The Impact of Global Recession Over our

Economy Next year

A Term Paper Submitted in

Partial Fulfillment of the Requirements for the Course
Foreign Exchange Dealing and International Banking

MD. ASHIQUR RAHMAN

ID# 50712062

EMBA Program
Department of Banking
UNIVERSITY OF DHAKA
 January 2009
The "financial tsunami" originating in the United States has plunged the world
economy into its worst crisis since the great depression of the 1930s. What started as a
sub prime mortgage crisis in the USA has now gone global. The damage to economic
growth, incomes and jobs is already being felt sharply in every corner of the world.
The crisis has created a downward spiral of loss of confidence and trust on the free
market system.

In this backdrop, the three challenges to be addressed are: the current financial crisis
and its impact on the real economy, the emerging role of Asia, and the possible niches
for countries such as Bangladesh.

It has been disseminated that globalization has the potential to benefit all people, not
just a fortunate few and it can provide a conduit to a better life, and deliverance from
poverty and despair. Regrettably, the reality of the international system today does not
match the rhetoric.

The global rules are negotiated by a select few, with too much protection for special
interests, underpinned by too many broken promises. Weakly regulated financial
markets have become prey to the self-serving actions of a limited few. And, the lives
and livelihoods of hundreds of millions around the globe are adversely affected.

Consequently, the real economy has received a tremendous systemic shock. The
credit crunch has hit both manufacturers and consumers. Businesses can no longer
rely on the so-called sophisticated financial instruments. Reduced spending by
consumers will depress demand and create a vicious cycle in which manufacturers cut
back even further, with consequent job cuts.

International cooperation on a global scale is essential to build a consensus on what

needs to be done to reduce the potential depth and duration of the global slowdown
and to ensure coherence among national policy responses. Many countries have taken
unprecedented steps to address this problem; the successes will remain to be seen. The
vast sums of liquidity pumped into the banking system have not found their way into

Impact of global recession over our economy next year 2

the real economy. It would appear that any funds the banks now receive are used to
increase the reserve margins. In contrast, what is now essential is for banks to restore
confidence by extending credit to consumers and to businesses, which was exactly the
point of the government intervention in the first place.

For any consensus, a vital element for countries will be to resist any temptation to
isolate themselves from the global crisis through protectionist measures to restrict
imports. Parallels are being drawn between the crisis of today and the Great
Depression-the last crisis of comparable proportions. Almost 80 years ago, many
nations reacted to the Great Depression by raising border tariffs and ended up making
matters worse-for themselves included. Beggar-my-neighbour protectionism ended up
beggaring everyone. That is one of the most unambiguous lessons of the 1930s.

Perhaps this crisis will also lead to modification of global economic power structures.
What will be Asia's role in the changing global financial landscape? Asia with its
huge markets will clearly have a role in this changing global financial landscape and
should not be a passive bystander. It should project its influence on any initiative to
give shape to a new global financial architecture. They have skilled, cost-effective
labour. And, they are quick in acquiring and developing technology and the know-
how that is required to compete in a globalized world. In the financial world, their
reserves built on oil revenues or export earnings, estimated at over US$ 3 trillion plus,
have created a new player on the global stage: Sovereign Wealth Funds. These funds
are eagerly sought by investors, and quiet deals are being made. This gives them a
potential that they must exploit for the good of humankind.

The G-20 Summit in Washington on November 15 agreed on certain key issues

including reform of international financial institutions ( IMF and World Bank),
agreement for a successful free-trade deal before the year ends, improvements to
financial market transparency and ensuring complete and accurate disclosure by firms
of their financial conditions, preventing excessive risk taking by the banks and
financial institutions, finance ministers to draw-up a list of financial institutions
whose collapse would endanger the global economic system and strengthening

Impact of global recession over our economy next year 3

countries' financial regulatory regimes and taking a "fresh look" at rules that govern
markets manipulations and fraud.

The questions of reforming the Bretton Woods Institutions have now come up. One
may wonder about the effectiveness and necessity of such institutions in the wake of
the financial crisis. During the debt crisis of 1980s and 1990s it became amply clear
that there was something deeply wrong with the architecture of the IMF's facility
regime. The East Asian states also remember what they consider a 'hostile' role the
IMF played in 1997 financial crisis. Instead of bailing them out under its $95 billion
loan package, what the IMF did was to bail out their western lenders. The IMF itself
had at that time "become a part of the problem rather than part of the solution." Since
the west was not affected by the Fund's way of fixing an economy, it did not feel the
need for seriously looking into its functioning and improving its governance in the
light of complaints, nor took measures to change its methods. Now that it is the west
itself which is at the centre of the storm, it is showing urgency not only in reforming
the IMF but also in strengthening the Fund itself instead of reviewing the necessity of
such an institution!!

However, for all the talks of actions and changes, some analysts and campaigners said
the outcome was disappointing. The immediate impact of the outcome of the Summit
has not been encouraging as has been evident from the downslide in stock market all
over the world as well as Japan joining the countries facing recession. It is predicted
that the US economy will be in recession beyond 2009.

Bangladesh and other vulnerable economies must cautiously watch the impact of
actions taken and to be taken by the world leaders representing 85 per cent of the
world economy to restore the global growth. These countries should also take
appropriate actions in time to face the consequences of the fall out.

If there is a silver lining to the current crisis, it may be that it is delivering a painful
message that governments must develop more effective ways of governing an
interdependent world in order to maximize the good effects of globalization and
minimize the bad ones. The global economy is in increasing need of better

Impact of global recession over our economy next year 4

governance and that implies deeper and wider cooperation between nation states than
they have shown themselves capable of to date. The global financial turmoil due to
the collapse of big financial corporate houses has proven the lack of good governance
and transparency, which the developed economies have so long been preaching for
adoption by the developing economies.

However, for smaller countries, such as Bangladesh, challenges from a protracted

global recession may be serious. Many have opened up their economies to a
remarkable degree, and will face all the consequences that are associated with this.
Where exports were important, there will be reduced export earnings; where workers'
remittance was important, there will be declines; where FDI or foreign investment
was important, foreign investors may seek to take their funds out or demand
extraordinarily high returns.

Impact of global recession over our economy next year 5

The world economy is currently passing through yet another phase of recession.
Though there is sharp difference of opinion as regards the beginning of the
recession, its depth and severity, contributing factors, and projections about its
end, most analysts agree that the recession has by now crossed the critical
threshold of eleven months which has been the average period of longevity for
the six major post-war recessions. In the beginning it was hard for many to accept
that there was at all a downturn in the global economy - after all following the
last global recession of the early 1990s the world economy has been performing
rather well for almost a decade and, as a matter of fact, has attained its highest
growth rate for over a decade in the year 2000. However, the world economy
started to experience a sharp downturn in the last quarter of 2000 which
subsequently continued, sustained and deepened in 2001.

Some experts were hoping that there would be an upturn in the global economy by the
beginning of the last quarter of 2001. This, however, was shattered by the
September 11 terrorist attacks in the USA. US growth forecast by the IMF for
2002 has now been revised from 2.2% to a lowly 0.7%. The projections of
growth of the world economy for 2002 was cut back from 2.4% to 1.5%. It is to
be noted here that such a low growth rate would make 2002 the second
consecutive year when economic growth would fail to keep pace with the
expansion of the world population. An obvious consequence of this is that the
world per capita GDP would continue to remain static in 2002. OECD growth
forecast for 2002 for the 30 member countries, at 1%, is the most gloomy since
1982. Investments have come down significantly and OECD manufacturing
production index has already declined by 2%.

Impact of global recession over our economy next year 6

The recession in the global economy could not but have severe negative implications
for the world trade, a consequence which have had important consequences for
Bangladesh’s export sector performance in recent months. World trade, which
registered a robust growth of 12.5% in 2000, began to slow down in tandem as
recession strengthened its grip on the economies of the major trading blocs and
countries. Overall growth rate of world trade in 2001 was a paltry 0.8% and
though the UN forecast for 2002 is somewhat higher, at 3%, it is still far off the
trend line. Following the September 11 attacks the growth in world trade during
the last quarter was almost zero. The combined impact of the recession and the
September 11 terrorist attack on the US economy which is the singlemost
important export destination of Bangladesh, has been specially severe. The US
economy is expected to grow by only 0.7% in 2002; nationally the
unemployment rate was 5.8% in December 2001; more than 1.2 million jobs
were lost because of the recession. Total unemployment figure in USA has
reached 7.0 million and it is to be noted that this exclude millions of workers who
lost part time jobs. The state of the economy obviously had a dampening impact
on consumer confidence - consumer expenditure index in the USA is down by
1.8%, the fastest drop since the late 1980s and all time low since the early 1990s.
A report prepared by the WTO projects that the strong slowdown in consumer
demand in Western Europe will continue in 2002. Evidence suggests that the
current stagnation in imports to the US have deepened further during the fourth
quarter of 2001 (October-December, 2001).

As was mentioned earlier, the recession which was officially recognized to have
started in March 2001, has now been there for almost 11 months, the average period
of post-World War II recession. If the downturn continues in the coming months, the
recession is likely to get more severe, with attendant negative consequences and
implications for exports of countries such as Bangladesh.

As is well known, Bangladesh economy has passed through a heightened pace of

global integration in the 1990s. The degree of openness of the Bangladesh economy is
now higher than most of the LDCs and many developing countries – exports and
imports of goods and services currently account for about a-third of the country’s

Impact of global recession over our economy next year 7

GDP. Thus, by definition, the state of the global economy is likely to have a stronger
impact on the Bangladesh economy now than at any time in the past. The impact of
the state of the global economy would continue to be increasingly felt in terms of the
country’s macroeconomic performance, GDP growth rate, external sector
performance, foreign exchange reserves, and health of the financial institutions. This
is perhaps one of the most important legacies that the Bangladesh economy has
inherited through its developmental practice and reforms of the 1990s.

It is now widely recognized that, as far as developing countries and LDCs such as
Bangladesh are concerned, global integration has both its opportunities and risks.
Policy makers, therefore, can not afford to ignore this new reality in the governance of
the country, both in terms of preparedness to address the attendant risks, and taking
initiatives to access the emerging opportunities. As global experience shows,
increased global integration does not necessarily mean strengthened global
integration and it is in times of recessions such as the current one that this dichotomy
exposes the inherent challenges for a globalising developing economy such as ours. It
also perhaps provides an opportunity to take on, with due urgency, the task of
designing the short and medium to long-term policy initiatives and reforms to address
the attendant risk factors in order to make globalisation work for the economy and the
people of the country.

As is known, Bangladesh’s export sector registered double-digit real growth rate

throughout the 1990s. As a matter of fact, real export sector growth rate was almost
three times the real GDP growth rate during this period. Even during FY 1990 and FY
1991, a period which coincided with the last major global recession, Bangladesh’s
export sector posted robust growth rates of 17.9% and 12.7% respectively. The
structure of export was different, though, at the time. Raw jute, jute goods and leather
were some of the major export commodities in the early 1990s, their combined share
being equal to the share of RMG in total exports of Bangladesh. A relatively
diversified base and market provided some sort of a cushion against sudden
fluctuations of the global market. As was mentioned, the context of the current
recession contrasts significantly when compared to the period of the earlier recession.
Bangladesh economy at present is more globally integrated than at any time in the

Impact of global recession over our economy next year 8

past. At the same time the export base has also become increasingly concentrated,
both market wise and product wise – for example, share of RMG export is now about
eight times high compared to the combined contribution of abovementioned three
products; markets have also become more concentrated with the USA and EU
accounting for about four-fifths of Bangladesh’s total exports. Bangladesh does not
have a captive market; she has to compete in an increasingly competitive global
environment. On the other hand, as was pointed out in a recent study conducted by the
CPD, Bangladesh’s exports are, in general, more income elastic, rather than price
elastic. This would mean that exports remain highly susceptible to fluctuations in the
income levels in the major developed market economies. Consequently, any recession
is likely to have, and in future will continue to have, increasingly negative
consequence for Bangladesh’s export sector.

Thus, the current deceleration experienced by Bangladesh’s export sector needs to be

seen in the context of the ongoing recession. For the first time in recent history, over
the past few months export sector of Bangladesh has been consistently posting a
negative growth rate. Export earnings during the first five months of the current
FY2002 (July-November, 2002) have come down by about 11% compared to the
matched period of FY 2001. Between January-October 2001, a period which
coincides with the current global recession, Bangladesh’s export earning was $5089
million, down from the $5236 million registered during January-October, 2000, a fall
of almost $180 million. What is of interest to note here is that during January-July
period, export was still somewhat higher in 2001 ($3084 million) compared to 2000
($3007); export sector was feeling the burden of the emerging pressure emanating
from the onslaught of recession, but continued to show some resilience. However,
with the deepening of global recession there was significant deceleration during the
next four months – exports during July-October, 2001 was only $2005 million, down
from $2230 million registered over the corresponding period of 2000. Exports of all
major items suffered a setback: woven and knit-RMG, principal exports of the
country, posted growth rates of –9.5% and –3.3% respectively; exports of shrimp
came down by 32.8%. What is also of interest to note here is that if the growth rate of
–10.06% during the first four months is decomposed, it is seen that most of it
originated from a decline in the volume of export (-9.74%), rather than fall in unit

Impact of global recession over our economy next year 9

price of export (-0.32%), underscoring the importance of the income effect in the
deceleration of the export earnings. It is to be noted here that L/C opening figures for
imports of fabrics under b/b L/Cs during July-November, 2001 is also showing a
negative growth of - 5.5%. This would indicate a fall in export orders which would
mature during the first quarter of 2002 with consequent expected fall in earnings from
export of RMG over the corresponding period.

As was mentioned earlier, the forecast for the growth of world trade in 2002 is rather
bleak and obviously Bangladesh is not the only country whose export sector has
suffered a setback. Pakistan had to revise downward by about 10% its export target of
$10.1 bln for 2002; India’s export of some of the major items in FY 2002 (April-
October) is also showing negative growth trends. Consequently, India’s growth
projection for the current year was scaled down from 6.4% to 5.2%; China, which
registered a significantly high export growth rate of 29.8% in 2000 was able to attain
only a 3% growth in 2001.

Increasing product and market concentration, weak domestic linkage of export-

oriented industries and shallow domestic market of goods that are exported make
Bangladesh’s export sector specially vulnerable to external shocks. Recent global
initiatives such as USTDA 2000 and special preferential treatment accorded by EU
and USA to Pakistan are in all likelihood having adverse impact on Bangladesh’s
exports and accentuating the negative consequences of the ongoing recession. The
recently introduced initiative of EU’s everything but arms initiative providing LDCs
zero-quota zero-tariff access to EU market is not expected to benefit Bangladesh
much either – a recent study conducted by the Commonwealth Secretariat showed that
from a static perspective, Bangladesh’s gain is expected to be very negligible, about
$8.0 million. Bangladesh, however, stands to gain substantively if such a treatment
was accorded globally in which case the gains for Bangladesh are estimated to be
$1200 million annually. However, as is known, the recently held fourth WTO
Ministerial Meeting in Doha failed to come up with such an initiative.

Thus, there is hardly any cushion available to Bangladesh to mitigate the adverse
impact of the ongoing recession. The purpose of this write up, however, is not to

Impact of global recession over our economy next year 10

come up with policy suggestions for addressing the current debacle. This would call
for a separate and serious professional exercise. As a matter of fact, a number of areas
requiring policy interventions towards raising the competitiveness of domestic export-
oriented sector and enhancing trade related capacity building have already been
identified and put on the table. The task now is to seriously get on with the business of
implementing the agendas. The upshot of the above discussion is to reemphasise that
in the coming months and years Bangladesh’s increasingly globalised economy will,
of necessity, have to be adequately prepared to face the consequences of the
fluctuating fortunes of the global economy. The current debacle suffered by
Bangladesh’s export sector should transmit appropriate signals to the country’s policy
makers to the effect that it is only from strengthened global integration that
Bangladesh stands to benefit in the context of her increasingly globalised economy;
failing this, the price to be paid will rise in direct proportion to the degree of the
country’s lack of preparedness. The ongoing global recession should thus serve
Bangladesh both as a wake-up call, and as an warning bell.

Impact of global recession over our economy next year 11