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Ernst & Young interviewed a large of number of managers and owners of companies around the world, first in January 2009 and again in June 2009 [1]. Companies were surprised by the speed and severity of downturn and the impact was more than expected in January 2009. Many respondents feel that the crisis has permanently changed their operating model (43%), the regulatory framework for their sector (45%) and risk management (56%). The compilation of their responses on the impact of and responses to the crisis is quite revealing. The main companies were surprised by the speed and severity of downturn and the impact was more than expected in January 2009; findings can be tabulated as follows

1. About 82% of respondents still having difficulty in accessing credit and this is impacting upon their investment strategy
2. Companies are facing heightened concerns over risks while managing their assets, and over likelihood of more regulations
3. Almost 9 out of 10 accelerating cost reductions through review of capital investment and employee reduction but only 67% have been in reducing costs, particularly through IT and real estate.
4. Companies using this crisis to outsource (23%) and for strategic acquisitions (34%). About 32% are disposing of assets to increase cash and liquidity.
5. Only 19% see growth returning during second half or 2009 and 38% in 2010.
6. Remaining respondents feel that future is bright later on.
7. In January 2009, only 20% planned for entering new geographic markets but by June 2009, 33% expect to.

Most growth analysis has been primarily a macroeconomic subject with particular emphasis on contribution of capital, education adjusted labor, and total factor productivity to output growth (see Collins and Bosworth 1996, Hu and Khan, 1997, Sarel 1997, Sala-i-Martin 2000, Hall and Jones, 1999, Easterly and Levine 2001). Importance of macroeconomic policies as represented by budget deficits, exchange rate premia, inflation, trade openness and inflow of foreign Investment etc are tagged on in the growth analysis at a macroeconomic level. A few studies have invoked ethnic differences and other exogenous factors to understand cross country differences in total productivity growth and per capita incomes. 

In trying to understand the rapid output growth of East Asian ‘miracle’ countries, Krugman (1994), Young (1995), and others were engaged in an interesting debate on whether capital accumulation or total factor productivity growth best explained the high and sustained output growth of these countries. Their conclusion that capital accumulation was most important was based on macroeconomic data analysis in a factors of production approach to sources of growth. Others have found that the growth of output is strongly correlated with productivity growth in developed and developing economies as reported by Kehoe and Prescott (2002) and Solimano and Soto (2004), and this co-movement appears to be stronger the longer is the time period considered.

This is a summary of materials available from ILO and World Bank.

The financial and economic crises of 2008 had gender-specific impacts and placed a disproportionate burden on women, in particular poor, migrant and minority women. Even though both women and men are affected by job losses, women are often laid off first, as men are traditionally considered to be the main “breadwinners”. Some of the implications of the global financial and economic crisis on women are:

As interdependence between the developed (North) and developing countries (South) becomes greater, the economic policies of the North will invariably impact on the South. Globalization, defined as the increasingly free flow of ideas, people, goods, services, and capital that leads to the integration of economies and societies, has become a major force for global change, but much remains to be understood about the transmission channels and potential impacts.  The developing countries commonly complain that the global system is a ‘creditor-run financial system’ and as such, maintaining the stability of the financial system is more important for the advanced countries than mitigating financial crisis in any particular country. 

Transmission of crisis from home mortgages to US credit freeze and global oil-price hike

By early-2007, it became clear as housing prices began to decline, losses on sub-primate mortgages originated in 2003-2006 were rising more rapidly than the assumptions used and risk-model predictions.  The deterioration in borrowing quality and other shortcomings mentioned yesterday gave little comfort to investors.  The losses were hard to estimate, especially in an environment of house-price busts, and given that the sub-prime MBS had been re-packaged into complex CDOs and CDO-conduits were financed by commercial paper and various notes.

The bursting of the housing bubbles in the United States (as reflected in a surge in defaults and foreclosures since mid-2006 in US, resulted in a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.  These financial losses have left many financial institutions with too little capital — too few assets compared with their debt (US financial firms lost over $1 trillion by Dec 2008). This problem is especially severe because households, corporations, and government took on so much debt during the bubble years (that debt cumulated to over 400% of US GDP in U.S. and about 450% of UK GDP).

Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs. (US and European banks have been raising capital of about $400 billion from oil-producing countries and China but there is still a large gap as banks continue to write-down bad loans).

Why did the U.S. Housing go bust in 2006-07?

The exact time when the home mortgage problems surfaced can now be pin-pointed as mid-2006 even though the housing problem was not fully acknowledged by the government and market players until almost summer of 2007.  By mid-2006, there is now enough evidence that housing prices began to decrease significantly and default rates increased in some states such as California, Arizona etc.
 
There are essentially five theoretical models or frameworks that are used by economists to explain credit booms and busts.  These are (1) changes in fundamentals over time; (2) irrational myopia as reflected in euphoric greed followed by fear or depressive panic; (3) implicit or explicit government subsidies and guarantees; (4) multiple equilibria or knife-edge problem; and (5) agency problems in assets management.  Each of these frameworks is used to analyze the current housing problems, which triggered a U.S. financial meltdown and impacted a global economic crisis.

The ‘fundamentals’ framework emphasizes that credit cycles depend on evolving news and asymmetric information.  Credit cycles reflect exogenous events which change rational expectations of future cash flows and risks among other things.   There was no exogenous shock that triggered a credit crisis in 2007.  There is no evidence that 9/11 attack on New York negatively impacted on credit for private investors and bankers continued to under-price risk and continue lending even larger amounts of money for mortgages during 2002-07.

Dramatic decreases in costs of transport, communication and information technology should have reduced spatial disparities in economic activities and moved us to a ‘global village.’  Yet, we find that in both industrial and developing countries, economic activities are concentrated in a few centers and there are regional disparities.  For example, about 15 percent of world population live in temperate zones but produce 50 percent of world GDP.  In United States, counties that take up 2 percent of the land area produce more than half of U.S. GDP.  Similarly, poverty is concentrated in a few pockets in many countries.  It was Krugman (1991) who deduced that agglomeration economies accrue at plant level and hence firms are located in a single area nearer to consumer demand in urban areas with large populations and minimal transport costs.  In other words, location of economic activity matters and a tiny (initial) difference may soon lead to a concentration of economic activity around a center and ultimately to a formation of industry cluster in the same space.   Agglomeration economies accrue at plant level, industry level or city and regional level.

The attached document is a consolidated summary of select papers from the Commission on Growth and Development.

Growth Strategies and Dynamics.

Introduction 

In classical economic theory, the consumer is assumed to be a rational decision maker who makes choices to maximize his utility given his budget constraints. The consumer is also assumed to make intertemporal choices about savings, education, work effort, career and health care, after weighing in the opportunity cost of his funds. The classical economic model is modeled on the basic economic principles that consumers are rational and that they are equipped with immutable logic to further their best interests. As a natural corollary, classical economic thought would predict that consumers would save for their retirement, take only loans that they can afford to repay regularly over their lifetime, and consume the quantity of goods and services that balances their intertemporal budget constraints.  

What then explains the apparently illogical behavior of consumers tossing coins into a slot machine without having any expectations of winning, or splurging their savings on holidays they can ill afford rather than saving for retirement, or even, successively refinancing their homes and indulging in conspicuous consumption while knowing fully well that either the unpredictable housing or labor markets makes repayment of debts very difficult? These decisions of consumers are not rational purchasing decisions and contrary to classical economic thought. This has led to an emerging field in economic thought and research, called neuroeconomics, that suggests that the interplay between the various centers of the brain play a part in the financial decisions that people make. 

 The Bottom Billion: Why the poorest countries are failing and what can be done about it? By Paul Collier. Oxford University Press, 2007
 
 The main thesis of the book is that globalization has been beneficial to a majority of the people in the developed and developing world, except for a large group of small countries in Africa, Caribbean ad Pacific countries, which comprise of a billion people (out of the total world population of about 6.5 billion). These billion people are being increasingly marginalized by globalization. For example, average per capita GDP growth of the economies of the bottom billion was 0.5% in 1970s, 0.4% in 1980s and negative 0.50% in 1990s. In comparison, per capita GDP growth in other developing countries increased from 2.5% in 1970s to 4% each in 1980s and 1990s. So there is big time divergence in income between the bottom billion and rest of the world population.