Ausgabe 2/2009

The International Downturn In the Globalized Crisis, Everyone Shares the Pain


Part 2: Dragging Each Other Down

No one can escape the maelstrom. It was an illusion to believe that the world economy was broadened by the rise of China, India and Eastern Europe, and that the risks were more evenly distributed as a result. And the hope that the emerging economies could disengage themselves from the economic slump and grow on their own proved to be deceptive. The world has become multipolar, just as the crisis itself is multipolar.

Nowadays the economies in North America, Europe and Asia are tightly interwoven, and labor is distributed around the world. Sporting goods maker Adidas, for example, develops its shoes in Portland, among other places, its designers work in New York and Tokyo, and its marketing offices are in Amsterdam. The company's products are mostly made in China -- where else? The People's Republic, responsible for 11.8 percent of global exports, has already become the world's second-largest exporter after the European Union, which accounts for 16.8 percent.

The risk of infection is even greater on the financial markets. If homeowners in Miami default on their mortgages, this can end up bankrupting savers in Munich, whose bank may have bought and sold the toxic debt after it was prettily repackaged as securities.

More than ever before, the world economy is proving to share a common fate. Because the individual economies are linked -- for better or for worse -- they tend to drag each other down. But can they also rise up again together?

Graphic: Raw materials prices in 2008

Graphic: Raw materials prices in 2008

Or is the new motto "every man for himself," with each country developing its own rescue plan, even at the expense of other countries? For economists, this protectionist strategy poses the greatest danger to the world economy. They fear that individual countries will use tariffs and subsidies to protect their own markets, and that the selfish pursuit of national interests will only make the crisis worse.

The United States, which has been in a recession for the past year, presumably faces the most difficult path ahead. The optimistic scenarios see the downturn continuing until June. But New York economist Nouriel Roubini takes a significantly more pessimistic view. Even if there is a recovery in 2010 and 2011, the professor told Fortune magazine, the situation will still "feel like a recession."

The crisis affects US citizens in several ways: as homeowners whose properties are worth less and less from one month to the next, as investors whose retirement nest eggs are vanishing, and as workers anxious about keeping their jobs. The unemployment rate has grown by half since April 2007. Without an effective social welfare system, this means a descent into poverty for many.

When things are going badly in the United States, the effects are felt almost immediately by its neighbors to the south. Latin America is suffering greatly from weakening demand for its commodities. From Chilean copper to Argentinean soybeans to Brazilian sugarcane, demand has plunged worldwide and prices have declined across the board. The International Monetary Fund expects growth of only 2.5 percent for Latin America this year, which is almost the equivalent of stagnation. Shortly before Christmas, Brazilian President Luiz Inacio Lula da Silva urged his citizens to consume, and even reduced taxes on new cars as an incentive. But people remained cautious. Italian carmaker Fiat, which has a plant in Brazil, even had to rent space at a decommissioned airport to store its many unsellable cars.

Graphic: Growth forecasts for leading economies

Graphic: Growth forecasts for leading economies

Venezuela has been especially hard-hit by the crisis. The government there derives more than half of its budget from oil revenues. The government of President Hugo Chavez based its budget calculations on an oil price of $60 (€44) per barrel, but now even that price has declined by a third. Foreign currency reserves are shrinking and could reach a "critical level" in six to eight months, warns José Guerra, a former chief economist with the Venezuelan central bank.

What economists refer to as the "resource curse" or "paradox of plenty" is proving itself to be true once again. The thesis holds that countries with large natural resources are especially vulnerable to downturns, because they rely on their resources while neglecting to develop other sectors.

Former Russian prime minister Yegor Gaidar has been warning of this danger for a long time. In a speech to 800 top executives and politicians two years ago, Gaidar sharply criticized the domestic economy's dependence on oil and gas. No one took him seriously at the time, because no one wanted to spoil the party.

And nowhere was the party quite as intoxicating as in Moscow. Imports of French cognac grew by 650 percent within a decade, and Moscow was expected to become a prominent financial center, a "Manhattan on the Moskva." As recently as last summer, President Dmitry Medvedev praised his country as an "island of stability." And only a few months ago, Russia even overtook Germany as Europe's largest automotive market. Today this seems like news from another era.

The Russian ministry of industry expects auto sales to decline by more than a third this year. Japanese automaker Suzuki has put its plans to build a factory in St. Petersburg on hold. The energy sector has been hardest hit. Gazprom, Russia's massive oil and gas conglomerate, has shrunk to normal proportions. Only recently, management was bragging that Gazprom, worth $1 trillion (€764 billion), would soon become the world's most expensive company. Today Gazprom is worth a mere $86 billion ($64 billion).

At stake is the success of "Putinomics," the economic policies of former President Vladimir Putin, who emphasized the importance of major companies as "national champions." The national budget is expected to slide into deficit territory this year, for the first time in 10 years. Unemployment threatens to climb from 6 to 10 percent, with 400,000 people having lost their jobs in November alone. The prosperity of the new middle class, which has just become accustomed to vacationing in places like Thailand and Egypt, is in jeopardy.

According to the Russian public opinion research institute Levada Center, the crisis has already affected one in four Russians in some way -- in the form of job losses, reduced working hours or pay cuts. In light of such figures, former politician Gaidar hopes "the current crisis will bring the government, the elite and citizens to reason."

But whether investors will return in the foreseeable future is another story. They are pulling their funds out of Russia and Brazil, whose currencies are now under enormous devaluation pressure. The Brazilian real has lost almost half of its value against the dollar since August, and the Russian ruble is at its lowest point in five years.

On the one hand, the devaluation of their currencies places a tremendous burden on newly industrialized countries. The less their own currencies are worth, the more crushing are the debts they have incurred in dollars or euros. On the other hand, a weak currency makes their own products more competitive, as they become less expensive on the world market.


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