Sunday, August 9, 2009

Why decline in global trade is faster than decline in global GDP?

The IMF projects a decline in international trade of as much as 12 percent in 2009 in comparison to 6 percent fall in 2008. It all started with bursting of housing and asset markets bubble, which is not particularly related to international trade. However, with a financial crisis in the US, the world economy went in a downward spin, contracting global trade. Why would global trade, which has been growing on average 11 percent since 1957 as opposed to 4 percent growth of global output, collapse all of a sudden and inflict so much harm to major exporters? The ratio of fall in trade to fall in GDP has been 4:1 Economists and analysts hunt for the reasons (published in Spring 2009 edition of International Economy):

Barry Eichengreen, UC, Berkeley

He argues that we really don’t have an adequate understanding of the causes of collapse in world trade. However, few factors can be singled out.

  1. The most important one is the disruption in global supply chain, i.e. something like a domino effect in the form of decreasing demand for goods from one country leads to decline in exports of final goods from another and further decline in demand for intermediate goods from another country and so on. The growth of global supply chains has magnified the impact of declining final demand on trade.
  2. Another reason might be the disruptions to the supply of credit from international banks to some developing countries and industries.

Fred Bergsten, PIIE

He offers solutions rather than reasons for why trade declined more than GDP.

  1. There should be new protectionist measures (G20 needs to honor this pledge). Competitive currency devaluation should be avoided.
  2. Policy needs to correct large global trade and current account imbalances.

Gary Hufbauer, PIIE

Two reasons why developing world trade collapsed: prices and volume

  1. Commodity prices have been volatile instead of being a shock absorber.
  2. Exports volume is down because most of the developing countries export consumer goods, which has contracted severely due to global recession. He argues, “Any country that sees its exports drop less than 7 percent in 2009 can count itself lucky.”

Ronald McKinnon, Stanford University

  1. Intensive trading of manufactures went down as people cut back on purchase of durables.
  2. The credit crisis limited financing associated with international trade.
  3. Forward exchange transacting became more difficult and expensive because of disruption in the foreign and domestic interbank markets. Traders found it difficult to hedge themselves from currency fluctuations.

Jagdish Bhagwati, Columbia University

  1. He argues that drying up of financial credit is the main reason for decline in global trade. Btw, he refers to Naomi Klein as “a fount of many economic fallacies.”

Richard Erb, University of Montana

  1. The decline in tradeables generally decline more rapidly than the demand for services during a recession.
  2. The finanical crisis intensified this process.

Steve Hanke, Johns Hopkins University

  1. World trade is elastic with respect to global GDP. So, when global GDP slumps, we should expect an outsized plunge in world trade. And, the panic of 2008 has intensified this process.

Marina Whitman, University of Michigan

  1. It is because of a severe pull-back in financing added to—and interacting with—the global recession. Almost 90 percent of merchandise trade is dependent on trade finance.
  2. Intra-firm trade slows down more than GDP during financial crisis of this kind because this kind of trading activity is hinged on financing.
  3. Protectionist measures have so far had far less impact on the decline of trade than the other factors.

William Brock, Former US Trade Representative

  1. Recession led to less money available for investment, less capital to finance new technologies and greater production domestically, and less financing for exports or imports.
  2. He argues that a large part of the answer lies in the habit of making things worse (politically by engaging in protectionist measures) when times are tough.

Tadashi Nakamae, Nakamae International Economic Research

  1. There are multiple transactions involved in completion of a final good. When demand for that good falls, then the whole chain of transactions collapses, thus reducing world trade drastically. i.e. the fall in global trade is greater than the fall in global GDP.
  2. World trade is collapsing because American consumers are not spending, spreading large ripples across the globe.

Sylvia Ostry, University of Toronto

  1. We really don’t know what caused this because we have a new trading system and no data that tracks multiple trading of the same goods across borders.
  2. It also could be a widespread recession, a shortage of trade finance, and a rise in protectionism (although Bhagwati argues that there is no evidence that protectionist moves/threats so far have had any dent on trade flows).

Bernard Connolly, Connolly Global Macro Advisers

While there is no direct evidence that protectionist measures are the main cause, Conolloy argues that “protectionist measures, overt or covert, were one.”

  1. Reduced trade finance was another reason.
  2. Misallocation of resources and brining forward future spending.

Andrew Szamossezgi, Capital Trade

  1. Decline in manufacturing output has exceeded the decline in global GDP.
  2. Trade has suffered due to lowering of inventories and an effort to conserve cash.
  3. Disruption in global credit markets has restricted flows of credit needed to support trade.
  4. Commodity prices are falling and inventories of such items are piling up in ports.

Clayton Yeutter, Hogan & Hartson

  1. Decline in demand globally and businesses focusing more on domestic markets.
  2. Credit crunch hit trade financing.
  3. Risk, uncertainty and rising volatility (exchange rate) pulled back commerce.
  4. Protectionist measures in stimulus packages shrunk trade.

Norbert Walter, Deutsche Bank Group

  1. The current economic crisis is hitting countries all over at the same time, magnifying the decline in trade.
  2. Destocking of commodities, which were stocked heavily when prices went up in 2007 and 2008, created massive downturn in trade.
  3. The fall of Lehman Brothers brought money markets and the markets for short-term corporate credit to standstill.

Nicolas Veron, Bruegel

  1. Trade shock is a direct consequence of the events that wrecked the financial system because finance and trade are so deeply interdependent that it is impossible to consider one without the other.

William Caldwell, Advanced Cell Technology

  1. International production sharing or the internationalization of manufacturing supply chains is a major part of the story. When demand for a product shrinks, the multiple trade flows are terminated; not just the final trade flow.

Barcamp Kathmandu 2009

On Saturday morning, I gave a live presentation at the first-ever Barcamp (@barcampktm) organized in Kathmandu. I am totally enthralled by the enthusiasm of the organizers (Shankar and his friends) and most importantly the active participants, lively ( and critical) discussion sessions, the wide range of topics covered in the sessions, and overall management of the whole event. Congratulations to every one who participated, organized and sponsored BarCamp Kathmandu 2009. Thanks to Shankar for excellent correspondence and coordination.

What amazed me was the way the participants were using Twitter (and Facebook) to update, in real time, about the sessions that were in progress. It was simply awesome! Here is a rundown of the sessions during the BCKTM09. Information about my session is available here.

Thanks to Shishir, I was able to share my desktop PowerPoint presentation in real time with the audience in Nepal. The voice quality was also good (at least on my side). In short, I spoke about how to bring about change by digging in the most relevant development challenges/issues in one’s area of concern; identifying the most pressing ones (on the assumption that we cannot solve all the problems at the same time-- piecemeal and calculative approach); eliciting potential solutions; and letting it be heard in the public (through blogs, newspapers, other media, discussion forms, and also grassroots civil activism) loud and clear so that policymaking is positively influenced going roundabout the corrupt bureaucracy, which necessarily should not be a binding constraint on positive change. I also responded to questions raised by the participants. As far as I remember, Bibek, Vinya, and Jenny asked very good, perfectly valid and stimulating questions. I hope I responded appropriately :)

Here is how Ujjwol, who led a very popular session (judgment based on tweets about his session) about Sanskrit language, describes my presentation:

Dig in and let it be heard! : Once the BarCamp was officially started, the first session was Dig in and let it be heard! by Chandan Sapkota. He was conducting the session from the United States, and once the technical glitches were fixed he started his session. In this session, he talked about policymakers in Nepal, prioritizing issues, how to dig in into a problem and solution, and knowing about them using various media. As he said, one work of digging in as example could be taking an policy which has appeared in media as news and start to dig into it, know more about and after the estimated time try to see how has that been implemented and write on what and what has the implementation been done and publish in blog, newspapers and other medias. He discussed on ways to get involved in the current development debates and on how to influence policymaking. And on the getting published to large Medias like Newspaper was what people discussed more, they shared bitter experience of articles not getting published. And on that note, he share his experience of getting article publish into the newspaper which he had face years ago. He said in most of the cases the articles are just rejected but we should always send them so that they will once at take time to read and after one day they will publish and once your article is published for the first time than your next article has a more probability. Finally on this session, the session was itself fruitful for me and others as well, after this I am willing to dig in and let it be heard by writing on my blog and newspapers.

There are not much blog posts about the BarCamp yet. I hope other participants will weigh in soon. Here is Geshan writing about the event. On a side note, I am very surprised that only one newspaper covered the event the next day (alas, the reporter missed the main point of a BarCamp and even forgot to mention the name--if it is not the reporter’s fault, then it is the editor or copyeditor at the news desk who mistakenly thought that the name and scope of the event do not matter!). I can’t figure out why editors trivialize these kind of crucial events that are wholly organized by youths and eager minds. I think covering the event would have been more fruitful than covering mundane street protests and political quibble! We need to give space to ‘agents of change’ instead of ‘agents of disruption’. Anyway, the quality and output of the event should matter more than an editor’s biases. In all respects, the event was successful.

I hope more of such events are organized in the coming days.