Economic Performance after the 2008 Crisis
(a)Growth in per capita income: The growth of per capita income has declined after the financial crash of 2008. The average growth rate during the period 2011–2016 is lower for all income groups and regions except for the low-income group (Table 1).
This is also mostly true for the 19 member countries of the G20. The average growth rate of the more developed countries has declined from 1.5% during 2001–2007 to 0.9% during 2011–2016. The average growth rate for the less developed members of the G20 has similarly declined from 4.4% during 2001–2007 to 2.7% during 2011–2016 (Table 2). For only three countries, India, Indonesia and Italy, can the recovery be considered complete. For these three countries, the growth rate in 2016 is higher than the average growth rate during 2001–2007, for India and Indonesia it is only marginally higher in 2016 compared to 2001–2007. For Indonesia, it increased from 3.6% to 3.8% and for India from 5.8% to 5.9%. For Italy, it increased from 0.8% to 1.1%.
Table 1. Growth of Per Capita GDP (Annual Average %)
Source: World Bank World Development Indicators.
Table 2. Growth of Per Capita Income of G20 Countries
Neither the major regions and economies have fully recovered from the 2008 crisis nor have the growth rates been balanced among the different regions and countries.
(b)Gross fixed capital formation: Despite the decrease in the growth rates, the share of gross fixed capital formation (GFCF) in GDP increased in the developing countries and only decreased marginally in the developed countries. Maintenance of GFCF while the growth rate has decreased has meant that the incremental capital output ratio (ICOR) has increased considerably. The average for the developed countries increased from 12.5 to over 16. For developing countries, it almost doubled from 4.6 to 8. Only for Saudi Arabia the ICOR decreased from 24.7 to 13.8; for Turkey, it decreased from 6 to 5.9. The increase in the share of GFCF is not only because of actions by governments to help cushion the impact of the crisis on their economies but also GFCF by the private sector increased in all five developing countries for which data were available in the World Bank’s Development Indicators.
Table 3. External Balance (% of GDP)
Source: World Bank World Development Indicators.
(c)The external sector: Developing countries were particularly hard hit by the recession following the 2008 crisis, as the external balance (EB) of all developing regions and income groups deteriorated (Table 3).
The worst affected were the poorest, i.e. the least developed and the low- income countries. Since growth rates tend to decline when the current account worsens, the future prospects for these economies are not very good. The world economy is continued to be far from providing SSB. The experience of the developed countries was more mixed. The current account balance (CAB) improved for four of them and worsened for the other four. Even for the four for which it worsened, it was high only for the US.1 The surplus for Germany increased to a very high level, almost that of oil exporters such as Saudi Arabia. It is also important to note that China’s surplus decreased and was much smaller than Germany’s (Table 4).
The CAB deteriorated much more substantially for developing countries (Table 5). For no developing country did it improve. It improved for Korea, but Korea is hardly a developing country anymore.
Table 4. Current Account Balance (% of GDP)
Table 5. Current Account Balance (% of GDP)
Furthermore, the CAB was still deteriorating in 2015 and 2016. For a few countries, the size of the deficit as a percentage of GDP was stabilising. It was only for India that the deficit was the largest in 2012 at 5% of GDP. Since then it improved so that it was only 0.5% of GDP in 2016.
The different behaviour of the CAB in the developed countries against that in the developing countries can be partly explained by the difference in their export performance.
Table 6. Exports of Goods and Services (% of GDP)
Table 7. Share of XGS in GDP
Share of exports of goods and services in GDP (XGS) increased for the developed countries; only for Canada the share decreased (Table 6). However, for the developing countries as a whole it decreased (Table 7). The share increased for only two countries, India and South Africa.
In brief, the growth recovery has been very limited. The poorer countries have fared worse. Furthermore, the worsening of the CAB because of poor export performance does not augur well for the future.
The World Economy During the Inter-War Years
Problems for Recovery after the War
The world economy was turbulent through much of the inter-war period. Rates of unemployment were high for sustained periods of time. Unemployment in the UK was over 20% in 1933 (Laybourn, 1999). Between 1920 and 1939, in only 2 years was it less than 10%.2 In the US, it was over 10% in 1921, 1922 and 1930–1938, at times reaching almost a third (Eichengreen and Hatton, 1988). It the case of Germany, it averaged almost 19% between 1923 and 1936.
There was monetary instability. There was inadequate liquidity as the US which held the majority of the world’s gold ran surpluses and continued to add to these holdings. The shortage of gold in other countries meant that their currencies were not convertible into other currencies or into reserve assets. There were also persistent imbalances in the balance of payments (BOP). These problems were further complicated by the issue of war debts. These included reparations to be paid mainly by Germany and the debts of many of the victorious allies to the UK and of the UK and some of the allied to the US. Furthermore, there was the issue of establishing central banks and systems of monetary management in the countries newly established after the breakup of the Austro-Hungarian Empire.
Policymakers desired to fix exchange rates (ERs) to stabilise expectations and encourage investments that would increase output and preferably exports. But countries were reluctant to fix their ERs as it was not clear what they should be given the inflation that had occurred during the war and its immediate aftermath. As a consequence, ERs fluctuated considerably, which created uncertainties in the minds of exporters
