The historic credit rating downgrade of the US last week is dramatic, sending a shock through global financial markets, but still only symptomatic of a deeper problem. The world economy is still struggling to find sources of growth to replace the merely debt- and speculation-driven growth of the 1990s and early 2000s. The US downgrade is at the same time significant for highlighting the unravelling sovereign debt crisis which is the next financial flashpoint for the world economy.
Impact on PH
The US downgrade is meaningful not yet for any immediate impact but for possibly marking the start of another severe economic slowdown or new stage of recession in the US. A worsening of the US economic situation will quickly impact on the Philippines in terms of weaker remittances, lower exports, and more problematic investments. For instance, it may be recalled that remittances from the US fell by some 6.4% or US$502 million in 2009– from US$7.83 billion in 2008 to US$7.32 billion in 2009. This only weakly recovered to US$7.86 billion in 2010.
The problem with the US credit downgrade is not just in immediate financial terms of the impact on interest rates, the foreign exchange rate, Philippine debt and the stock market. The problem rather is that it shows how deep are the long-term problems of the US and the other big advanced capitalist powers. They are all facing slowing growth due to public debt troubles, austerity, high unemployment and the lack of productive domestic investment opportunities. Other economies such as the so-called BRICS and even the Philippines have roughly the same problem and every country is looking for sustainable sources of growth.
The government’s Philippine Development Plan (PDP) 2011-2016 and national government (NG) budget for 2012 however seem oblivious to this and assume a world economic situation that is long past. They are anchored on an export-oriented and foreign-investment led model that is no longer viable.
Slow global growth, debt woes
A semblance of stability and recovery was manufactured in the last two years only because of massive fiscal and monetary stimulus especially by the big economic powers. This total value of this stimulus reaches US$10.8 trillion if we count all new financial support measures including bailouts, public loans and guarantees, public assumption of private sector debt and other liabilities, and nationalization of private capital – this is equivalent to almost a fifth of global gross domestic product (GDP). The US’s two rounds of ‘quantitative easing’ for instance totalled US$2.3 trillion.
The benefits however are clearly short-lived. The global economy is slowing again as of mid-2011 with world economic growth projected by the International Monetary Fund (IMF) to be just 4.3% in 2011 from 5.1% last year.
The slowdown is also not just in the advanced capitalist economies but also in the supposed alternative growth centers – China’s growth is projected to fall from 10.3% in 2010 to 9.6% in 2011, India’s from 10.4% to 8.2%, and Brazil’s from 7.5% to 4.1%; only Russia, which is less than one-fourth the size of China, is seen to grow slightly from 4.0% to 4.8% next year. These countries are still dependent on the major capitalist centers for a large part of their demand, exports and investments aside from also having their own internal economic troubles.
Indeed, the short-lived benefits have created new fiscal and financial sector imbalances. Sovereign debt problems are particularly marked with advanced capitalist countries facing huge burdens that are leading to greater austerity and further depression of growth. The IMF estimates that US gross public debt is going to reach US$15.2 trillion or 99.5% of GDP in 2011. Other important economies have even bigger projected debt burdens in 2011 including Japan (229.1% of GDP), Greece (152.3%), Italy (120.3%) and Ireland (114.1%). For others it is relatively smaller but still considerable: France (87.6%), United Kingdom (83.0%), Germany (80.1%) and Spain (63.9%).
Growth remains not just imbalanced but weak around the world. Economic activity is slowing and the risks are if anything increasing as the US downgrade, to take a particular instance, shows. The situation is still very fragile despite repeated claims in the last two years of the world having dealt with the crisis and now slowly, if unevenly, recovering.
The biggest dampener on growth is the persistently high global unemployment and persistently weak productive investment (i.e., non-financial). At the same time, mounting sovereign debt troubles means fiscal austerity which further dampens demand especially in the US, Europe and Japan. This also makes the political situation in these countries volatile. The clash in early August between the Republican and Democratic parties on the US debt ceiling is only just one example, and is even less explosive than the upsurge of protests by citizens across Europe, the Middle East and North Africa.
All is not well for the world economy and this is the single most important economic feature in the current world situation. The sooner the Philippines’ economic directions are focused on building the domestic economy the better. Job creation and poverty reduction will not happen if the same failed globalization policies of previous administrations are retained. There must instead be more democratic income, asset and wealth reform and greater assertions of economic sovereignty in the country’s international trade and investment relations.
(Sonny Africa is the research head of IBON Foundation is a research-education-information and advocacy organization set up in 1978. IBON is a non-stock non-profit development institution committed to serve marginalized sectors.)