
• While the 2008 financial crisis that originated in the US, had severe economic
and financial repercussions on the core countries (the US and the
European), the regulatory regimes of the Canadian financial institutions
limited Canada’s exposure to the crisis and minimized its adverse impact on
the economy and employment.
• In contrast, the Third world countries where most people are already poor,
faced worsening of poverty due to their declining GDP, loss of export trade
and growing unemployment that led to greater poverty.
TheWorld Bank Global Monitoring Report 2010: The Millennium Development
Goals (MDGs) after the Crisis (April 2010)
• WB projects the poverty impact of the crisis
through the effect on growth; also for MDG targets
• “The crisis left an estimated 50 million more
people in extreme poverty in 2009, and some
64 million more will fall into that category by
the end of 2010 relative to a pre-crisis trend”
(p. 102)
• That is 2% of the world population...
http://www.imf.org/external/pubs/ft/gmr/2010/eng/gmr.pdf
Impact of the 2008 Financial Crisis (FC): Canada
I.
Economy and Finance
II.
Employment and Economic security
III.
Human Development and Poverty
Canada: Financial Crisis of 2008 (FC)
I.
Economy and Finance
1. FC: less impact than in other AICs. Credit has solid growth as
Canada’s financial institutions are better capitalized and less
leveraged than their international counterparts. Canadian financial
institutions continue to be the healthiest in the world. World Economic
Forum has ranked Canada’s banking system as the soundest
in the world for 3 consecutive years.
2. Strong growth in world prices of most commodities produced in
Canada since mid-2010
3. Canada’s sound fundamentals have made Canadian financial assets
attractive to international investors
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•
•
•
The six largest domestic banks hold > 90% of banking industry assets. This
adds to the banking industry’s stability
In 2006, sub-prime loans accounted for less than 5% of new mortgages in
Canada, compared to 22% in the United States.
While >50% of all mortgage debts outstanding in the US were sold to
investors through securitization, >75% of Canadian mortgages were held by
financial institutions on their balance sheet as traditional mortgages
Understanding the financial crisis of 2008
http://www.youtube.com/watch?v=qqUGoVez8xg 11 min
However, the downside:
• Stock markets registered their greatest drops in more than 75 years.
•
•
As the contagion spreads, it directly affected our exports to the US. Threequarters of our exports go to US markets. Sharp decline in exports - decrease
by >16 % in 2010.
Capital investments declined due to uncertainty in a weakening financial
markets with shaken consumer and business confidence: 22 % downturn in
business investments in 2010
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www.bankofcanada.ca/wp.../2013/01/mprsummary-2013-01-23.pdf
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Impact of the 2008 Financial Crisis (FC): Canada
I.
Economy and Finance
II.
Employment and Economic security
III.
Human Development and Poverty
Canada:
Employment losses were much less serious than during earlier recessions - jobs
regained sooner
But, only partial recovery of business investment (45%) and exports (67%) from
the losses due to the recession. Jobs linked to these sectors have not come back .
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Impact of the 2008 Financial Crisis (FC): Canada
I.
Economy and Finance
II.
Employment and Economic security
III.
Human Development and Poverty
III. Human Development and Poverty
• In US, 2 of the Detroit-based auto companies received
loan guarantees of $17 billion and $4 billion from the
Canadian Federal and Ontario provincial governments.
Ford received a line of credit. Without them, millions of
workers would have lost their jobs in Canada.
• Feminized sectors & women workers were left out in job creation policies:
Investment in ‘infrastructure’ for repairing and constructing roads, bridges
and buildings, and bailing out the Detroit Three is job creation that amounts
to ‘jobs for boys,’ as far fewer women work in such industries.
Human Development and Poverty (cont’d)
Public Spending on the poorer families and children:
Instead of assisting the unemployed, the poor on welfare and income supplement by
not cutting them back in the govt budgets:
1. Canadian government helped Canada’s banks. – swapped hundreds of
billions of dollars for questionable assets held by banks
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2. $85-billion cumulative deficit over five years for the bail out - “Insured
Mortgage Purchase Program” lists the $75-billion CMHC buyout
3. $ 45-billion is being provided to further backstop mortgage lending by banks
Impact of the 2008 Financial Crisis (FC): DW
I.
Economy and Finance
II.
Employment and Economic security
III.
Human Development and Poverty
Developing Countries pursued autonomous policies - not dependent on those based
on IMF strictures:
• Reserve accumulation to insure themselves after learning form 1990s crises
• Counter-cyclical macro-policies (fiscal, monetary and exch-rate) to stabilize their
output
• More extensive safety nets (universal rather than targeted) to sustain demand
Financial stability in DW:
The region’s financial sector had no complex new financial instruments (such as in
US: Collateralized Debt Obligation (CDO) Credit Default Swap (CDS))
Effective financial supervision and prudent risk management
Foreign exchange reserves have been built up in Asia based on export surpluses (e.g.
China), and on capital inflows or remittances (e.g. in the cases of Bangladesh, India,
Indonesia, and Viet Nam).
However:
FDI fell significantly. Banking stresses in low income countries e.g., non-performing
loans (NPLs) to total assets ratio doubled in Zambia (7% to 13% during 2009.
Economy: (OXFAM study)
Asia and the Pacific, especially in Central and South-East Asia GDP growth dropped
in 2008 and 2009. India, Indonesia, Thailand, Viet Nam, the Philippines, Pakistan,
and Sri Lanka where the poor populations predominate.
China: state control and high foreign exchange reserves have given greater
flexibility to control the crisis.
Newly industrialized countries: South Korea, Malaysia, Singapore, Taiwan, Hong
Kong and Macau: high per capita incomes, high degrees of trade and investment
integration with the world, highly export dependent. But, they have fiscal and social
policies to deal with declining exports & increasing unemployment.
Less developed countries :Bangladesh, Cambodia, Bhutan, Lao PDR, Mongolia, and
Nepal: increasingly integrated with the global
and regional economy through trade. Worsening economies
2010 GDP in sub-Saharan Africa : Fell 7% ($84 billion).
(Source: International Monetary Fund (IMF) data and forecasts, 2011
http://www.imf.org/external/pubs/ft/weo/2010/update/01/index.htm)
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India in 2009 http://www.youtube.com/watch?v=W5xMujBRvmU
DW:
However, income distribution has worsened and poverty risen in the DW
• Managed exchange rates maintain output/employment rather than
wages/incomes in the formal sector.
• The burden falls on the informal sector – lower wages and spending by the poor.
• Remittances from abroad declined.
• World Bank estimates poverty rising due to deceleration in
growth
• Decline in job creation while labour force continues to grow
Impact of the 2008 Financial Crisis (FC): DW
I.
Economy and Finance
II.
Employment and Economic security
III.
Human Development and Poverty
Employment:
The greatest impact on employment was in the garment and mining industries.
Jobs lost:
In 2009. 25,000 to 30,000 garments workers’ jobs lost in Bangladesh.
In 2009, Cambodia lost a third of garment workers (102,527 jobs)
A third of Zambia ‘s mining jobs lost:10,000
Three quarters of miners in DRC (18,000 people) lost jobs
Cambodia has been hit hard with job losses in garments, tourism, and construction
industries.
Philippines: most lay-offs in export processing zones (EPZs) - 75 % are women
workers
Thailand: 125,700 women (I in 4 export industries) laid off or lost regular work that
turned temporary.
In Indonesia and Thailand: (Oxfam evidence)
Using crisis as an excuse: Factories dismissed workers in order to hire younger,
cheaper workers.
In Serang, Indonesia, in one factory, 79 employees with 8 to 14 years seniority were
dismissed Then, hired younger workers with flexible, lower paid short-term
contracts, apprenticeships, and for outsourcing.
Impact of the 2008 Financial Crisis (FC): DW
I.
Economy and Finance
II.
Employment and Economic security
III.
Human Development and Poverty
Human Development in DW:
• Families : In Indonesia: If with jobs, give up meat or fish.
Women now unemployed - only food twice a day instead of three times - eat less at
each meal.
• Forego food to give food to their children or husbands
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Watered down the milk to babies and feeding children less
• No money for school meals
• For the first three months my kids found it very difficult to give up rice,
tempe, and tofu and just eat soup and the cheapest thing.
– (Dismissed worker in a focus group discussion, Indonesia)
My husband and I skip meals to make sure our baby has milk.
– (Woman in focus group discussion, the Philippines)
Men deserve to eat more food because they are physically stronger, do hard work on
the farm, and earn income for the family.
– (Focus group discussion, Viet Nam)
Human Development:
In Cambodia, 70% of the poor took out loans from relatives or friends, or bought
food on credit.
Parents in urban areas in Indonesia report eating less and selling assets to keep
their children in school.
“It is better for us not to eat than for our kids not to go to school.”
– (Woman in a focus group discussion, Indonesia)
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Above graphab
(The above graph is on Argentina & Brazil (Not Chile or Columbia))
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Mexico does not have a national unemployment insurance program, but the Distrito
Federal initiated an unemployment insurance program in fall 2008 for city residents
working for firms in the city for six months or more.
Mexico set up a temporary Job Preservation Program in 2008. It provided subsidies
of $110 Mexican Pesos per day (about US$8.23 with September exchange rate) for
up to three quarters of the workers in participating firms, for up to a total of $5,100
Mexican pesos per worker (US$382).
Mexico scaled up it Programa de Empleo Temporal (PET) as one of several labor
market measures.
With the global crisis, it was scaled up, covering 285,000 beneficiaries in 2008,
682,000 in 2009 and 894,000 in 2010 (World Bank 2011; ILO/OECD 2011).
Conditional cash transfer programs (CCTs) are meant to break the intergeneration
transmission of poverty, by transferring cash to poor households on the condition
that those household make prespecified investments in the human capital of their
children (Fiszbein and Schady 2009).
Source: Understanding the Poverty Impact of the Global Financial Crisis in Latin
America and the Caribbean -Part II: The role of social protection DRAFT 1/31/13
Margaret Grosh, Anna Fruttero, Maria Laura Oliveri, World Bank
Global Financial Crisis, its Impact on India and the Policy Response Nirupam Bajpai
Working Paper No. 5 July 2011
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Social spending in India after the crisis:
· The spending on social sector has been increased (US$ 30 billion) in 2010-11,
which is 37 percent of the total plan outlay in 2010-11.
· Another 25 percent of the plan allocations are devoted to the development of rural
infrastructure.
Education
· allocation for school education increased by 16 percent (US$ 6 billion) in 2009-10.
US$ 7 billion in 2010-11.
· In addition, States will have access to US$ 792 million for elementary education for
2010-11.
Health
· allocation to Ministry of Health & Family Welfare increased US$ 5 billion for 201011.
The measures undertaken by government of India to counter the effects of the
global meltdown on the Indian economy have resulted in shortfall in revenues and
substantial increases in government expenditures,
India
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Key Drivers to Recovery India
- High Government Expenditure, funded largely through borrowings.
- Increased incomes in rural areas due to greater social spending and high farm
good prices; creation of wage employment are National Rural Employment
Guarantee Programme (MGNREGA) in the rural areas and Swarna Jayanti Shahari
Rozgar Yojana (SJSRY) in the urban areas.
Food security
· Livelihood security
· Water security
· Ecological Security
· Flood risk reduction
World
India: Nearly 40 per cent of female respondents were the primary income earners in
their household, and in other households, women’s income made crucial
contribution to the sustenance of their household income. The above survey results
indicated that the income-earning burden on women seemed to be intensifying, as
20 per cent of respondents reported recent retrenchments of household members
during the previous six months, and 40 per cent reported a drastic reduction of
income provided by one or more members of the household in the same period. An
increased number of informal women workers were supporting the entire family on
less income. Source: Horn, Zoe Elena (2010), ‘Effects of the global economic crisis on
women in the informal economy: research
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findings from WIEGO and the Inclusive Cities partners’, Gender & Development,
18:2, 263–276.
National Rural Employment Guarantee Programme in India
The main feature of the programme promoting women’s employment and income
opportunities entails:
- one third of jobs should be given to women;
- equal wages for work of equal value;
- requiring the provision of a crèche when there are more than five women on a
programme.
The national average of women’s participation was 49 per cent. In 20 States, women
made up at least 30 per cent of participants in 2008. The programme reduced
distressed migration, and improved income and nutrition in the workers’
households. Due to the wage payment at post offices or through banks, the
programme has introduced some sections of the community to use formal financial
institutions for the first time.
Source: 2009, UN New York: World survey on role of women in development:
Women’s control over economic resources and access to financial resources,
including microcredit, pp. 74–75.
India
h p://www.voxeu.org/ar cle/india-s-economic-slowdown-and-what-should-bedone-about-it
Population: 1.22 billion
Yearly increase: 18 million
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Major group: 50% - 0 – 25 years
More than 1.53 billion people by the end of 2030.
Average life expectancy: 68.6 years
Average fertility rate: 2.7 children per woman
Male literacy rate at 75.96% and female at 54.28%
LR 74.04% in 2011 from 65.38% in 2001
About 72.2% of the population lives in some 638,000 villages and the rest 27.8% in
about 5,480 towns and urban agglomerations
Homes without electricity: 25 per cent
In 2011, World Bank reported, 32.7% of Indians below the international poverty
line of US$ 1.25 per day (PPP) while 68.7% live on less than US$ 2 per day.
India's banks are stable compared to those in richer countries.
Bollywood is thriving as movies sell even in hard times.
People in India save, not spend their earnings
Every Indian tries to save for a house even if it takes 20 years to build own house.
Seldom do they borrow to finance their lifestyle.
The country’s domestic demand does not slump
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