The Global Financial Crisis and the world response

by Dr. Jerrol Thompson 02.JAN.09

In a recent startling and uncharacteristic pronouncement, Dominique Strauss-Kahn, the Managing Director of the IMF, stated that larger stimulus packages are required to jump start global economies. This was a major reversal in policy by the IMF. This adoption of Keynesian type strategy which focuses on injecting stimuli and countercyclical policies and even the act of commenting on such policy was uncharacteristic of the IMF.{{more}} It is generally accepted that IMF policies of the 80’s and 90’s where too harsh where they prescribed an overdose of financial austerity measures to countries which were already financially sick and in many cases worsened the situation.

The current global financial crisis has spared no region of the world. The USA’s economy is projected to only recover in late 2010; so what will the interim period between 2009 – 10 have in store and what will it take to put the global economy back on track? How different is the Vincentian economy to that of developed countries, and what is the forecast for developing states like SVG?

In small town America, there is a massive slow down; unemployment figures are rising, prompting talks of an even larger than anticipated Obama stimulus package with mind boggling figures in the trillion. In New York State, home of our largest Diaspora contingent, 160,000 job cuts are expected in 2009. Globally countries now value and rank targeted stimulus packages far greater than a rise in national debt.

China, a country which has practiced a policy of one town, one product, has seen temporary closure of hundreds of factories due to global slow down and reduced demand by US consumers. Russia, which was once riding high on high oil and gas prices, recently devalued the Ruble twice in one week and along with OPEC has cut oil production in an effort to pump back up oil prices.

Other successful and high growth countries have had collapses in their housing market and banking sector. For example, Ireland, which plans to inject 7.7 Billion in three major banks. In India, steel mills which employ tens of thousands now suffer from reduced demand for steel and even its ICT outsourcing industry has waned.

In Japan, Toyota, the world’s most efficient and profitable company with 12 billion profit in 2007, has announced its first ever US$1.7 billion operating losses in 2008 due to reduced demands and a strong YEN. The Japanese government has also proposed record spending as a stimulus in 2009. In Germany, where 1 in 7 persons are employed in the car industry, they also expect significant job cuts.

Africa also paints a very dismal picture, with crisis in Zimbabwe, Dar-fur, Somalia, Guinea and many other states, and the Caribbean region Sandals has laid off hundreds of workers in St. Lucia and Antigua. This preceding information has been featured on CNN, BBC, etc and most Vincentians are fully aware. However, this knowledge has not significantly changed our own understanding and appreciation of the Vincentian economy?

In view of the global slow down, what is the forecast for the Caribbean, in particular St. Vincent & the Grenadines, how much of the global negative impact will be felt and what can we do? One would expect reduced tourist arrivals, reduced remittances and in some countries drastically reduced FDI.

One observation is that at times when the economy seems slow, we blame the government. Similarly, the brisk spending of the Christmas season still suggests a buoyant and vibrant economy, but are individual Vincentians responding to the impact of Global financial crisis in the most effective way? Around the world, with the expected large numbers of lay-offs, some workers and unions are offering roll-backs on employee benefits and assurances of increased productivity. In these countries, employees jostle to be ranked in the top half of their company’s staff list to avoid being the first to be laid off. A job is now precious as there may not be a ready alternative. Here in St. Vincent, this fear of job losses seen in other nations is not evident. We have some excellent workers. However, productivity in several sub-sectors must significantly improve if we are to be competitive.

Our Banana Industry continues to experience global threats. Fertilizer prices have quadrupled and we have all suffered from being a high energy cost destination. In 2001 VINLEC spent $14 million for diesel to generate electricity; in 2008 it will have spent $70 Million. Clearly the government could not have subsidized all of this $70 million, nor as some persons believe can it completely shield Vincentians from all the fall out of the global crisis and so far SVG seems to have done quite well.

You can easily be convinced to make plans to be defeated, dejected and depressed in the next year (and some actually will). You can be convinced into believing that 2009 will be the worst year ever and so throw in your towel, become paralyzed and turn your back on any good opportunity. Other persons may be convinced that this might be their best year.

In contrast to the USA, Ireland or the UK, where the housing market was the seed of the crisis, persons speculate or frequently change homes and continually move to more expensive and more affluent locations. In SVG, our housing market is not as dynamic. One is more likely to expand and improve their existing homes irrespective of the location. Here there are no sub-prime or variable rate mortgages and very few companies are exposed to the ravages of stock market fluctuations.

Construction will continue to be vigorous over the next 3 years, with airport, highways, hotels and other major infrastructure developments. It was reassuring to see four (4) cruise ships on Christmas Eve, although tourism, our lead sector, is only going to really take off after the Argyle International Airport is opened and the massive expansion in hotel rooms from 2,100 to 5,000 has been achieved, thus tripling visitor arrivals and spending. Social safety nets and access to education at every level have been put in place to help lift persons out of poverty, build greater skills and knowledge based work force and a significant effort is being made to make the private sector more competitive and successful.

The planned resurgence of agriculture, back yard farming, food production, agro-processing and promoting the benefits of natural local foods will improve our food security, prices, wellness and prospects for exports.

Whatever the immediate future brings, there are great challenges and a need for a deeper understanding of the unique characteristics and opportunities of our local economy verses the global. The specific role and obligation of government and the concept of individual responsibility and productivity must be appreciated. Whenever the global economy recovers, SVG and its people should have learnt many lessons, and we must be stronger, more robust, resilient and ready to take full advantage of the early recovery period. My best wishes for 2009.