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April 29, 2017

A deepening crisis


April 29, 2017

President Trump’s electoral victory in the US on the economic agenda of protectionism and nationalism, Brexit and the rising tide of extreme right-wing, populist, nationalist, anti-EU forces in Europe coupled with the continued economic crisis in most of the emerging markets has not only posed a threat to political stability but has also affected the world economy.

If Trump decided to go on the path of economic nationalism and protectionism and decided to impose higher tariffs on Chinese and Mexican products, this move alone can cause major disruption for world trade and the economy. China will be forced to retaliate and take measures to protect its economic and trade interests. The uncertain Trump policies and political volatility in Europe will continue to pose threats to world economic growth and recovery.

The capitalist class is still sticking with the policies of austerity, neoliberalism and the free-market economy. These policies led to the world economic crisis and the slump between 2007 and 2010. But the ruling capitalist class refused to change the policies and prolonged the crisis. They even refused to accept the fact that capitalist greed and the profit maximisation caused the slump. They just blame some bankers for this most serious crisis faced by capitalism since the Great Depression of 1929. Both the Great Depression and the Great Recession were caused by the same free-market economic policies.

The world economy has recovered from the crisis of 2007-10. However, the growth and recovery is still weak and feeble and mainly based on China, India, the US and some other emerging markets. Despite all the problems and challenges faced by the world economy, it has been experiencing a steady growth since 2011. In the last four years, the average growth rate has been around 3.1 percent. This is still below the average growth rate of the pre-crisis period.

The major concern is the stagnation in Europe and the growth rate of developed economies, which is 1.7 percent on average in the last four years. Most of the European economies failed to fully recover from the economic crisis of 2007-8. Europe has not solved its accumulated problems and is just inching ahead economically with a meagre growth rate of less than one percent in the Eurozone. It will be wrong to compare the present stagnation with that of the 1930s. In the 1930s, it was much deeper and occurred on a much wider scale. But the prospect for a longer period of stagnation is real.

Many European countries, such as Greece, Portugal and Spain, have not been able to climb the mountain of debt and stabilise the economy. Unemployment is still rampant and real incomes continue to fall.

The emerging markets have led the growth in the world economy in the last 15 years. Emerging markets played an important role in the recovery of the world economy from the recession of 2007-10. In the last one-and-a-half decade, the emerging markets have recorded economic growth that doubles the pace of the advanced capitalist countries. This was the case both before and after the 2007-10 crisis. The 40 countries, mainly the leading economies in Asia – excluding Japan, Africa, Latin America and Eastern Europe – were considered to be emerging economies. The most important among them are called the Brics countries (Brazil, Russia, India, China and South Africa). The emerging economies accounted for nearly 52 percent of the global GDP.    

But the slump in oil and commodity prices and the slowdown in China’s economy have hit the emerging markets the hardest. Most of these economies are primarily commodity exporters. The slowdown in China is the major cause of concern as its growth rate fell from 10.5 percent to around 6.5 percent. Many emerging markets were depending heavily on Chinese growth for their increased exports and earnings. As soon as China’s economy slowed down, it caused havoc in many Latin American and African economies.

Since China uses half of the world’s steel and other minerals and a third of global rice and cotton, the effects can clearly be seen everywhere. Commodity prices have been collapsing – by approximately 40 percent over the last three years. According to the Associated Press, “the drops are stunning. Oil falling by more than two thirds in the past year, iron ore plunging more than 40 percent, coal and copper by more than one third. Even prices of wheat and corn have fallen by more than half in two years”.

Now the Brics economies are facing serious economic challenges. Brazil’s economy is in a recession. The continued political crisis has badly affected the economy. The crisis is still deepening. This former export champion now has a trade deficit. The Brazilian real – its currency – has lost half its value in just over two years. Russia is also facing economic hardships since the collapse of oil and gas prices. South Africa is also in a political and economic mess.

Cheap credit did stimulate massive investment from the West into emerging markets. This investment developed bubbles in property, commodities and financial assets. This was one of the major sources of global growth in the last few years. 

But the situation is now different. There is a massive outflow of capital from emerging markets, including China, towards the US and other advanced economies. The investors consider the US to be much safer than the emerging markets.

China was for years the main locomotive of world growth. However, its growth has dropped by almost 40 percent since 2015. A further drop in its economy will have serious repercussions for the world’s economic growth.


The writer is a freelance journalist.


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