Economic Downturn in the West Part I

In the autumn of 2008, the American investment bank Lehman Brothers was declared bankrupt, and a global downturn began. The large industrialized countries are still struggling with the effects of the most severe post-war economic downturn. However, several Asian, African and Latin American countries did surprisingly well during the crisis. New economic superpowers, such as China and India, are on the rise. This is about to have consequences for the economic balance of power in the world.

  • How are the balance of power in the world economy changing?
  • What does it mean that the dollar is considered the world’s reserve currency?
  • What are the implications of the dollar’s strong position for the United States and other countries?
  • Is the central role of the dollar threatened?

Now, in 2012, the great downturn is still lingering in most western industrialized countries. After signs of optimism and new growth towards the end of 2009 and at the beginning of 2010, the arrows began to point downwards again in 2011. The turmoil in the financial markets flared up again, and in the eurozone a serious sovereign debt crisis developed.

Based on historical experiences with banking and financial crises, it is not surprising that recovery has been slow and uneven. Periods prior to such banking crises are often characterized by the build-up of large financial imbalances, which take a long time to rectify. This may in particular involve the build-up of high private debt, but also deficits in the state budget and trade balance.

2: Asia came out well

In many western countries , the level of activity is still lower than it was at the beginning of 2008. Unemployment has remained at an unacceptably high level. Both in the United Kingdom and in the United States, unemployment is eight to nine percent. The eurozone has an unemployment rate of just over ten percent.

While the West is experiencing tough economic times, developments in the so-called emerging economies have been far more uplifting. This somewhat imprecise collective term is often used about a group of relatively poor countries, which in the last couple of decades have experienced strong economic growth. According to CAMPINGSHIP, a number of Asian countries, such as China and India, fall into this category.

Previous periods of recession in Europe and the USA have had major negative consequences for these countries – such as lower foreign trade and less investment capital from abroad. But this time they (especially Asia) did remarkably well. The crisis that came to the surface in the United States in 2008 did, however, have ripple effects almost all over the world. However, it did not take long for several Asian countries to return to their original growth path.

One important reason was probably that the countries had pursued a responsible fiscal and monetary policy in the years before the crisis occurred. Since they had saved up in good times, they thus had the opportunity to respond to the downturn with an active policy – spend more money on government crisis measures such as employment programs.

3: The downturn in the west reinforced a trend

The fact that emerging economies in Asia and Latin America have a higher growth rate than the industrialized countries is nothing new – this has been the case for a number of years (Africa’s growth is newer). The downturn in western countries has in many ways only intensified a shift in power that was already underway.

In 2010, China took over for Japan as the world’s second largest economy , measured by total value creation (GDP). Most people think that it is only a matter of time before China ranks first ahead of the United States on the list of the world’s largest economies. The downturn in Western countries, including the United States, will accelerate this change of throne . The British news magazine The Economist now estimates that China can overtake the United States already during 2018.

In many economic areas, China is already the largest in the world. They have the largest exports of goods, they consume more energy than any other country, they have the highest industrial production – just to name a few. Nowhere in the world are more cars now sold than in China. But it is also important to remember that China is still a relatively poor country, with large economic and social inequalities.

Economic Downturn in the West 1

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