by Norman Lowe
It was not immediately obvious how the 2008 meltdown would affect the BRIC nations. Many economists believed it would be possible for them to ‘decouple’ themselves from the West and continue growing. This turned out not to be the case and many commentators began to doubt whether globalization had been a ‘good thing’ after all. It seemed as if it had made the world economy less stable, more volatile, and more vulnerable to the danger of a crisis in one country infecting the rest of the world. A brief survey of the world’s leading states shows that, unfortunately, very few were able to avoid the contagion. As a report from Crédit Suisse said: ‘We may not be at the brink of a new global recession, but we are even less likely to be at the threshold of a global boom.’
(a) China
As we saw earlier, the financial crisis of 2008 caused an immediate drop in China’s exports. China launched a great spending spree in 2008 and 2009 to improve the country’s infrastructure and launch a number of environmental projects. This seemed to work at first and China’s growth rate soon recovered. However, this policy was continued through 2010 and 2011 when the total investment was an unprecedented 49 per cent of China’s GDP. There were several problems with this state of affairs. Most observers believed that there was a limit to the number of roads, airports and high-rise flats that China could keep on building, and they feared that there had been an unsustainable building bubble that was about to burst, just as similar bubbles burst earlier in the USA, Spain and Portugal. The concentration on domestic consumption and reduced demand from overseas meant that exports, and therefore revenue from exports, were continuing to decline, and the growth rate was slowing. The Chinese themselves were extremely nervous about their own vulnerability in view of the continuing crisis in the eurozone. So much so that in June 2012, along with India, they contributed tens of billions of dollars to the IMF’s emergency fund for tackling the EU’s ongoing problems.
(b) Brazil
Like China, Brazil initially responded well to the 2008 economic crisis, launching a massive property-building project. This created thousands of new jobs and unemployment fell to its lowest level for many years. Domestic demand continued at a high level. The economy continued to grow, receiving a huge boost with the discovery of more oil and gas reserves off the coast. By 2012 Brazil had become the world’s ninth largest oil producer, and was hoping eventually to become the fifth largest. It had overtaken Britain and was now rated to be the sixth largest economy in the world. Other good news was that poverty was decreasing – over the last few years, the incomes of the poorest 50 per cent of the population have increased by almost 70 per cent. Brazil will host the 2014 soccer World Cup and the 2016 Summer Olympics will take place in Rio de Janeiro.
However, the latest reports suggest that all is not well in Brazil. House prices in Rio have trebled since 2008, causing mortgage borrowing to rocket and raising the prospect of yet another crash if and when the housing bubble should burst. Since some of Brazil’s main exports included raw materials and oil to China, the slow-down in Chinese exports of manufactured goods and the general decline in global demand did not bode well for Brazil’s export trade, especially taking into account the 30 per cent fall in oil prices. Domestic demand fell as consumer confidence waned, and all the analysts were predicting a dramatic slowdown in growth.
(c) India
India’s economy had been expanding rapidly and words like ‘dynamic’ and ‘rampaging Asian tiger’ had been used to describe it. However, as the financial crisis hit the USA and Europe, demand for Indian goods plummeted and was still falling in 2012. In fact, Indian exports fell by a further 3 per cent in the year from May 2011 to May 2012. As the economy slowed down, investors began to desert India, preferring something safer, like the US dollar. This sent the value of the rupee plunging until in June 2012 it reached a record low against the dollar. In theory this should help Indian exports, which would be cheaper; but on the other hand it made India’s imports more expensive, and this pushed up the cost of living, making even essentials difficult to afford. In addition India had further problems: much of its infrastructure was in a dilapidated state, and businesses complained of being hampered by corruption, bribery and unnecessary bureaucracy. The country’s current account deficit stood at $49 billion in June 2011 and was estimated to be $72 billion at the end of 2012, which would be over four per cent of India’s GDP. According to Morgan Stanley, a sustainable deficit ought to be no more than two per cent of GDP. Standard and Poor’s and Fitch both reduced their ratings of the Indian economy to ‘negative’, though Moody’s continued to rate it as ‘stable’. Clearly India had failed to ‘decouple’ itself from the problems of the eurozone. Desperate for the eurozone crisis to be resolved, in June 2012 India joined China in making a substantial contribution to the IMF’s emergency fund.
(d) Russia
Up until 2008 the Russian economy enjoyed ten years of spectacular growth thanks mainly to high oil prices. GDP increased tenfold, and by 2008 revenues from oil and gas were worth around $200 billion, about one-third of total revenue. The fact that the economy was so dependent on the price of oil meant that there could be no ‘decoupling’ from the rest of the world’s economic problems. The rapid fall in oil prices and in demand for oil had a disastrous effect on Russia: in 2008 the price per barrel plunged from $140 to $40, causing a drastic fall in revenue. The foreign credits that Russian banks and businesses had relied on quickly dried up, leaving many firms unable to pay their debts. The government was forced to help them by providing $200 billion to increase liquidity in the Russian banking sector. The Russian Central Bank also spent a third of its $600 billion international currency reserve fund to slow down the devaluation of the rouble. Fortunately, by the middle of 2009 the slump had bottomed out and the economy began to grow again. In 2011, as well as becoming the world’s leading oil producer, surpassing Saudi Arabia, Russia also became the second largest producer of natural gas and the third largest exporter of steel and aluminium. The high price of oil in 2011 helped the recovery and enabled Russia to reduce the large budget deficit that had accrued during the lean period in 2008 and early 2009.
However, recognizing the danger of being too dependent on oil, the government successfully encouraged the expansion of other areas. In 2012 Russia was the world’s second largest producer of armaments, including military aircraft, after the USA, and the IT industry had a year of record growth. Companies making nuclear power plants were expanding, and several plants were exported to China and India. In 2012 statistics showed that Russia was the third richest country in the world in terms of cash reserves; inflation had been reduced and unemployment had fallen. Nor was the expansion confined to Moscow and St Petersburg; other cities, including Nizhny Novgorod, Samara and Volgograd (formerly Stalingrad), were playing an important role in the diversification of industry. Of the four BRIC nations Russia was clearly the strongest economically.
(e) The USA
Unemployment, which had stood at 15 per cent at the end of 2010, continued to fall, but only slowly. Fitch ratings agency estimated that President Obama’s fiscal stimulus packages boosted US GDP by 4 per cent over the following two years. However, according to a Guardian report (27 June 2012), ‘the US economy is still limping along with very slow growth and a high rate of unemployment. Although the economy has been expanding for three years, the level of GDP is still only 1 per cent higher than it was nearly five years ago. Recent data shows falling real personal incomes, declining employment gains, and lower retail sales.’ Another problem was that, although mortgage interest rates were low, house prices have continued to fall and in 2012 were 10 per cent lower in real terms than they were two years ago.
At the end of June 2012 the Organization for Economic Co-operation and Development (OECD), the Paris-based group of independent economists from 34 countries, produced its biannual report on the US economy. This confirmed that the US recovery remained fragile and pointed out that two of the main problems were record long-term unemployment and th
e widening gap between the poor and the wealthy. About 5.3 million Americans, 40 per cent of unemployed people, have been out of work for six months or more. Poverty in the US is worse than in Europe, and of the 34 OECD member states, only Chile, Mexico and Turkey rank higher in terms of income inequality. The report also suggested measures to remedy the situation:
Equalize tax rates by ending tax breaks for the very wealthy – in other words, make the rich pay more. Earlier in 2012 the government proposed a measure to make sure that everyone making more than a million dollars a year pays at least 30 per cent in tax. Predictably, this was strongly opposed by the Republicans.
Provide more investment for education and innovation, and more training programmes to get the long-term unemployed back to work.
Increase gas prices to help reduce the use of fossil fuels.
The government should reduce spending, but only gradually, rather than make drastic cuts; these might discourage business investment and slow growth even further.
How the situation would develop depended very much on the results of the presidential and congressional elections held in November 2012. Tax cuts for the wealthy introduced during the Bush administration were due to end on 31 December 2012. Another hangover from the Bush era was that automatic spending cuts would be applied at the end of 2012. The cuts involved, dubbed ‘the fiscal cliff’, would amount to $1.2 trillion.
(e) The European Union
In the summer of 2012 the future looked uncertain. In June there were tense elections in Greece when the party that was prepared to continue the austerity policy won a narrow victory over the socialist party that resented having austerity forced on the country by outsiders, and was determined to abandon the euro. And so the euro survived again. There was also resentment in some of the more economically successful north European states, especially in Germany, at having to bail out what many saw as the ‘feckless, reckless and lazy’ south. The most likely outcome seemed to be that the taxpayers of northern Europe would bail out the south and would, in effect, take control of overall eurozone economic policy, so that the eurozone would become much closer to being a fiscal union, and therefore, to some extent, a political union as well. Of course the governments of southern Europe resisted losing overall control of their economic policies; but without a bailout of some sort – the eurozone seemed likely to disintegrate.
On the other hand, many economists and financiers believed that the euro must be saved. In September 2012 Mario Draghi, the president of the European Central Bank (ECB), announced: ‘We say that the euro is irreversible. So, unfounded fears of reversibility are just that – unfounded fears.’ It was felt that the collapse of the euro would throw the entire global economy into chaos. Certainly Germany wanted the euro saved, because the cheap euro benefited German exports, whereas a strong Deutschmark would do considerable damage to their exports. Hopes for the survival of the euro revived in September 2012 when Mario Draghi unveiled a rescue plan that involved the ECB buying up the bonds of Spain and Italy, the two eurozone countries after Greece most heavily in debt. Those governments could then request a bailout from the ECB which would be granted, provided they agreed to implement strict austerity measures. The announcement of the plan received a glowing reception across most of Europe; stock markets soared on both sides of the Atlantic, and so did confidence in the euro’s survival. This was sufficient to bring down borrowing costs for Spain and Italy, and their future seemed brighter. Even the Germans agreed to go along with the scheme. At first the German Bundesbank condemned the whole idea as ‘tantamount to financing governments by printing banknotes’. But eventually, after pressure from Chancellor Merkel and Mario Draghi himself, followed a few days later by the approval of the German constitutional court, the Bundesbank, albeit rather grudgingly, agreed to back the plan. The European Stability Mechanism (ESM), as it was now known, was poised to go into operation with the creation of a rescue fund of €500 billion.
FURTHER READING
Archer, D. and Rahmstorf, S., The Climate Crisis (Cambridge University Press, 2009).
Brandt, W., World Armament and World Hunger (Gollancz, 1986).
The Brandt Report: North-South, A Programme for Survival (Pan, 1980).
Cohan, W., Money and Power: How Goldman Sachs Came to Rule the World (Allen Lane, 2011).
Giddens, A., The Politics of Climate Change (Polity, 2nd edition, 2011).
Harvey, D., The Enigma of Capital and the Crises of Capitalism (Profile, 2010).
Hulme, M., Why We Disagree About Climate Change (Cambridge University Press, 2009).
Hutton, W., The World We’re In (Abacus, 2003).
Hutton, W., The Writing on the Wall: China and the West in the 21st Century (Abacus, 2008).
Kenwood, G., Lougheed, A. and Graff, M., Growth of the International Economy, 1820–2012 (Routledge, 2012).
Lanchester, J., ‘Cityphobia’, London Review of Books (23 October 2008).
Lanchester, J., ‘The Great British Economy Disaster’, London Review of Books (11 March 2010).
Lanchester, J., ‘On the Global Economy, London Review of Books (8 September 2011).
Laqueur, W., After the Fall: The End of the European Dream and the Decline of a Continent (Thomas Dunne, 2012).
Lloyd, J., The Protest Ethic: How the Anti-Globalisation Movement Challenges Social Democracy (Demos, 2001).
Mason, P., Meltdown: The End of the Age of Greed (Verso, 2010 edition).
Mason, P., Why It’s Kicking Off Everywhere: The New Global Revolutions (Verso, 2012).
Mattick, P., Business As Usual: The Economic Crisis and the Failure of Capitalism (Reaktion Books, 2011).
McDonald, L., A Colossal Failure of Common Sense: The Incredible Inside Story of the Collapse of Lehman Brothers (Ebury, 2009).
Moss, N., Managing the Planet: The Politics of the New Millennium (Earthscan, 2009).
Peston, R., Who Runs Britain: and Who’s to Blame for the Economic Mess We’re in? (Hodder, 2008).
Posner, R. A., A Failure of Capitalism (Harvard University Press, 2009).
Rifkin, J., The European Dream: How Europe’s Vision of the Future is Eclipsing the American Dream (Polity, 2004).
Tett, G., Fool’s Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe (Abacus, 2010).
Victor, D. G., The Collapse of the Kyoto Protocol and the Struggle to Slow Global Warming (Princeton University Press, 2004).
QUESTIONS
What is meant by the term ‘North–South divide’? What attempts have been made since 1980 to close the gap between North and South, and how successful have they been?
Assess the reasons why global warming is seen as such a serious problem for the world’s future. To what extent do you think it is the twenty-first century’s major problem?
Explain why there was a ‘crisis of capitalism’ in the decade leading up to 2012.
There is a document question about pollution and global warming on the website.
Chapter 28
The world’s population
SUMMARY OF EVENTS
Before the seventeenth century the world’s population increased very slowly. It has been estimated that by 1650 the population had doubled since the year AD 1, to about 500 million. Over the next 200 years the rate of increase was much faster, so that by 1850 the population had more than doubled to 1200 million (1.2 billion). After that, the population growth accelerated so rapidly that people talked about a population ‘explosion’; in 1927 it reached the 2 billion mark. By the year 2000 it had passed 6 billion and at the end of 2011 it reached 7 billion. In 2003 the UN calculated that if the population continued to increase at the same rate, the global total would be somewhere between 10 billion and 14 billion by 2050, depending on how effectively family planning campaigns were carried out. It was also estimated, given the much lower birth rates in the developed world, that almost 90 per cent of the people would be living in the poorer countries. During the 1980s the spread of HIV/A
IDS reached pandemic proportions; most countries in the world were affected, but again it was the poor nations of the Third World which suffered worst. This chapter examines the causes of the population ‘explosion’, the regional variations, the consequences of all the changes, the attempts at population control and the impact of AIDS.
28.1 THE INCREASING WORLD POPULATION SINCE 1900
(a) Statistics of population increase
It is easy to see from the steeply climbing population total in Figure 28.1 why people talk about a population ‘explosion’ in the twentieth century. Between 1850 and 1900 the world’s population was increasing, on average, by 0.6 per cent every year. During the next 50 years the rate of increase averaged 0.9 per cent a year; it was after 1960 that the full force of the ‘explosion’ was felt, with the total world population increasing at the rate of 1.9 per cent a year, on average. In 1990 the population was increasing by roughly a million every week, and the total had reached 5300 million. In 1994 there was an increase of 95 million, the biggest ever increase in a single year so far. In 1995 the record was broken again, as the total population grew by 100 million to 5750 million. According to the Population Institute in Washington, 90 per cent of the growth was in poor countries ‘torn by civil strife and social unrest’. During 1996 a further 90 million were added to the population, and by 2000 the global total was well past 6 billion. It topped the 7 billion mark at the end of 2011.