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Economy: Worldwide effects of crisis

NewsNotes, November-December 2008

While news sources have focused primarily on the consequence of the current financial crisis on the U.S. and European economies, less attention has been paid to its effect on countries in the global South. As the saying goes, when the U.S. sneezes, the rest of the world gets the flu. While that adage is still true in many ways, a number of factors point to the possibility of a lesser effect on countries in the South. It is impossible to know what will happen in this crisis and how deep and wide the downturn will be, but this article looks at possible consequences for countries in Latin America, Asia and Africa

Latin America

In the initial stages of the financial crisis in the U.S., Brazilian President Lula da Silva boasted that Brazil would not be affected by the “jazz effect” as Argentine President Cristina Kirchner has called the crisis. Yet as the crisis grows, clearly not even the economic giant Brazil will remain free from the predicament. In the past eight years, Latin America has experienced high growth rates due in part to three factors: high commodity prices (especially minerals and metals), easy financing conditions, and increased levels of remittances sent by family members who had moved to the U.S. or Europe. The current financial crisis will have a negative effect on each of these factors: Commodity prices are falling due to decreased demand, credit worldwide has dried up, and immigrants in the North, experiencing rising unemployment, send less money home.

However, trends indicate that Latin America possibly will not be as severely affected by this crisis as it has been in the past. In recent years, Eastern Europe and Asia have been the more favored places for international investors to put their money, so there is not as much money being pulled out by panicking investors, though there have been notable falls in Brazilian, Argentine and Mexican stock markets.

Latin America as a whole is less economically dependent on the United State than in the past. Exports to the U.S. have dropped to 40 percent of total regional exports, versus 57 percent in 2000, while trade with Asia and especially within Latin America has increased. Yet this is mostly true for larger South American economies like Brazil, Argentina and Chile. Mexico and Central American economies, still heavily linked to the U.S. economy and dependent on remittances from there, should feel stronger effects from the crisis.


Falling energy prices will favor many Asian countries as most of them import their energy sources, but it is unclear what the overall effect of the crisis will be on Asian countries. Renowned investor George Soros has predicted that the crisis will result in a transfer of power from the U.S. and European Union to Asia, especially China and India. While the U.S. and EU will suffer more deeply, he believes that Asian countries, with its increasing regional trade, will be able to use the crisis to make needed changes to their economies and avoid a large downturn. Others see a continuing dependence of Asian economies on the U.S. and Europe to buy their exports and therefore will experience a similar downturn for most of Asia. They point out that much of the rapidly increasing inter-East Asian trade is mostly from integrated production networks that produce goods for the U.S. and Europe.

China, heavily dependent on buyers in countries most affected by the crisis, will face difficulties, but the IMF still predicts nine percent growth there in 2009. Many see an opportunity for China to lower its dependence on exports and build its internal economy. With massive amounts of reserves, China has more options available than other countries.

India, for example, has fewer though still substantial financial reserves, but as a smaller part of its economy is dependent on exports, it should be less affected by the crisis than China.

Southeast Asian countries like Indonesia and the Philippines, with higher poverty rates, lower growth rates and higher dependence on remittances, could face a deeper downturn that would force millions more into poverty. Recent political conflicts in Thailand and Malaysia will most likely be intensified by a slowing economy.


Most experts believe that Africa will be relatively sheltered from the more drastic effects of the crisis as their economies are less stringently tied to the U.S. and Europe. Yet they will face increased difficulties due to indirect effects from money losses in the global North.

One of the key indirect effects will be the decrease in remittances on which some African countries are increasingly dependent. In addition, as Northern governments bail out their economies, they will probably reduce their assistance programs to Africa. Northern non-governmental organizations will also find their donations decreasing which will result in cuts in programs throughout Africa.

On the positive side, the crisis will lead Northern countries to lower their interest rates which would help relieve some of the debt burden that so many African countries face. Most will also benefit from lower prices for petroleum and food.

Ultimately, high world food prices have most affected African countries, most of which are net importers of food, and the crisis will divert needed money to other areas. Senegalese President Abdoulaye Wade said the crisis means little to the average African. “Who cares if the bourgeois can no longer travel or live in comfort? The greatest menace to most Africans is hunger,” he said. “The amount of investment needed to feed people and create jobs in Africa is a fraction of the money being spent on the global financial crisis.”

While today’s crisis represents new economic difficulties in the global South, remember that during the Depression of the 1930s, many of these countries were forced to concentrate on their internal economies as foreign money dried up, resulting in greater progress than while dominated by foreign capital. Today’s crisis could result in a similar situation, allowing countries more freedom in choosing their economic policies. Southern countries notice that governments in the U.S. and Europe, when confronted with a crisis, have gone against their own advice and become heavily involved in their economies. When Southern governments establish alternative policies today they will be better able to resist demands from the North to follow neoliberal policies that they themselves do not use.


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