FEATURE | SPRING 2011 EFFECT

A Post-Recession International Business Check-Up

by Mary Turck

The global economy is recovering from the recession more slowly than anyone would like. Surprisingly, the world’s emerging economies appear to be on a faster track to recovery than the already industrialized, wealthier nations. That’s true, at least, when looking at macroeconomic indicators such as growth of gross domestic product (GDP), which is the accepted way of measuring a recession. (The standard definition is two consecutive quarters of negative GDP; growing GDP means recovery.)

By that measure, the U.S. recession ended in 2009, and recovery has been ongoing since then. Workers who have lost jobs find it hard to believe the macroeconomic indicators when the official U.S. unemployment rate is still around 9 percent, and the unofficial rate (including those who have given up looking and those involuntarily working part-time) is almost double that. As Chris Farrell, editor of American Public Media’s Marketplace Money, observes, unemployment is “how it comes home to the household. We don’t eat GDP.”

A slow but steadily growing economy means the number of jobs is increasing, though not fast enough to create jobs for people who were laid off during the recession and for the new workers entering the market. Unless the economy picks up momentum—a lot of it—a high unemployment rate may be the “new normal” for the foreseeable future.

If recovery looks anemic here, how is the rest of the world faring? The growth figures for some developing countries look good, but are they good enough to alleviate—or even make a dent in—the existing unemployment and poverty?

Using GDP as a measure, many developing economies never slid into recession at all. In general, they were less affected by the downturn than the “advanced economies,” which are concentrated in North America, Europe, and Japan. Of course, it’s not quite as simple as developed versus developing economies; regional variations and development patterns are important to consider. In this article, we’ll examine the overall trajectory of the recession and recovery around the world.

Sub-Saharan Africa

South Africa, Nigeria, Angola, Ethiopia, and Kenya contain almost half the population of sub-Saharan Africa and produce two-thirds of the region’s economic output.

These five countries are leading the regional recovery with GDP growth predicted to be near 5 percent in 2010 and 5.5 percent in 2011. Among the big five countries, oil-exporting Nigeria and Ethiopia are doing the best, with the International Monetary Fund (IMF) predicting GDP increases of 7.5 to 8.5 percent each year. Of course, neither Nigeria nor Ethiopia ever went into a recession. Their growth slowed, but remained positive throughout the global economic crisis.

Outside the big five countries, the IMF predicts continuing growth for all 42 countries in sub-Saharan Africa. Even in the recession year of 2009, the region’s GDP grew about 2.5 percent. Among the country groupings, only the middle-income, non-oil-exporting countries saw declining GDP, however, in the context of sub-Saharan Africa, “middle income” means GDP of more than $975 per capita.

South Africa is in a tougher spot than the other four large economies in the region, having lost a million jobs in 2009, and its GDP is growing only about 3 percent each year. But South Africa started with a per-capita GDP of $10,300 compared to Ethiopia’s $900 and Nigeria’s $2,300. Even though Nigeria and Ethiopia have a much higher growth rate, they are nowhere near catching up to South Africa. If we think of economics as a marathon, poor countries can be running faster, but even with a setback, industrialized nations are still out in front at about mile 22.

The Middle East and North Africa

Oil is the biggest factor shaping the economic circumstances of the Middle East and North Africa. According to the IMF, the oil-exporting countries include Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan, the United Arab Emirates, and Yemen. Falling oil prices and exports during the recession hit oil-exporting countries, but they still maintained positive growth even in 2009, and expect to pick up speed in 2010 and 2011.

The non-oil exporters had other problems. Exports and tourism declined, as did foreign direct investment. Remittances from workers in Europe and the United States fell off, as unemployment rose in those regions. In Egypt, for example, (www.migration4development.org/content/impact-economic-crisis-egyptian-migration-and-egyptians-abroad) Egyptian migrants sent home 9.5 billion dollars in 2008—about 6 percent of the Egyptian GDP. A report released in August 2009 compared migrants’ remittances from the first quarter of 2008 to the first quarter of 2009 and found an absolute decrease of about 550 million dollars.

In general, economies most closely tied to the United States and European Union felt the effects of the recession, whether because of declining remittances or falling trade.

One might expect that on-going wars would have meant worsening economies for at least Iraq and Somalia; however, according to the CIA World Factbook, both countries report steady economic growth.

South Asia, East Asia, and the Pacific

Led by China and India, Asian economies are maintaining their strength. China and India saw no recession, only a slowdown. China’s GDP grew by 8.7 percent and India by 7.7 percent in 2009. In contrast, the U.S. GDP declined by 2.4 percent.

In general, emerging economies in this region should see a greater percentage growth in GDP than already-industrialized economies like Japan, Australia, and New Zealand. Japan, perhaps the most industrialized country and long the economic leader in the region, was hardest hit, and its economy contracted 5.2 percent in 2009. The Economist’s Asia blogger notes: “But this year [2010] Japan was overtaken by one of the geese in its slipstream. The upstart was not China, which remains far poorer than Japan, even if its economy is now bigger, but Taiwan.”

The World Bank forecasts strong, if uneven, growth for the Asia Pacific region in 2010 and 2011. Japan expects slow but steady recovery after its GDP declined 5.2 percent in 2009, and China, India, and Vietnam are expected to continue their solid expansion through 2011.

Tony Hallada of LarsonAllen Financial, LLC points out that China is now the second-largest economy in the world, with auto sales that surpassed those of the United States in 2010 and are expected to double by 2015.

“Their impact on global economy and on what’s happening is growing in importance each and every day,” Hallada says. He points out that in addition to China’s rapid urbanization (1.5 million people per month moving from the countryside into urban areas), China has $2 trillion in excess reserves, compared to the United States’ $1 trillion deficit.

In part, says Hallada, China’s rapid growth is due to its centralized, non-democratic government. He cites China’s “very clear vision of what they are trying to build,” and says, “They have a body that can make decisions very quickly to enact monetary and fiscal policy and spending programs.”

Europe and Central Asia

Europe and Central Asia were hit hard by the recession. Most of the more developed economies of Europe and the British Isles began to solidify recovery in 2010. Overall European recovery, however, has to contend with the fragile economies of Ireland, Greece, Portugal, Italy, and Spain. The IMF predicts a slow recovery for “advanced Europe” of 1.6 or 1.7 percent in 2010 and 2011. (Regions are grouped and characterized in slightly different ways. The IMF, for example, talks about “advanced Europe” and “emerging Europe.” Distinctions do not follow traditional geography—Israel, for example, is included as part of “advanced Europe.”)

Unlike other emerging economies, those of Europe and Central Asia were dramatically affected. Katelka, a blogger in Kazakhstan, wrote in early 2009, “We became 25 percent poorer. Lately the salaries of budget-paid employees and pensions were increased by 25 percent, and now this raise is eaten up. I have friends who get paid in KZT, but their mortgage is in dollars … ”

Overall, economies in the Europe/Central Asia region contracted by 5.9 percent in 2009. For some Central Asian countries, declining oil revenues played a big part, as did declining remittances from migrants working abroad.

On the other hand, the IMF predicts a 3.8 to 3.9 percent GDP increase for “emerging Europe” in 2010 and 2011. The “emerging Europe” countries (some of which are included in the World Bank’s East Asia category) include Russia, Latvia, Estonia, Romania, Serbia, Lithuania, Hungary, Macedonia, Bulgaria, Poland, Montenegro, Bosnia and Herzegovina, Croatia, Albania, Moldova, Turkey, and Ukraine.

Latin America and the Caribbean

Like other developing economies, most of Latin America and the Caribbean should see a strong recovery in 2010 and 2011, with GDP improvement of more than 4 percent. That’s welcome news for a region with a 2.3 percent  overall decline in GDP in 2009. However, the economic stress did not affect the region uniformly. Two of the largest economies demonstrate the division: Brazil posted only a 0.2 percent decline in 2009, while Mexico’s GDP plummeted by 6.5 percent. Venezuela’s discomfort is projected to continue through 2010, before its recovery even kicks in.

Except for Mexico, Latin America is doing surprisingly well, notes Dean Baker, the co-director of the Center for Economic and Policy Research. Over the course of the past 30 years, much of Latin America has moved from close economic ties to the United States to developing a more diversified international trade base. Increasing trade with China and other Asian countries, and increasing domestic demand mean greater independence from U.S. economic swings. Mexico remains an exception, still heavily export dependent, with the United States its primary trading partner.

Recession, recovery, and the wealth gap

Here at home, the U.S. unemployment rate remains higher than pre-recession levels and slower U.S. economic and wage growth may be the “new normal” for the foreseeable future. A rising GDP does not lift all boats equally, and may leave those without a boat frantically treading water. According to the U.S. Bureau of Labor Statistics, “In 2009, the unemployment rate for workers with college degrees was 4.6 percent. The rate for workers without a high school diploma was 10 points higher.”

However, Hallada is optimistic. He sees good prospects for the United States as well as other countries. Baker is more cautious, and points to the upward redistribution of wealth in the United States during the past several years. “Profits have more than recovered pre-recession levels,” he says, “while employment is still at 9.6 percent unemployment, and wages are going nowhere.”

Farrell concurs, calling the wealth gap “a major fault line in our society.” He also talks about the international wealth gap between the richer countries and emerging economies. “You’d love to have the global wealth gap decline—we grow fast, but they grow faster. …. What I rebel against is the notion that somehow that means we are in decline as a nation or an economy. I hope the emerging markets continue to grow fast. Despite all the gains they have made, these are still very poor nations with a lot of poor consumers with very high levels of poverty and a lack of education.”

But Farrell also sounds a note of optimism. “If you take a step back,” he says, “we’ve been living through one of the greatest, most heartening periods in history.” While acknowledging the “terrible downturn of this recession,” he also points to a period of great wealth creation in emerging economies and to dramatic declines in poverty in Asia—especially in China and India, South Korea, and Vietnam.

The IMF, the World Bank, and most economists agree that the recession has ended. That doesn’t quite mean blue skies and sunshine for everyone, but it’s far better than the storm we’ve just been through.