Impact of the 2008 Financial Crisis (FC): Canada Economy and Finance Employment and Economic security Human Development

Topic 1: Global Impact of the 2008 Financial Crisis (FC): Comparing Canada and the Third World Countries (One county or the Developing World in general, with examples on countries) Framework: Formulate a framework using the arguments and concepts from one or more Kit Articles 1-5 and from Term 1 lecture 5 on Financial Crisis.

Thesis: The endless accumulation of capital is the cause for financial crises in the global economy. Economic development through globalization is guided by the Washington Consensus: “privatization of state productive enterprises, reduction of state expenditures, opening of the frontiers to uncontrolled entry of commodities and capital, and the orientation to production for export (Wallerstein, 2011: 4)”. However, since 1970s, the capitalists’ shifted from production to financial speculation for their continued accumulation of capital As a result, the world-system went through a series of speculative bubbles of which the FC of 2008 is one, that has lead to serious global rise in indebtednesses.

Thesis: While the 2008 financial crisis that originated in the US, had severe economic and financial repercussions on the core countries (the US and the European), the regulatory regimes of the Canadian financial institutions limited Canada’s exposure to the crisis and minimized its adverse impact on the economy and employment. In contrast, the Third world countries where most people are already poor, faced worsening of poverty due to their declining GDP, loss of export trade and growing unemployment that led to greater poverty.

Impact of the 2008 Financial Crisis (FC): Canada • Economy and Finance • Employment and Economic security • Human Development and Poverty

Canada: Financial Crisis of 2008 (FC) • Economy and Finance • 1. FC: less impact than in other AICs. Credit has solid growth as • Canada’s financial institutions are better capitalized and less • leveraged than their international counterparts. Canadian financial • institutions continue to be the healthiest in the world. World Economic • Forum has ranked Canada’s banking system as the soundest • in the world for 3 consecutive years. • 2. Strong growth in world prices of most commodities produced in • Canada since mid-2010 • 3. Canada’s sound fundamentals have made Canadian financial assets • attractive to international investors

http://www.bankofcanada.ca/2011/03/speeches/great-recession-canada-perception-reality/http://www.bankofcanada.ca/2011/03/speeches/great-recession-canada-perception-reality/

2012: http://www.budget.gc.ca/2012/plan/toc-tdm-eng.html

http://www.budget.gc.ca/2011/plan/chap2-eng.html

The six largest domestic banks hold > 90% of banking industry assets. This adds to the banking industry’s stability • In 2006, sub-prime loans accounted for less than 5% of new mortgages in Canada, compared to 22% in the United States. • While >50% of all mortgage debts outstanding in the US were sold to investors through securitization, >75% of Canadian mortgages were held by financial institutions on their balance sheet as traditional mortgages

Subprime Subprime is a classification of borrowers with a tarnished or limited credit history. Lenders will use a credit scoring system to determine which loans a borrower may qualify for. Subprime loans are usually classified as those where the borrower has a credit score below 640. Subprime loans carry more credit risk, and as such, will carry higher interest rates as well. Approximately 25% of mortgage originations in US are classified as subprime. Subprime lending encompasses a variety of credit types, including mortgages, auto loans, and credit cards.

However, the downside: • Stock markets registered their greatest drops in more than 75 years. • As the contagion spreads, it directly affected our exports to the US. Three-quarters of our exports go to US markets. Sharp decline in exports - decrease by >16 % in 2010. • Capital investments declined due to uncertainty in a weakening financial markets with shaken consumer and business confidence: 22 % downturn in business investments in 2010

www.bankofcanada.ca/wp.../2013/01/mpr-summary-2013-01-23.pdf

Canada: Employment losses were much less serious than during earlier recessions - jobs regained sooner But, only partial recovery of business investment (45%) and exports (67%) from the losses due to the recession. Jobs linked to these sectors have not come back .

2012: http://www.budget.gc.ca/2012/plan/toc-tdm-eng.html

2012 http://www.budget.gc.ca/2012/plan/toc-tdm-eng.html

III. Human Development and Poverty • In US, 2 of the Detroit-based auto companies receive • loan guarantees of $17 billion and $4 billion from the • Canadian Federal and Ontario provincial governments. • Ford received a line of credit. Without them, millions of • workers will lose their jobs in Canada. • Feminized sectors & women workers left out in job creation: Investment in ‘infrastructure’ for repairing and constructing roads, bridges and buildings, and bailing out the Detroit Three is job creation that amounts to ‘jobs for boys,’ as far fewer women work in such industries.

Human Development and Poverty (cont’d) • Cut public Spending on the poorer families and children: • Instead of assisting the unemployed, the poor on welfare and income supplement by not cutting them back in the govt budgets: • Canadian government helped Canada’s banks. – swapped hundreds of billions of dollars for questionable assets held by banks • $85-billion cumulative deficit over five years for the bail out - “Insured Mortgage Purchase Program” lists the $75-billion CMHC buyout • $ 45-billion is being provided to further backstop mortgage lending by banks

Impact of the 2008 Financial Crisis (FC): DW • Economy and Finance • Employment and Economic security • Human Development and Poverty

Economy: (OXFAM study) Asia and the Pacific, especially in Central and South-East Asia GDP growth dropped in 2008 and 2009. India, Indonesia, Thailand, Viet Nam, the Philippines, Pakistan, and Sri Lanka where the poor populations predominate. China:state control and high foreign exchange reserves have given greater flexibility to control the crisis. Newly industrialized countries: South Korea, Malaysia, Singapore, Taiwan, Hong Kong and Macau: high per capita incomes, high degrees of trade and investment integration with the world, highly export dependent. But, they have fiscal and social policies to deal with declining exports & increasing unemployment. Less developed countries :Bangladesh, Cambodia, Bhutan, Lao PDR, Mongolia, and Nepal: increasingly integrated with the global and regional economy through trade. Worsening economies 2010 GDP in sub-Saharan Africa : Fell 7% ($84 billion). (International Monetary Fund (IMF) data and forecasts, 2011 http://www.imf.org/external/pubs/ft/weo/2010/update/01/index.htm)

Financial stability in DW: The region’s financial sector had no complex new financial instruments (such as in US: Collateralized Debt Obligation (CDO) Credit Default Swap (CDS)) Effective financial supervision and prudent risk management Foreign exchange reserves have been built up in Asia based on export surpluses (e.g. China), and on capital inflows or remittances (e.g. in the cases of Bangladesh, India, Indonesia, and Viet Nam). However: FDI fell significantly. Banking stresses in low income countries e.g., non-performing loans (NPLs) to total assets ratio doubled in Zambia (7% to 13% during 2009.

Employment: The greatest impact on employment was in the garment and mining industries. Jobs lost: In 2009. 25,000 to 30,000 garments workers’ jobs lost in Bangladesh. In 2009, Cambodia lost a third of garment workers (102,527 jobs) A third of Zambia ‘s mining jobs lost:10,000 Three quarters of miners in DRC (18,000 people) lost jobs Cambodia has been hit hard with job losses in garments, tourism, and construction industries. Philippines: most lay-offs in export processing zones (EPZs) - 75 % are women workers Thailand: 125,700 women (I in 4 export industries) laid off or lost regular work that turned temporary.

In Indonesia and Thailand: (Oxfam evidence) Using crisis as an excuse: Factories dismissed workers in order to hire younger, cheaper workers. In Serang, Indonesia, in one factory, 79 employees with 8 to 14 years seniority were dismissed Then, hired younger workers with flexible, lower paid short-term contracts, apprenticeships, and for outsourcing.

Human Development in DW: • Families : In Indonesia: If with jobs, give up meat or fish. • Women now unemployed - only food twice a day instead of three times - eat less at each meal. • Forego food to give food to their children or husbands • Watered down the milk to babies and feeding children less • No money for school meals • For the first three months my kids found it very difficult to give up rice, tempe, and tofu and just eat soup and the cheapest thing. • – (Dismissed worker in a focus group discussion, Indonesia) • My husband and I skip meals to make sure our baby has milk. • – (Woman in focus group discussion, the Philippines) • Men deserve to eat more food because they are physically stronger, do hard work on the farm, and earn income for the family. • – (Focus group discussion, Viet Nam)

Human Development: In Cambodia, 70% of the poor took out loans from relatives or friends, or bought food on credit. Parents in urban areas in Indonesia report eating less and selling assets to keep their children in school. “It is better for us not to eat than for our kids not to go to school.” – (Woman in a focus group discussion, Indonesia)

Mexico does not have a national unemployment insurance program, but the Distrito Federal initiated an unemployment insurance program in fall 2008 for city residents working for firms in the city for six months or more. Mexico set up a temporary Job Preservation Program in 2008. It provided subsidies of $110 Mexican Pesos per day (about US$8.23 with September exchange rate) for up to three quarters of the workers in participating firms, for up to a total of $5,100 Mexican pesos per worker (US$382). Mexico scaled up it Programa de Empleo Temporal (PET) as one of several labor market measures.

With the global crisis, it was scaled up, covering 285,000 beneficiaries in 2008, 682,000 in 2009 and 894,000 in 2010 (World Bank 2011; ILO/OECD 2011). Conditional cash transfer programs (CCTs) are meant to break the intergeneration transmission of poverty, by transferring cash to poor households on the condition that those household make prespecified investments in the human capital of their children (Fiszbein and Schady 2009).

Source: Understanding the Poverty Impact of the Global Financial Crisis in Latin America and the Caribbean -Part II: The role of social protection DRAFT 1/31/13 Margaret Grosh, Anna Fruttero, Maria Laura Oliveri, World Bank Global Financial Crisis, its Impact on India and the Policy Response NirupamBajpaiWorking Paper No. 5 July 2011

Population: 1.22 billion Yearly increase: 18 million Major group: 50% - 0 – 25 years More than 1.53 billion people by the end of 2030. Average life expectancy: 68.6 years Average fertility rate: 2.7 children per woman Male literacy rate at 75.96% and female at 54.28% LR 74.04% in 2011 from 65.38% in 2001 About 72.2% of the population lives in some 638,000 villages and the rest 27.8% in about 5,480 towns and urban agglomerations Homes without electricity: 25 per cent

Social spending in India after the crisis:  The spending on social sector has been increased (US$ 30 billion) in 2010-11, which is 37 percent of the total plan outlay in 2010-11.  Another 25 percent of the plan allocations are devoted to the development of rural infrastructure. Education  allocation for school education increased by 16 percent (US$ 6 billion) in 2009-10. US$ 7 billion in 2010-11.  In addition, States will have access to US$ 792 million for elementary education for 2010-11. Health  allocation to Ministry of Health & Family Welfare increased US$ 5 billion for 2010-11. The measures undertaken by government of India to counter the effects of the global meltdown on the Indian economy have resulted in shortfall in revenues and substantial increases in government expenditures,

Key Drivers to Recovery India - High Government Expenditure, funded largely through borrowings. - Increased incomes in rural areas due to greater social spending and high farm good prices; creation of wage employment are National Rural Employment Guarantee Programme (MGNREGA) in the rural areas and SwarnaJayantiShahariRozgarYojana (SJSRY) in the urban areas. Food security  Livelihood security  Water security  Ecological Security  Flood risk reduction

Impact of the 2008 Financial Crisis (FC): Canada Economy and Finance Employment and Economic security Human Development