Key Trends in Globalisation

China and developing economies will determine the chances for world growth in 2012

China’s economic growth has become a key factor not only for itself but for world markets. As the scale of China's impact is still too frequently underestimated it should be noted that, measured in current dollars and at market exchange rates, i.e. in terms of actual effective demand, in the three years following the start of the international financial crisis China contributed 33.4 per cent of global market growth – more than four times as much as the US 8.1 per cent (Table 1). While final data for 2011 is not yet available, it is already clear from the first three quarters figures that China’s market last year expanded by over $1 trillion – approximately twice as much in dollars as the US, despite US growth having resumed. Table 1 makes clear no other economy has approached China in terms of market/global aggregate demand expansion.

It is therefore a key question whether China will continue essentially the same scale of market growth in 2012. The answer is ‘yes’  - but because of the issue’s importance the reasons should be clearly outlined. Interlinked with this is the decisive role played by developing economies in recovery from the financial crisis – the interlinking being that China is by far the largest developing economy, while the developing economies have become China’s largest trade partners.

In the three years covering the period from the beginning of the international financial crisis to the latest available annual data, i.e. in 2007-2010, developing economies accounted for 78.6 per cent of world market growth and developed economies for only 21.4 per cent. Considered from another angle, simply taking different classifications, either the BRIC economies (Brazil, Russia, India and China), or China plus Latin America, contributed the majority of world market/effective demand expansion – either of these groupings accounting for more than twice as much market expansion as the developed economies.

Table 1

 

Turning to more detailed trends, the first feature determining China’s continued dominant position in world market expansion, one the consequences of which are insufficiently frequently noted, is that as China’s economy becomes larger a similar percentage yearly growth necessarily turns into an increasingly large annual absolute market increase - in inflation adjusted terms, China’s economy expanded by 2.3 trillion RMB in 2008, 2.4 trillion RMB in 2009, and 3.1 trillion RMB in 2010.

But even frequently cited constant price growth figures underestimate the expansion of China’s position in the world market. Actual sales, and therefore changes in aggregate demand, use real money which is affected by exchange rate shifts and inflation – further figures in this article are therefore at current market exchange rates and prices unless otherwise stated. In 2009, when China froze the RMB’s exchange rate due to the international financial crisis, China’s economy grew by $469 billion – compared to a US contraction of $353 billion. In 2010, when China allowed the RMB exchange rate to rise, its annual economic expansion rose to $935 billion and the figure will be over $1 trillion in 2011 – roughly twice US market expansion.

Table 1 also makes clear the second reason China’s market will continue  its expansion. World growth is now dominated by developing economies and China is their most rapidly expanding trading partner.

Considering trends among developing economies, China accounting for 33.4 per cent of global market expansion. Latin America was second – constituting 17.3 per cent of world growth, with Brazil accounting for 58 per cent of this. China and Latin America together accounted for 50.7 per cent of world market growth..

Among other developing economic regions, South Asia contributed 8.0 per cent to world market growth, with India accounting for 84 per cent of this. Developing East Asian economies, excluding China, accounted for 7.0 per cent of world growth – Indonesia constituting 54 per cent of this. The Middle East and North Africa accounted for 6.1 per cent of world growth with no single dominant regional economy – the largest contributor, Egypt, constituted only 19.9 per cent of the total. Developing countries in Europe and Central Asia accounted for 4.5 per cent of world growth – of which 55 per cent was Russia. Sub-Saharan Africa grew rapidly, but due to its low starting point only contributed 2.1 per cent of world growth.

Turning to developed economies, Japan illustrates the importance of currency movements for shifts in markets measured in dollar terms. Due to the yen’s sharp exchange rate rise, Japan contributed 14.9 per cent of the dollar expansion of the world market despite Japan’s economy contracting in inflation adjusted terms. The US contributed 8.2 per cent to world market growth, despite the US not having grown in constant price terms, due to the dollar rising against other currencies,

The ‘disaster area’ for world markets was the developed European economies with a decline of $668 billion - equivalent to subtracting 9.2 cent from world growth.

It is already clear 2012 will show no fundamental change in this pattern. Developed European economies will again be the worst performing region – suffering a recession possibly magnified by a low Euro exchange rate. The US should expand, but slowly compared to previous upswings in US business cycle. Therefore if the world economy is to grow this will again have to be primarily due to developing  economies.

Fortunately, the large developing economies are slowing but still growing substantially more rapidly than developed ones. China, the dominant factor in the equation, even on pessimistic estimates is likely to grow by at least 7-8 per cent in real terms this year which, after increases in the exchange rate of the RMB and inflation is take into account, means an expansion of its market of probably 12-15 per cent in dollar terms. Minimum real growth estimates for India are at least seven per cent.

It is also clear from the pattern in Table 1 why BRIC economies will again dominate world growth – in 2007-2010 they contributed 52.5 per cent of world market expansion. Not only are the BRICs individually the largest developing economies but each is the centre of a major regional economic area. While Brazil has slowed, Russia’s economy has been accelerating, and it is in any case China and India which are the dominant dynamic BRIC economies.

This overall situation clearly interrelates with China as it already carries out the majority of its trade with developing economies – 54 per cent of total trade, 49 per cent of exports and 60 per cent of imports.

The implications for China’s markets are clear. China has not only the world’s most rapidly expanding domestic market, and declining inflation gives it extra room for domestic economic loosening/stimulus in 2012, but its biggest trading partners are the most rapidly growing regions of the world economy. It is this combination of domestic and international factors which determines that  China will continue to remain the world’s most rapidly expanding market/supplier of increased aggregate demand in 2012. Given the negative prospects in Europe, and slow growth in the US, it will then be the situation in the developing economies, which is increasingly related to the situation in China, which will necessarily determine the overall prospects for world growth in 2012.

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This is an expanded version of an article which originally appeared in Shanghai Daily.

The weakness in world trade - pre-crisis trade levels only regained in Asia and Latin America

Europe’s economy is probably entering a double-dip recession. The indications from world trade, as analysed previously, are so far that the world economy as a whole is facing slowdown but not renewed recession. However a detailed breakdown shows extreme unevenness in the trade recovery - with only Asia and Latin America surpassing pre-financial crisis levels. Regional trends for imports and exports, using a three month moving average to smooth short term fluctuations, are shown in Figures 1 and 2.

Considering trends in detail, pre-crisis world trade peaked in April 2008. In the latest month for which data is available, September 2011, world trade was 2.3 per cent above its pre-crisis maximum on individual month comparisons and 3.6 per cent above on a three monthly moving average.

Table 1 shows a detailed breakdown of trade since the financial crisis by region. This data shows that only in developing Asia and Latin America are both exports and imports clearly above pre-financial crisis levels. Taking three monthly moving averages, imports are up from pre-crisis levels by 16.7 per cent in developing Asia and 9.4 per cent in Latin America, with exports up 17.0 per cent in developing Asia and 6.9 per cent in Latin America. In the US exports are slightly above pre-crisis levels but imports are significantly below. In all other regions – the Euro area, Africa and the Middle East, Central and Eastern Europe, and Japan – both exports and imports remain below pre-crisis levels.

The recovery of world trade to above pre-crisis levels is therefore due to the situation in two developing regions. The weakness of trade in the Euro area is worse than most regions, particularly in terms of imports, but not really exceptional. Trade in most areas of the world economy remains significantly below pre-crisis levels.

Table 1

 

Trade with China

Among the largest economies the chief beneficiary of this pattern of world trade is China - although it is likely the pattern itself is in significant part a result of the dynamics of China's trade.

In the period between China's peak pre-crisis level of exports and imports, in July 2008, and September 2011 China's exports to Asian developing economies rose by 22.9 per cent and its imports from these economies rose 31.4 per cent. China's exports to Latin America rose by 53.0 per cent and its imports by 59.9 per cent. These are clearly exceptional growth rates. China is the main trade partner for most developing Asian economies as well as for a significant number of Latin American economies including Brazil.

The patterns of world trade since the financial crisis therefore indicate the consolidation of a dynamic trading interaction between China, developing Asia and Latin America. China's economy and trade is not yet sufficiently large to offset a global scale recession in the EU and/or US, but there is clear evidence that China's economy is sufficient to produce the most dynamic of post-crisis world trade interactions centred on Asia and Latin America.

Figure 1

Figure 2

Trends in investment and labour inputs with economic development, as indicated in the data of Jorgenson and Vu

Key Trends in Globalisation has published two articles on: (i) the contribution of capital investment to GDP growth in developed and developing economies,(1) (ii) differing patterns of labour inputs in developed and developing economies.(2) These are based on analyses of the major database on international growth published by Jorgenson and Vu (Jorgenson & Vu, 2007b). The reason for such detailed analysis is both the importance of the issues involved and a relation to long standing research topics. The present article introduces these articles.

The most fundamental issue involved is that of the tendency of the contribution of investment to economic growth to increase with economic development. This trend was first analysed by Adam Smith and affirmed by other economists including Keynes.(3)However, it was rejected in analyses of economic growth put forward by various mid 20th century theorists. The latter asserted, against the analysis flowing from Adam Smith, that the division of the economy between investment and consumption remained constant with economic development – this is, of course, a central assumption of the widely employed Cobb-Douglas production function, of the economic growth model put forward by Solow (Solow, 1957), and continues to be repeated in many(4), although no longer all,(5) economic textbooks.

As discussed in detail elsewhere (Ross, 2009), the present author from the early 1970s concluded, on the basis of the long term historical data on growth that was then beginning to be published, than Adam Smith and those who followed his analysis were clearly correct. Despite the fact that the theories of Solow et al of a constant contribution of investment to GDP growth were the prevailing orthodoxy they were clearly contradicted by the historical data. Jorgenson has outlined more general reasons for the breakdown of such econometric models. (Jorgenson D. W., 2009) The theory that the proportion of the economy devoted to investment remained constant, rather than rose with economic development, was erroneous and classical economics was correct.

Initial statistical unclarity in this discussion was undoubtedly aided by the fact that the US is untypical in that, unlike the great majority of other economies, the proportion of the US economy devoted to fixed investment has indeed not risen for the approximately 150 year period for which reliable statistical data exists. (Ross, 2008a) (Barro & Sala-i-Martin, 2004).(6) Analyses based on generalisations from the US, therefore, arrived at the erroneous generalisation of a constant, rather than rising, share of investment in GDP.(7)

A consequence of the difference between the pattern in the US economy and the general international trend of a rising share of investment in GDP, is that the US share of fixed investment in GDP, which was above the international average in the 19th and first halt of the 20th century, has now fallen below the international average – in particular the US level of investment in GDP has fallen below the level of rapidly growing Asian economies. This contributes to the slow growth of the US economy compared to Asian competitors, the US balance of payments deficit with Asia, and present international financial developments. (Ross, 2008b)

The question of whether the role of fixed investment in economic growth rises with economic development, or remains constant, has numerous practical economic implications. The key pieces of evidence demonstrating the rising contribution of fixed investment to GDP growth with economic development, prior to the publication of the database of Jorgenson and Vu, included:

1. Trends in leading international growth economies. The analysis of leading growth economies, in successive historical periods of economic development from the 18^th century, carried out by the present author from the 1970s onwards, showed that each such leading economy – in chronological succession the UK, the US, West Germany, Japan, South Korea and now China – was characterised by a higher percentage of fixed investment in GDP than the preceding lead growth economy. This trend is shown in Figure 1.

Figure 1

2. The comprehensive comparative analyses, published by Angus Maddison, of economic growth in developed economies since World War II, including his Phases of Capitalist Development (Maddison, 1982) and Dynamic Forces in Capitalist Development (Maddison, 1991), demonstrated that capital investment was the largest contributor to post-World War II GDP growth in a wide range of advanced economies. Maddison demonstrated over a longer time frame than the post-World War II period that both non-residential fixed investment rates and savings rates, which were correlated with fixed investment rates, rose with time in most advanced economies – the US, as already noted, being an exception and not a rule. (Maddison, 1992)

3. Studies by Jorgenson and his co-authors demonstrated that capital investment was the largest single contribution to GDP growth in the US, the G7 and a number of developed economies.(8)

While these studies analysed a wide range of developed, and a number of leading developing, economies they were however not entirely comprehensive in coverage – in particular they did not include a comprehensive range of developing economies. The publication by Jorgenson and Vu (Jorgenson & Vu, 2007b) of a comprehensive growth accounting base for up to 122 economies, constituting more than 95% of world GDP, therefore provides an opportunity to fill this major gap.

A striking trend that may be analysed in its data, in addition to those drawn attention to by Jorgenson and Vu themselves, is that GDP growth in developed economies is capital-intensive while GDP growth in most developing economies is labour- intensive. The path of economic development is therefore a transition from labour intensive growth to capital intensive growth. The East Asian developing economies may be seen as an intermediate group between the majority of developing economies and the developed economies.

Such a pattern is, of course, consistent with the other evidence showing the rising contribution of investment to GDP growth with economic development. However, such a comprehensive database for evaluation of these trends has not previously been available – in particular it allows an integration of trends in developing economies with those in developed economies. It is for this reason that these three analyses of trends in the data of Jorgenson and Vu for capital and labour inputs in different stages of economic development have been published.

Summary

It is clear on the basis of the above data that there is overwhelming evidence of a tendency for the contribution of investment to GDP growth to rise with economic development. In light of such clear evidence it is evident that the assertion that the contribution of investment to GDP growth remains constant with time, rather than rising, is erroneous.

Economic models and theories therefore must take into account that the contribution of investment to GDP growth increases with economic development - Adam Smith and those who followed him on this issue were correct.

The implications of this for economic theory and practice of such a trend are numerous as has been analysed elsewhere (Ross, 2008a).

The normal disclaimer must, of course, be made that while these papers utilise calculations based on data produced by Jorgenson and Vu they do not bear responsibility for the conclusions drawn.

* * *

Since this analysis was carried out Jorgenson and Vu have extended their data to 2008. (Jorgenson & Vu, 2010) The new data does not alter the main trends analysed above. A detailed analysis from the angle of approach in this article will be published.

Notes

Labour inputs in stages of economic development – trends revealed in the data of Jorgenson and Vu

Summary

An earlier article (Ross, 2010 August) analysed trends in the contribution of capital investment to GDP growth in the database published by Jorgenson and Vu of growth accounting data for economies compromising more than 95% of world GDP. (Jorgenson & Vu, 2007b) Jorgenson and Vu themselves drew attention to two trends:

• Factor inputs of capital and labour greatly predominate over total factor productivity [TFP] in percentage contribution to international GDP growth.
• The increasing role played by capital investment in information technology (IT).

Analysis of this database by the present author showed another trend. (Ross, 2010 August)

• Developed economies have a capital-intensive path of growth compared to developing economies – i.e. the percentage contribution of capital investment to GDP growth is higher in developed than developing economies. The East Asian/Asian developing economies are an intermediate group - the percentage contribution to GDP growth of capital investment in these economies is greater than in the majority of developing economies but less than in developed economies.

This previous article looked only at investment in capital. It did not examine improvements in labour quality, which typically requires investment in human capital. This was because the percentage contribution to GDP growth of investment in physical capital in developed economies considerably exceeds that of improvements in labour quality and, for clarity, it was therefore helpful to concentrate on the primary trend.

It is, however, also revealing to analyse the combined contribution of physical capital and improvements in labour quality – in particular given this has direct practical implications. Investment in physical capital and improvements in labour quality require expenditure/investment – the latter in education, training etc. Taking capital investment and improvements in labour quality together, therefore, gives an indicator of the different patterns of such expenditure and investment in economies at different stages of development.

The present article therefore supplements the previous one by analysing the contribution of labour inputs in different economy groups.

It should be pointed out that while this paper utilises calculations based on data produced by Jorgenson and Vu they do not bear responsibility for conclusions drawn in the present article.

Capital-intensive and labour-intensive patterns of growth

The basic data for the present analysis is set out in Table 1 and Table 2. These show the percentage contribution to GDP growth of capital, labour and TFP, and of labour hours and labour quality, in economy groups for the periods 1995-2000, 1995-2000, and 2000-2006 as calculated from the data set out by Jorgenson and Vu (Jorgenson & Vu, 2007b). The pattern of the contribution of capital investment to GDP growth in the different economy groups was already analysed in the previous article and is therefore merely summarised here. (1) If the non-generally applicable case of East European economies, experiencing transition from Communism to capitalism, is left aside the patterns of growth of economies fall into two large groups according to their stage of economic development.

• The first are developed economies – the G7 and the 15 additional non-G7 developed economies. In the developed economies the percentage contribution to GDP growth of capital inputs exceeds the contribution of either labour or TFP in all periods – i.e. developed economies display capital-intensive growth.
• The second group are the majority of developing economies - in Sub-Saharan Africa, Latin America, the Middle East and North Africa. In these, with only one exception, Sub-Saharan Africa in 2000-2006, the percentage contribution of labour inputs exceeded the contribution of either capital or TFP in all periods – i.e. the majority of developing economies show labour-intensive growth. (2)

The Asian developing economies, in particular East Asian developing economies, are ‘intermediate’ between the developed and the majority of developing economies.

• In the Asian/East Asian economies the percentage contribution of capital inputs to GDP growth was larger than in the other developing economy groups in all periods. However in no period was the percentage contribution of capital inputs to GDP growth in the Asian/East Asian developing economies as high as in the G7. In two periods out of three the percentage contribution of capital inputs to GDP growth was lower in the Asian/East Asian developing economies than in the non-G7 developed economies.

It is notable that neither in the developed economies groups nor in the majority of developing economies was TFP growth the main percentage contributor to GDP growth. (3) This trend in developed and developing economies is of course in line with the overall conclusion of Jorgenson and Vu: ‘‘We allocate the growth of world output, as measured in the World Bank’s International Comparison Program, between input growth and productivity. We find… that input growth greatly predominates. ‘(Jorgenson & Vu, 2009)

Trends in labour inputs will be analysed in conjunction with this overall framework.

Trends in labour inputs

First labour inputs in the developed economies will be considered in Jorgenson and Vu's data and then those in differing groups of developing economies.

i. The Developed Economies

As already noted, both the G7 and the non-G7 groups of developed economies follow a pattern of capital-intensive growth – i.e. in all periods the contribution of capital inputs to GDP growth exceeds the contribution of either labour or TFP. However, G7 and non-G7 economies differ in the role played by different forms of labour inputs.

The contribution of increases in labour hours in all periods is smaller in the G7 than in the non-G7 economies.

In the G7 economies, in two periods out of three, the percentage contribution of labour quality to GDP growth exceeds that of increase in labour hours, whereas in two periods out of three in non-G7 developed economies the contribution of labour hours exceed the contribution of labour quality. That is, the bias in G7 economies within labour inputs is towards a higher percentage contribution of labour quality than labour hours, whereas in the non-G7 economies the bias is towards a higher contribution of labour hours than labour quality.

There is also a difference between forms of labour input and TFP growth in the G7 and non-G7 developed economies. In the G7 economies, in two out of three periods, the percentage contribution of TFP exceeds the total contribution of labour inputs, and in all periods the percentage contribution of TFP to GDP growth exceeds the contribution of either labour hours or labour quality considered individually. In contrast, in all periods, in the non-G7 developed economies the contribution of labour inputs exceeds the contribution of TFP growth.

In short, in both G7 and non-G7 developed economies the predominant contribution to GDP growth comes from capital inputs. But the pattern of growth in the G7 economies is predominantly based on ‘capital investment, plus increases in TFP and labour quality’, whereas in the non-G7 developed economies the pattern of growth is predominantly based on ‘capital investment, plus increases in labour inputs - in particular increases in labour hours’.

The dominance of capital inputs and labour quality in the G7 economies may be seen clearly in Table 1. The combination of capital inputs plus labour quality inputs plays an overwhelmingly dominant role in the contribution to GDP growth in the G7 economies – accounting in successive periods for 74.9%, 61.6% and 68.5% of GDP growth.

ii. Developing economies in Sub-Saharan Africa, Latin America, and the Middle East and North Africa

The dominant role played by labour inputs in GDP growth in the developing economies of Sub-Saharan Africa, Latin America, and the Middle East and North Africa is shown in that in all groups and periods except one, Sub-Saharan in 2000-2006, labour inputs exceeds either the input of capital or the input of TFP to GDP growth.

The contribution of labour inputs to GDP growth exceeds the contribution of TFP in all these economy groups in all periods .

Within this framework the dominance of increases in labour hours over increases in labour quality is clear. The percentage contribution of increases in labour hours exceeds the percentage contribution of increases in labour quality in all three economy groups in all three periods.

The pattern of growth of the majority of developing economies is therefore not only labour-intensive, but within that framework it is dominated by increases in labour hours rather than increases in labour quality.

iii. Developing Asian economies

In the developing Asian economies the percentage contribution of capital to GDP growth exceeds the contribution of labour in all periods. The percentage contribution of TFP also exceeds that of labour in all periods. In this overall pattern of higher inputs of capital and TFP than of labour inputs Asian developing economies are closest to the G7 group.

However, the pattern of labour inputs in the developing Asian economies differs markedly from the G7 economies. In all periods in the developing Asian economies, the percentage contribution of labour hours exceeds the percentage contribution of labour quality.

The pattern of growth of the Asian developing economies is therefore primarily based on inputs of capital, TFP and labour hours with a smaller percentage contribution from improvements in labour quality. If the developing Asian economies resemble the developed economies in the dominance of capital inputs over labour inputs, nevertheless within labour inputs the Asian economies resemble developing economies in that increases in labour hours predominate over increases in labour quality.

The Asian developing economies may therefore be taken as being ‘intermediate’ between the developing and developed economies in a dual sense.

• In terms of the contribution of capital inputs to GDP growth the Asian developing economies have clearly moved out of the ranks of developing economies closer to the capital-intensive pattern of growth in the developed economies - although the contribution of capital investment to growth in the developing Asian economies has still not yet reached the level of the developed economies.
• The developing Asian economies, unlike in particular the G7 economies, however continue to have a pattern of development similar to the majority of developing economies whereby inputs of labour hours are greater contribution to labour inputs than increases in labour quality.

Conclusion

These trends may now be summarised.

• The fundamental pattern of development whereby developed economies follow a pattern of capital-intensive growth and developing economies one of labour-intensive growth has already been noted. (Ross, 2010 August)
• Developing Asian/East Asian economies may be understood as occupying a position of transition from developing to developed status, with a capital-intensity of development that is higher than the other groups of developing economies but not as high as that of the developed economies.

In may, however, be seen from the present analysis that a second trend also occurs within labour inputs.

• The pattern of GDP growth of the developing economies is not only labour-intensive but, within that framework, is primarily dominated by increases in labour hours rather than by increases in labour quality.
• In the G7 group, in contrast, increases in labour inputs are somewhat more determined by increases in labour quality than by increases in labour hours.
• In the percentage contribution within labour inputs, the Asian/East Asian developing economies remain closer to developing economies than to the G7 in that the contribution of labour hours is greater than the contribution of labour quality.
• In terms of labour inputs, the Asian/East Asian developing economies are closer to the non-G7 developed economies than the G7, in that, unlike the G7, both groups tend to remain far more dependent on increases in labour hours than increases in labour quality for labour inputs.

There therefore appears to be a progressive development pattern, in terms of labour inputs, whereby most developing economies, including in this case Asia, have a larger contribution of labour hours than labour quality, the non-G7 developing economies retain this characteristic on a lesser scale, and the G7 economies have the greatest percentage contribution of increases in labour quality compared to increases in labour hours.

The pattern of economic development shown in the data of Jorgenson and Vu is therefore of an increase in the percentage contribution of capital to GDP growth compared to labour, and of an increase of improvements in labour quality compared to labour hours.

* * *

Since this analysis was carried out Jorgenson and Vu have extended their data to 2008. (Jorgenson & Vu, 2010) The new data does not alter the main trends analysed above. A detailed analysis from the angle of approach in this article will be published here.

Table 1

Table 2

 

Bibliography

The international financial crisis’s impact on financial markets in China, India and Latin America

John Authers of the Financial Times has an excellent video analysis, in English, on the impact of the international financial crisis on emerging markets - on China, India and Latin America in particular.

Latin America's trade as it enters the international financial crisis

The international financial crisis will hit Latin America via multiple mechanisms. It will, therefore, have to respond to each different aspect. But these responses will only be most effective if they are part of an integrated reaction. The subject of this article is, therefore, Latin America's trade as it enters the international economic crisis, but it is necessary to place this specific aspect in the context of other main trends.

First, and most fundamental, is that in the international recession private investment will sharply decline. This is the most important mechanism that will drive the economy deep into recession. 

Second, the core of the present international economic crisis is within the financial system.

Third, due to the financial crisis, funding to large enterprises will be squeezed - as seen in the bail out of the US and other countries car industries.

Fourth, due to the financial crisis, private banks will drastically reduce or cease to lend to small and medium enterprises.

Fifth, due to the financial crisis, mortgage lending for housing will severely contract or dry up - in the UK, for example, new mortgage lending has fallen by 80 per cent and a similar process is taking place in the US. This in turn will create a crisis in the house building industry - in the US new housing starts have fallen by 70 per cent.

Sixth, while programmes of state investment are geared up, of the type being envisaged in many countries including the US, China and others it is vital to prevent a decline in demand in the economy by maintaining the living standards and purchasing powers of the population. This should be done, in order to protect the strained position of companies finances during the recession, without placing extra wage costs on enterprises - this may be achieved by measures such as reduction in sales tax or increase in state benefits.

Seventh, despite these measures unemployment, particularly due the situation in the private sector, will rise.

Eighth, the international recession has already led to a decline in commodity prices, including oil, which will create decreases in revenues to state budgets. However under conditions of recession all countries are expanding their budget deficits in a Keynesian fashion.

Within the overall context outlined above a very important place is occupied by the question of international trade. One of the most important factors leading to the deep economic depression after 1929 was the collapse of international trade. A decline in world trade would also further severely depress the price of commodity exports which would greatly increase the budgetary problems of Latin America. Latin America and the Caribbean, therefore have a great interest in maintaining international trade during this international economic crisis. This article, therefore, examines overall parameters and objective possibilities of Latin America's trade.

Taking first exports, a key weakness of Latin America is excessive reliance on trade with the US. The dimensions of this problem are shown in Figure 1.

In 2007, the last year for which figures are available, 63.6 per cent of exports from Latin America and the Caribbean went to industrialised countries with 44.3 per cent going to the US. This represents some diversification of exports away from the US and industrialised countries during the last decade - the peak year for the share of industrialised countries in exports from Latin America and the Caribbean was 74.2 per cent in 1999 and the peak share of the United States in Latin American and Caribbean exports was in 2000 at 57.2 per cent.

Figure 1

To take data shown in Figure 2, in 2007 37.2 per cent of Latin America and the Caribbean exports were to developing countries - in other words exports to all developing countries were less than those to the US.

Latin American and Caribbean exports to the European Union and Japan are falling and show no sign of increase.

These figures have important implications. A trend of diversification of Latin America and the Caribbean's  exports away from the US and the industrialised countries is taking place. This is strategically important, needs to be maintained, and is in line with the overall trend in the world economy of the increased weight of developing countries in world trade. Nevertheless this trend is one operating over a prolonged period of years, a decade or more, and it cannot be made sufficiently rapid to deal with an economic crisis that has already begun and which will pick up momentum in a matter of a few months.

The consequence of the reliance of Latin America and the Caribbean on exports to the US is serious and will have strongly negative consequences in the current international recession. The origin of the present financial crisis is in the US and its economy is already moving sharply into recession. This means that imports into the US will fall sharply -a trend that will be made worse if a decline in the exchange rate of the dollar takes place. The working assumption in Latin America and the Caribbean must be that the volume of imports by the US will fall in absolute terms and this, combined with the decline in the price of commodities that has already taken places, means that income received by countries in Latin America and the Caribbean from their exports to the US will fall sharply.

Trade diversification to regions that are likely to suffer less severe recessions than the US, notably Asia, and expansion of trade within Latin America and the Caribbean is therefore important. But it cannot be put in place rapidly enough, or on a sufficient scale in the time frameavailable, to offset the negative consequences of the downturn of the business cycle. This means that the largest focus for Latin American countries must be the expansion of domestic demand. The overall framework must, therefore, be domestic recovery programmes supplement by measures to diversify trade away from the US and towards areas of higher economic growth.

Turning to the situation of possibilities for increasing Latin America and the Caribbean's exports to developing countries, which will be growing more rapidly than the US in the coming period, the key trends are shown in Figure 2.
There has been a significant increase in the exports of Latin America and the Caribbean to developing countries in the last period - after a period of depression in the mid-1990s. The share of Latin American exports going to developing countries rose from 22.8 per cent in 1999 to 32.7 per cent in 2007.

Within that framework half of the increase, 5.3 per cent, was due to increased exports to developing Asian countries - which increased from 3.6 per cent of Latin America and the Caribbean's exports to 8.9 per cent. Latin America and the Caribbean, however, still represented the largest market for their own exports with 19.1 per cent of exports in 2007 - an increase from 16.6 per cent in 1999. This 2.5 per cent increase in share is, however, less than that for Asia. Exports to the Middle East and Africa are low and with no substantial tendency to increase.

Figure 2

The combined total for exports by Latin America and Caribbean states to other countries in the region and to developing Asia is however now very significant. It accounts for 28 per cent of Latin American and Caribbean exports - far exceeding those to either the European Union or Japan.

Exports to Latin America and developing Asian countries are now almost two thirds, 63 per cent, of Latin American and Caribbean exports to the US. Furthermore, exports to Latin America and the Caribbean and developing Asian countries were rising while those to the US were falling sharply - see Figure 3.

In 2000 exports to the US accounted for 57.2 per cent of Latin American and Caribbean exports compared to 21.9 per cent for the combined total for exports to other countries in Latin America and the Caribbean and to developing Asia - that is, exports to the US were 161 per cent higher than those to Latin America and the Caribbean and developing Asia combined. By 2007 exports to the US were only 58 per cent higher than those to Latin America and developing Asia.

The implications of such numbers are clear. If the alternative to Latin American and Caribbean exports to the US is conceived of as only being Latin American and Caribbean integration this is too small to counterbalance the US. If, however, the framework is conceived of as Latin America and the Caribbean together with developing Asian countries then this total is rapidly catching up with exports to the US.

It follows from this that the top priority in Latin America and the Caribbean's export trade in the international financial crisis must be within Latin America and the Caribbean and in relation to developing Asian countries.

Figure 3

Turning to Latin America and the Caribbean's imports the situation is far more favourable than with exports. Imports from developing countries have already substantially overtaken those from the US - see Figure 4.

In 2007 imports from the US accounted for 33.1 per cent of Latin America and the Caribbean's imports whereas imports from developing countries accounted for 44.5 per cent. Furthermore imports to Latin America and the Caribbean from the European Union, as well as from the US, were falling sharply - while those to Japan and Canada were low with no tendency to increase. In short Latin America and the Caribbean's import trade from developing countries is much more dynamic than that with the industrialised countries, including the US.

This trend is strongly entrenched. As may be seen from Figure 4 diversification of Latin American and Caribbean imports away from the industrialised countries and from the US has been underway for a considerable period.

Considering the industrialised countries as a whole, the peak year for the share of Latin America and the Caribbean's imports from these countries was in 1991 at 74.3 per cent - by 2007 this had declined to 54.4 per cent. For imports from the US the peak year was 1999 at 49.2 per cent - by 2007 this had declined to 33.1 per cent. By 2007 developing countries accounted for 44.5 per cent of total imports by Latin America and the Caribbean compared to only 33.1 per cent from the US.

Figure 4

This trend in imports is important not only in itself but because it can be used as a framework to develop bilateral Latin American and Caribbean relations, including for exports, with those areas or countries that are becoming increasingly important trading partners.

Considering imports from developing countries in more detail the most dramatic expansion is again in imports from developing Asian countries. This is shown in Figures 5 and 6.

The share of imports to Latin America and the Caribbean from developing Asian countries has risen dramatically from 2.1 per cent in 1980 to 18.5 per cent in 2007 - see Figure 5. The share of imports from other countries in the region to Latin America and the Caribbean has also recently risen significantly - increasing from 15.3 per cent in 1999 to 21.6 per cent in 2007.

Imports from the Middle East and Africa remain low and with no tendency to increase.

Figure 5

Taking these trends together the combined share of Latin America and the Caribbean's imports accounted for by other Latin American and Caribbean countries and by developing Asian states already significant exceeds imports from the US.

In 2007 the share of Latin American and the Caribbean's imports coming from the US was 33.1 per cent whereas the share coming from other Latin American and Caribbean countries and from developing Asian states was 40.0 per cent.

Figure 6

Within that overall framework the most important single developing country market is China. China has already overtaken the US and Germany to become the world's largest exporter of goods. It is the world's third largest importer of goods, behind the US and Germany, with a more rapid increase of imports than either of these. Within the next twenty years it is projected that China will overtake the US to become the largest economy in the world.

The trend of Chinese imports into Latin America and the Caribbean, compared to the US, is shown in Figure 7.

Figure 7 

What conclusions follow from these trends for Latin America and the Caribbean as they face the international economic crisis?

First, the process already underway in several Latin American countries to lessen dependence on exports to the US is entirely necessary. There will be a sharp contraction in US demand for imports during the coming recession, due to both US economic downturn and possible declines in the exchange rate of the dollar, and the more Latin America and the Caribbean succeed in diversifying their exports away from the US the more successfully they will be able to meet the international economic crisis.

Second, however, the scale of the shift involved in diversifying exports is very great. It will not be possible in the time available before confronting the consequences of the internationaleconomic crisis, which has already commenced and will develop in the immediate coming months and years, either to lessen the share of exports to the US, or to develop other export markets, sufficiently rapidly to provide large enough alternative international markets to compensate for the crisis in the US. Therefore the core of the anti-crisis economic programmes in Latin America and the Caribbean must be measures to boost domestic economic recovery - supplemented by measures diversifying exports away from the US. As in all countries confronting the economic crisis, the core of these programmes must be an expansion of activity by the state in the economy - in particular expansion of state investment to counter the sharp decline in private investment that will take place.

Third, regarding trade, strategically the process of economic integration in Latin America and the Caribbean is extremely important. But this market is not large enough, by itself, to constitute an alternative trade market to that provided by the US. The combination of Latin America and the developing countries in Asia is, however, sufficient to compensate fully for the US. Therefore, alongside the measures to strengthen Latin American and Caribbean economic integration must go policies to strongly increase the economic relations between Latin America and the Caribbean and the developing Asian economies - in particular China.