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LOOKING AHEAD

July 02, 2009 (the date of publication in Russian)

Maxim Kalashnikov

THE GREAT BIG "U"

Nuriel Rubini, prophet of the crisis, warns against hopes for a quick recovery

A PESSIMIST IS A WELL INFORMED OPTIMIST

The "bottom" of the global recession is still distant, says economist Nuriel Rubini, whose prognosis of current global recession was once perceived with skepticism. The current forecasts of Mr. Rubini, Professor of New York University's Business School, are not inspiring. He believes that the global financial crisis is going to remain a major factor of big policy for a long time ahead.

According to Rubini's assessment, the global economy is only in the middle of the declining curve. Growth in the current year is excluded, he says. Rubini estimates reduction of international trade in 12% due to the banking crisis and excessive industrial facilities. While a number of economists irradiate optimism, pointing at the mitigation of decline in the second quarter of the year, Rubini insists that the recession will deepen, following a lengthy and ruthless U-form trajectory. The last-year "consensual" judgment of a V-form crisis wave is to be forgotten. In Europe and Japan, the economic situation is continuing to deteriorate, and therefore, the bottom is still distant. Active anti-crisis measures are currently undertaken only in the United States and China, and they suggest that the US economy may start recovering before the EU and Japan. Though the decline is mitigated, it is going to last during the whole of the current year.

In case the recovery starts in 2010, it is going to be lengthy and sluggish, due to huge losses of the banking sector and a huge burden of the heavily indebted households in states with a balance of payments deficit. Consumer demand is therefore going to recover slowly, and only with assistance from the state.

The average decline of economic activity is going to reach 1.9%. The most severe decline is expected in the so-called advanced economies, exceeding 4% in the EU and Japan. The recession is going to continue in the United States as well.

In the so-called emerging economies, particularly in BRIC states, growth will be twice smaller than in 2008, says Rubini. Brazil is going to be gripped with the decline encompassing the whole of Ibero-America where the dynamic is going to be negative, though in 2008, the subcontinent displayed a 4.1% surplus. The most significant decline is expected in Argentina, Brazil, and Chile.

East European economies, as well as "states of the Soviet sphere", are going to demonstrate a twice greater decline than Russia: the minus 5% figure should be doubled, for instance, in the Baltic States.

Reduction of exports is going to seriously affect Asian economies. While China and India will still demonstrate positive dynamics (respectively 5.5% and 4.3%), the "young tigers" like Singapore, Taiwan, South Korea, as well as Thailand and Malaysia, will enter a period of decline. Oil exporting countries of the Middle East and Africa are also likely to contract, Israel and South Africa affected least of all.

Unprecedented measures of fiscal stimulation and direct state investments are expected to prevent an L-form development of the global crisis. However, the increase of foreign debt is going to seriously affect developing nations, as well as Eastern Europe. In industrial nations, the 2010 figures of unemployment will be twice larger than in 2008, and this factor endangers banks, as those who will lose jobs won't be able to pay earlier liabilities. At the same time, unemployment in the West is going to trigger poverty in developing nations, with high risks of social and political destabilization.

According to Rubini's assessment, the average price of WTI oil in 2009 is not going to exceed $40 per barrel.

It is noteworthy that the renowned economist does not foresee the "Californian default" in the United States, predicted by many Russian authors. At the same time, Rubini expects a serious decline in Russia, due to low productivity of labor, demographic deterioration, difficulties of reforming the oil export-oriented economy. The excessive industrial potential of gas sector and industry, inherited from the USSR, are used up, Rubini says. Today, Russia will need new fixed capital, and this task is problematic. In addition, difficulty of borrowing and decline of real income serve as serious obstacles for recovery.

 

THE FIRST GLEAM OF ANTI-MONETARISM IN THE WEST

Rubini's forecast of increasing unemployment is confirmed with latest US statistics. For the first time since 1993, the percentage of unemployed has exceeded 10% of the working population. According to the Department of Labor, the direst situation is in the former auto-producing state of Michigan where unemployment reaches 14.1%.

On the Western coast, the loss of jobs is most remarkable in the semi-defaulted California, comprising 11.5%, and in Nevada, reaching 11.3%. North Carolina, Oregon, Rhode Island, South Carolina, Florida, and Georgia also display highest indices of unemployment since 1976.

Thus, the recession in the United States is really deepening, and even more severely than Nuriel Rubini has predicted.

On this background, Forbes Magazine has undertaken a peculiar move, admitting in a small analytical report that the "anti-crisis" recipe proscribed by the IMF to various countries in 1990s, were good for nothing: in fact, Europe and the United States are acting to the contrary today.

The article, entitled Congress' Chance to Change The IMF", was written by two economists who don't belong to the analytical beau monde: Peter Bujari is the executive director of Human Development Trust, while Joanne Carter chairs the anti-poverty board of RESULTS law firm. The argumentation, presented by the authors in the top mainstream magazine, strikingly reminds violent anti-monetarist rhetoric in Russian patriotic press of the 1990s.

The two authors remind that the IMF has once issued loans, demanding that acceptors sharply reduce state expenses. The outcome is an overall degeneration of state management, along with deterioration of health care and education. Though the IMF is now distancing itself from its own past, its conditionalities haven't significantly changed. In Pakistan, the authorities were forced, under IMF pressure, to raise taxes and bank interests, choking the small and medium business and sharply increasing social stratification – exactly like in Russia in early 1990s. In Latvia, the IMF forced the government to slash 40% of budget expenses, endangering viability of all the social services.

Just imagine that the same is done in the United States: the country would be able neither to create new jobs, nor to boost economy, nor to assist the affected banks. That would be a collapse. In fact, Obama's plan directly contradicts to the IMF's monetarist scheme, the authors remind. Moreover, all the G-20 nations perform contrary to IMF conditionalities, though pumping lots of money into the same IMF. Thus, the US Congress, as the main shareholder of the IMF, has to change its policy through revision of legislation.

What does that mean? Are we witnessing "the first portent" of official anathema to monetarist policies in the heart of the system where they had emerged from? It's quite possible – as the recession is deepening, and we are perfectly aware of the character of implications this development is likely to trigger in ideology and polity.


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