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 Critics
of global integration, who have argued that corporate growth and
the unregulated flow of goods and capital will not foster
sustained prosperity for peoples of the world, are pointing a
finger towards the malaise spreading globally. Capitals of the
world are suffering from shrinking economies and worsening
performance. In fact, many economists agree that the world
is suffering from a recession, the first in two decades, and they
believe that recovery will be slow.
The worldwide slump is
revealing the darker sides of economic integration. Nations are
responding to the downturn in sync, as they report lower levels of
trade, investment, and consumer confidence.
There is no doubt that
the world has entered a recession. But what exactly does a
recession mean? In numerical figures, a recession translates into
a growth rate less than 2.5%, a dangerous low that the
International Monetary Fund defines as the breaking point between
economic progress and slippage.
The situation has been
exacerbated by the Sept. 11 attacks that have set major losses for
corporations worldwide. On the European front, reinsurance
companies are performing less than mediocre while German
conglomerates are suffering from declines in auto sales. The Asian
front is also looking bleak as Taiwanese semiconductor makers are
losing jobs due to a drop in computer sales in the United States.
Asian investors are dumping stocks after a corporate disaster in
Japan and a drawback in American consumer confidence.
The short-term U.S.
economic outlook does not look too promising either due to a high
level of uncertainty caused by the Sept. 11 attacks and economic
rebound does not seem likely until next year, says Federal Reserve
President Robert Parry. His opinion is based on a 0.4% shrinkage
in the economy, experienced in the third quarter of this year, as
well as a substantial drop in the levels of industrial output and
investment. He predicts a deteriorating economic situation till
the end of the year and a rise in the unemployment rate that is
currently at 5.4%. Rising unemployment may dampen consumer
confidence affecting growth prospects.
Parry believes that
the attacks on the World Trade Center and the Pentagon were the
final straw for a struggling U.S. economy. From an economic
perspective the attacks pushed the U.S. economy from sluggish
growth to a downright contraction. Federal Reserve efforts to help
pick up the economy have called for an aggressive monetary policy
action. Ten interest rate cuts have brought borrowing costs down
4.5 percentage points to 2% since January. Government tax cuts and
spending programs have also been implemented with the aim of
spurring a rebound.
Other economists are
more optimistic about the situation. They say that the U.S.
economy is slowly picking up and showing early signs of
stabilization. They believe that the problem is not a domestic
one, but rather a global one nonetheless affecting the U.S.
economy. They have reported a drop in the number of people filing
for unemployment insurance, for four straight weeks, and a level
of consumer confidence that is slowly beginning to rise. However
as America’s trading partners continue to suffer, hopes for a
speedy worldwide recovery are being postponed. So, the next
relevant question is how bad is the situation of America’s
trading partners?
Japan’s worsening
economic crisis is causing East Asian economies to shrink in the
second half of 2001. Mexico and Canada have fallen into a
recession and have spread this epidemic to Brazil and Argentina.
And Germany’s economic slip could drag the rest of Europe into
the ground.
One by one, every
major country is slipping into recession resulting in a global
collapse. If a trend is established, the three main engines of
growth, United States, Japan and Europe, are likely to experience
a collective contraction, similar to the oil price shock of the
mid-1970’s. Economic forecasters say they see the economy
suffering until the second half of 2002, followed by a modest
surge.
What factors have led
forecasters to have such a bleak outlook? To name a few, such
influencing factors include global trade and commerce, as well as
investment and output. Lets take a closer look at each of these
factors and their corresponding trends.
Throughout the
1990’s, global trade flourished through a global supply chain,
minimizing costs and maximizing efficiency. In fact, trade
comprised a 17% of economic activity 20 years ago compared to the
26% of economic activity today, according to the Organization for
Economic Cooperation and Development, an organization headed by
the world’s most advanced countries.
And, while global
commerce grew by 13 % in 2000, a monumental increase, it has
declined this year, the first drop since the recession of the
early 1980’s. Trade has gone from spurring global prosperity to
widening the economic crack. Without a doubt, global trade has
become key in defining economic trends, but we must look at
corporate behavior in order to understand how it affects global
trade.
Corporations conduct
their operations based on their general financial health. They
react to a calamity, for example the Sept. 11 attacks in the
United States, by cutting investment and employment in say Germany
and or Hong Kong, ignoring the differences in the economic
performance of the three places. Supporting statistics indicate
that companies react quickly to political and or economic crises
by cutting capital expenditure. Capital flows to emerging markets
start to decline, as businesses cut investments abroad quicker
than at home. Corporate size also tends to shrink as companies
become less involved in mergers and acquisitions. In fact,
according to Morgan Stanley, mergers and acquisitions are off by
55% this year compared to 2000.
The decline in trade
and investment is dragging global growth down, suggesting that
economic integration has played a key role in humbling the world.
Global integration has advocated trade and market liberalization.
However, open borders and free competition have proven to be a
double-edged sword. Prices of highly traded goods have declined
and while consumers have rejoiced at the news, suppliers have had
a totally different response. Theirs has been a negative response
as they struggle to make substantial profits, albeit drops in the
prices of commodities and manufactured goods.
Commodity prices like
that of coffee and gold as well as manufactured goods like clothes
and shoes have been on a gradual decline. Even prices of highly
traded industrial goods like steel have dropped. Deflation has
seized Japan and other Asian nations and is encroaching upon the
boundaries of the United States and Europe.
The United States is
beginning to witness a fall in prices, as indicated by economic
statistics. The American producer price index has slipped by a
1.6% rate last month and consumer prices have also dropped.
Deflation has serious ramifications on other sectors of the
economy.
Falling prices tend to
discourage economic activity because businesses expect to earn
lower profits since they have to cut prices in order to remain
competitive. An anticipated drop in prices causes consumers to
delay their purchases since they think they will be able to buy
them cheaper in the future. In fact, business and consumer
sentiment are highly correlated in such a way that they sway
economic performance.
Air travel and tourism
are also down everywhere. Air travel companies are facing severe
financial blows and are being forced to downsize and nations that
are highly dependent on revenues from tourism, such as Egypt, are
experiencing budget problems.
All in all, the global
outlook seems dismal at this time. Because all major economies are
suffering, the Organization for Economic Cooperation and
Development has forecasted that its 30 member nations would
experience reduced output in the second half of this year. It also
shrunk its growth forecast for next year by two-thirds, to 1% from
3%.
Nations that followed
global strategic economic advisors through welcoming foreign
multinational investment and keeping their markets open and
currencies freely convertible, are suffering drastically Such has
been the fate of Singapore, Taiwan, Mexico and Argentina, all
currently experiencing deep recessions.
However, nations that
have been more weary towards global integration such China, Russia
and India are suffering much less, giving ground to advocates of
anti-globalization.
But as we all know,
there are two faces to the same coin. Global integration
definitely has its pros and cons. We are less critical of its cons
when we are experiencing global prosperity, supported by rising
growth and increasing investment. However, when we start
experiencing downturns that affect the stability of the global
economy, we doubt the perfections of our system. And yet, although
the situation looks bleak at this very pressing moment, we are all
looking forward to a global recovery no matter how long it takes
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