The Global Economic Crisis and the Future of Migration: Issues and Prospects

What will migration look like in 2045?

Bimal Ghosh

• Publisher: Palgrave Macmillan
• Year: 2012
• ISBN:
  9781137291301
• Topic: Économie
• Subtopic: Finances publiques

The reason for the depth the 2008's global depression lies in the intractability of modern economic systems. This has led to an emergence of unprecedented migratory patterns, the analysis and management of which is key to economic recovery.

Part I

The Economic Crisis and Migration

1

The Great Recession and Its Distinctive Features

How different is it from its predecessors?

“Man cannot bathe twice in the same water in a running stream” – is an old saying, attributed to Heraclitus, the Greek philosopher, dating back to 500 B.C. No matter who said this first; it holds sway. History is indeed like a running stream, as it has always been. If it repeats itself, it does not do so in exactly the same way; “at best it rhymes,” as Mark Twain put it. Since before the Great Depression, the world has seen several economic crises. But no two of them have been exactly alike. The recent recession is not an exception. History can nonetheless be useful in understanding the present, and keep us alive to the differences and similarities between current events and their predecessors. We can also learn from history how we can avoid some of the mistakes made in the past and not repeat them. As a recent report by the UK-based Chartered Financial Analyst Society tersely, even if somewhat hyperbolically, warned, “Financial amnesia disarms individuals, the market and the regulator. It causes risk to be mispriced, bubbles to develop and crises to break.”

How then does the present crisis differ from the Great Depression or from the more recent recessions?

A striking feature of the 2008–2009 downturn is the unprecedented speed and spread of its contagion effect, which flows from the nature of the current phase of economic globalization. It is markedly different from the economically shallow and geographically narrow pre-First World War globalization on the back of which the Great Depression took place and dominated the early 1930s.

During the earlier phase of globalization, the core of the global economy was still confined within a few countries, and their links extended mostly to colonial peripheries. Now, not only has the core economy itself become wider and diversified, but an increasing number of countries, both large and small, are actively engaged in the global economy. The group of seven most industrialized countries (G 7) is becoming over shadowed, though not completely dethroned, by the Group of 20, which now includes so many emerging economies from around the world, and accounts for nearly 90 per cent of the world GDP and 80 per cent of world trade. Emerging economies alone now represent more than one–third of the global output at market prices and may account for as much as half within the next several decades. Their sovereign funds have become a major source of global investment.

New groupings of countries such as the BRICs (Brazil, Russia, India, and China and, more recently South Africa), which hold 40 per cent of the world’s currency reserves and also account for about 45 per cent of world population and 25 per cent of global GDP, are seeking at least symbolically to throw their weight around. A string of other countries, including Indonesia, Turkey and Mexico, have become important players in the global economy. Developing countries as a whole now account for 38 per cent of world GDP at market exchange rates and about 54 per cent in terms of purchasing power parity. Their exports edged about half of the world total in 2010, compared to 27 per cent in 1990, and imports jumped to 47 per cent. They also attracted over half of all inflows of foreign direct investment worldwide (The Economist 2011a)¹ (further discussed in Chapter 7).

The spread and speed of the contagion effect of the crisis and the closely interwoven global economy

If the geographical scope of globalization has changed, so has the nature of economic integration, including the speed and intensity of cross border transactions, making the system closely interlocked. In the earlier phase of economic integration, a number of countries established economic links mainly through an expansion of primary exports and flows of foreign direct investment (FDI) in the primary sector; this included transport – steamships and railways – needed for trade in primary goods (Ghosh, 1999).² That economic landscape has now radically changed, with a complex web of production and supply links extending to manufacturing and services sectors, helped by rapid technological progress. Profound changes in communication and information technology have virtually abolished the distance in time and space, increasing tradability and facilitating immediate delivery of a wide range of services, including those in the financial sector.

Other developments such as the 24–hour opening of the global money market and rapid expansion of e-commerce have followed. Global data traffic nearly tripled in each year during 2008–2009 and is set to double annually over the next four years as more people are seeking mobile internet access via laptop and smart phones (2010e).³ Some five billion people are using mobile phones around the globe; even Africa, less integrated than other major regions, has 600 million mobile phone users – more than America or Europe.

Financial markets, in particular, have become closely integrated. The stock of foreign assets and liabilities relative to GDP has risen five times in the past 30 years in rich countries and twofold in emerging economies. At the same time, the speed and intensity of financial transactions have dramatically increased. Just before the present crisis, every 24 hours over 3 trillion US dollars were flowing across borders, and this figure has since been hovering around the US$ 4 trillion mark. Innovation of exotic financial products, including credit derivatives and mortgage-backed securities, helped in making the financial market incredibly agile and potentially volatile. Securitization of mortgage-backed debt led to a massive expansion of loans. While world GDP amounted to some 65 trillion dollars, the derivatives market, according to one estimate, had reached 600 trillion dollars. In terms of number of persons and intensity of movement, human mobility, too, was at a record high. Every minute at least 13 persons, on average, were crossing borders on the planet, not counting many more people – tourists, temporary service providers, and others – who normally are not considered migrants.

Internal economic integration has progressed in a large number of countries alongside the interpenetration of markets across countries. A complex web of linkages has thus made the world economy so densely interwoven that the malfunctioning of any small part of it can affect the system, sending shock waves almost everywhere.

Given this fast-moving and densely inter-woven economic landscape, it is no wonder that what had started as a sub-prime mortgage downturn in the housing market in the USA could so quickly move to its credit market and its banking system. Between 2000 and 2007, the average mortgage debt of US households rose from two-thirds of disposable income to more than 100 per cent. In Britain, households’ mortgage indebtedness increased from 83 per cent to 138 per cent; and debt binges, though smaller, took place in a number of other rich countries, including France, Italy, and Canada. The biggest build-up of debt was in the financial sector. In the eurozone, for example, total financial sector debt doubled from 1999 to EUR 20 trillion on the eve of the financial crisis – or, to put it differently, from 155 per cent to 222 per cent of the total annual income of the entire eurozone (Financial Times, 2011a2).⁴

The crisis then spread to manufacturing and soon thereafter to nearly all of the real economy, driving millions of people both homeless and jobless, along with a sharp fall in output, income, and trade. Within a short span of time, the downturn became one of the most severe global recessions in decades. In the last quarter of 2008 and first quarter of 2009, the rate of downturn in the advanced economies was similar to the GDP free-fall in the early stages of the Great Depression (Financial Times, 2011b).⁵ More recently, a study by Barry Eichengreen and Kevin H.O’Rourke found that global trade, industrial production and the stock market had all seen a steeper decline in 2008–2009 even as compared to 1929–1930 (Echengreen and O’Rourke, 2010).⁶

And this time the geographical spread became much wider. Not surprisingly, those who had imagined, or hoped, that the economic downturn would remain confined to advanced economies were soon proven wrong. Even some of the fastest growing countries like Brazil, China, and India witnessed declines in growth and faced some serious economic difficulties with ominous social consequences. As Robert Skidelsky put it, up until mid-2008 there was considerable Schadenfreude in emerging markets as they saw the giants of the world economy topple (Skidelski 2009).⁷ But after mid-2008, their confidence, too, started to fade. Sub-Saharan Africa, though least integrated with the global economy, was unable to escape from the contagion fallout, and the poor were among the hardest hit.

It is not just the changed economic landscape that makes the recent recession different from the Great Depression. An asymmetry in the sequence of events surrounding the two crises also made them different.

Although the Depression began with a tightening of monetary policy in 1928, accelerating the American stock market collapse in 1929, many of the international economic linkages established across nations during 1870 and 1913 had been already weakened or severed. The situation was worsened by a litany of protectionist measures that followed. This included, as already noted, restrictionist immigration policies – notably the US measures in the early 1920s – that were introduced during and after World War I (OECD, 2009).⁸ And it took some three years before the USA was ready to take any effective remedial action. As David Kennedy puts it, “down to the last weeks of 1930, Americans could plausibly assume that they were caught up in yet another of the routine business cycle downswings” (Kennedy, 1999).⁹

On 5 September 1929, economist Roger Babson, then a solitary and often disdained figure, reiterated his doomsday cry: “Sooner or later a crash is coming, and it may be terrific.” As the stock market showed its first signs of fragility, President Herbert Hoover, turned to Thomas W. Lamont, senior partner of J.P. Morgan & Co, for reassurance. Only five days before the market virtually imploded on Black Thursday, 24 October 1929, Lamont had sent his reply: “The future appears brilliant”(The New York Times, 2009h).¹⁰ From September 1930 to May 1933, Herbert Hoover continued with his half-hearted, and mostly laissez-faire, policy, while the US economy headed towards a GDP decline of 27 per cent and unemployment soared to 25 per cent. In September 1929 the hugely inflated Dow Jones index had peaked at 381; in 1932 it declined to 41.2, a drop of 90 per cent (Skidelsky 2009).¹¹ By 1931 the recession had already turned into a serious depression.

And when action finally came, it was mostly uncoordinated and local, not global. In his first inaugural speech President Roosevelt declared, “Our international trade relations, though vastly important, are in point of time and necessity secondary to the establishment of a sound national economy. I favor as a practical policy the putting of first things first” (The American Presidency Project, 1938).¹² And an adviser to President Roosevelt famously put it, “the crisis is global, but action must be local.” A breakdown of the international system was soon to follow. In the words of Charles Kindleberger (1973)¹³:

The world economic system was unstable unless some country stabilized it as Britain had done in the nineteenth century and up to 1913. In 1929, the British couldn’t, and the United States wouldn’t. When every country turned to protect its national private interest, the world public interest went down the drain, and with it the private interests of all.

By contrast, the recent recession did not start in an unduly protectionist environment, nor was it immediately accentuated by restrictive measures. If anything, market forces, especially in the financial sector, were in many ways allowed excessive freedom to run amok, sowing the seeds of backlash, breakdown of confidence, and economic meltdown. True, there were some ominous new signs of protectionism, but they gained further ground only after the recession had already set in. And, at least in policy rhetoric, though not necessarily in action, most nations remained committed to shunning protectionism. The emphasis, especially in Europe and the developing regions, was more on regulatory reforms to curb the market excesses and improved transparency.

There are important institutional differences too (IMF, 2009).¹⁴ For instance, in the absence of any deposit insurance schemes during the Great Depression, as people became concerned about the solvency of their banks, there were frantic runs on them; the deposit base of the banks was eroded. In the USA, four waves of such runs led to the failure of one-third of all banks, and the panic soon spread to other major economies – notably Austria and Germany. In the present crisis, this was largely prevented because of the existence of deposit insurance schemes. The erosion of liquidity and credit stemmed from...

Table of contents

• Cover
• Title
• Introduction
• Part I  The Economic Crisis and Migration
• Part II  The Future
• Part III  A New Opportunity
• Annex: Foreword by William Swing and Peter Sutherland, 2010
• Glossary
• References
• Index