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Cause and effect, Part I

Cause and effect, Part I

Nobel laureate Paul Krugman tells Ian Munroe about the origins of the financial crisis, and how its fallout will change the global economy, Part I.

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August 26, 2009 10:50 by



Have we seen the bottom yet, or do we have further to fall?

We certainly still have further to fall. Everybody talks about green shoots, favorable signs. But the only thing we have is some evidence that the pace of the decline is slowing, that things are getting worse more slowly. When we actually reach the point where things level off, nobody knows.

I wouldn’t be surprised if measures like industrial production do in fact level off later this year. But that’s not enough, that’s still leaving output failing to grow – it’s almost certainly going to mean unemployment in the major economies continuing to rise.

So we may hit a kind of plateau beyond which we don’t fall very much. But actual recovery, actual return to anything like full employment, full capacity utilization, I think is years away – two, three years if we’re lucky, quite possibly much longer than that.

Is everyone hurting equally? Who’s feeling the brunt of the slowdown?

There are two kinds of losses here. There are the financial losses, which fall more heavily on the wealthy than they do on the rest because they have more financial assets. But even there, substantial losses are also occurring in pension funds, things that affect people around the world. Then there’s the economic disruption, which I’m sorry to say, as always, falls most heavily on the weakest and the poorest.

If we’re looking at Western countries, unemployment is rising most sharply among the least-skilled, the lowest-paid. And if we’re looking worldwide, although the GDP numbers may be falling most in particularly troubled, advanced countries, the sheer human misery is concentrated in the poorest countries.

A lot of people will starve as a result of this crisis. Not many of those people will be in the West. They will be in less-developed parts of the world.

Will the developing world feel those effects later on?

It’s already happening now. If you look at the sharp fall in world trade and the disruption in world trade credit, you can see there are already extremely negative effects happening in parts of Africa. World trade has declined faster than it did during the Great Depression. For many poor countries, trade is literally what they need to survive. Hit with a decline in their ability to export – which is necessary to buy the essentials of life – they’re in terrible trouble.

How well has Barack Obama dealt with the crisis so far?

I’m giving him a ‘B.’ The fiscal policy has been fast. It looks like it’s going to be reasonably effective, but it’s not big enough. And the bank policy has been cautious – I think the word might be ‘diffident.’ They’ve shied away from taking any really strong measures to clean up the system.

So I support the general direction of the policies, but I’m disappointed in the lack of boldness.

And how well has the international community responded?

Some things have been good. The expansion of IMF funding is a good sign. In general, I think the IMF has done a good job compared with during the Asian crisis, for example. There have been some major disappointments, though. The inability of the European Union countries to settle on any cooperative economic policy, and in particular the failure to aid emerging Europe on a sufficient scale in this crisis has been a real disappointment.

There’s not a lot of international cooperation going on aside from the IMF funding, and that’s a shame because this really is a global crisis and there’s a lot to be said for cooperating in the response.

What should the Gulf states do to cope with the financial crisis?

They don’t have a lot of freedom of action. They need to engage in some austerity. They need to ride this through. Although oil prices have fallen a lot from those very high peaks in early 2008, they’re actually holding up surprisingly well in real terms.

The price of oil is substantially higher than it was early in this decade, despite the fact that the world economy is so deeply depressed right now. … This is not 1986; this is still a world of surprisingly robust demand for oil.

First published in Trends magazine.



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