The financial crisis is all about the U.S. Day after day, hour by hour, we hear reports detailing whether the stock market is up or down, how many more people are unemployed, uninsured and dispossessed. We are living through a very serious crisis and many Americans are suffering. But what about the rest of the world -- especially the regions of Latin America, Asia and Africa that had been growing, advancing, and reaching new levels of income? Many of these countries had followed U.S.-designed policy prescriptions for macroeconomic policies and had instituted stronger regulatory policies than those in the US and Europe. They had opened their economies to foreign capital and trade, followed an economic model that had worked for decades for the wealthier countries. But the bursting of the US housing bubble also destroyed the dreams and hopes of millions of people around the world.
A little background -- from 2003-07, what is called the developing world (those low or middle income countries) experienced impressive economic growth, growing on average about 7% a year. Millions of people were moving from poverty to having some disposable income, some measure of wealth. There were four reasons low and middle-income countries grew so quickly during this period: commodity prices were high, remittances from workers in richer countries were large, international financing was available and exports to the developed world were strong and growing. All of these conditions have disappeared., and millions are slipping back into poverty.
I have just returned from Central America and many of the people on my plane to Guatemala had been working in the U.S., especially in the construction industry. They were going home. They had all lost their jobs and not only will not be sending remittances back home, they will now join the rapidly increasing ranks of the unemployed in their own countries. Remittances have been a large part of economic growth for many countries in Latin America. According to the Inter-American Development Bank, in 2008, remittances to Latin America reached $69 billion, and for seven countries in the region -- El Salvador, Guatemala, Guyana, Haiti, Honduras, Jamaica and Nicaragua --12% or more of GDP came from migrants who live abroad. In January alone, remittances dropped by 13% in the region. Not only have remittances fallen, commodity prices have declined dramatically, exports have slowed because countries like the US are importing fewer goods from the region and foreign direct investment has dried up. The IMF and World Bank had encouraged the developing world to open their economies to global income flows, trade and aid.
Now the bargain has been broken and a new one has yet to be put in place that offers some hope of improving lives and livelihoods for the world's poor and emerging middle-class.
What does it all mean? The whole world is experiencing the worst recession since the Great Depression, and the poor around the world are suffering. China, a growing economic force, has recently proposed that the dollar be replaced as the major currency for trade and reserves. Others have proposed a new international financial structure that could monitor and better regulate trade and capital flows. These grand schemes are unlikely to happen, at least in the short term. Most countrie, unfortunately, are behaving like we are -- turning inward and focusing on their own problems without recognizing that without a global perspective the likelihood of developing "beggar-thy-neighbor policies" (policies that improve your own country's welfare at the expense of other countries), is increasing. While these policies might help in the short run, they were major causes leading to the Great Depression of the 1930s.
It is a time to find common ground with our neighbors around the world and develop global solutions to a global crisis.