The “financial Tsunami” originating in the United States has plunged the world economy into its worst crisis since the great depression of the 1930s. What started as a sub prime mortgage crisis in the USA has now gone global and engulfed the G-7 countries and more said ICCb News Bulletin published on October 2.

Stocks and shares in the US dropped dramatically on 10th October and have been subjected to wild fluctuations since then. The crisis has created a downward spiral of loss of confidence and trust on the free market system. While there will be considerable analysis of the reasons for the financial meltdown, inadequate regulation and poor supervision of the banks and investment firms by the watchdog is undeniable.

With the intensification of the financial crisis, world leaders struggled to come up with immediate measures to overcome it. The US Congress approved a US$ 700 billion package to help cash starved firms; in addition, more than US$ 130 billion was injected in the giant insurance company, AIG. The total commitment of the European countries is estimated to amount to more than Euro 1,400 billion. In addition, other monetary and fiscal measures have been undertaken.

No one really knows whether these measures will work. Far less is known of the mechanism through which the stimulus package will affect the financial sector. Confidence once shaken is difficult to restore. Money being given by Governments to banks is being used to build their reserves, and not for extending credit to the borrowers as was envisaged by the Governments.

The impact of the financial meltdown on the real economy is already visible. Manufacturers are cutting down production in response to lowered demand from the consumers. In the process, jobs are being eliminated. Smaller firms that have relied on the banking sector for funds are suddenly finding their source of credit has dried up. Normally, they would negotiate with the larger firms for mergers; however, this will not be possible in the absence of credit. Many will file for bankruptcy. International trade will be seriously affected.

The IMF expects global growth of 3% in 2009, relying on reasonably robust expansion in emerging economies; the rich-world economies are expected to grow by only 0.5%. These estimates will need to be revised to conform to actual developments: on 24th October, it was announced that the UK economy had contracted by 0.5 %, which was much more than predicted.

The International Labor Organization has warned that the number of unemployed could rise from 190 million in 2007 to 210 million in late 2009. The number living on less than a dollar a day could rise by some 40 million — and those at two dollars a day by more than 100 million. This is a vivid illustration of how the crisis on Wall Street will impact on the real economy, and create massive job losses.

It will require significant coordinated policy actions among the advanced and emerging market economies to quickly recover from this economic and financial disaster. Clearly, the world needs a long term strategy for streamlining world financial governance, including accountability and transparency in order to restore the confidence on free market mechanisms. People are demanding a new global financial architecture with proper representation of developing country interests.

How will the financial turmoil affect the Bangladesh economy? The Bangladesh financial sector had little exposure to the sub-prime mortgage securities, and may emerge unscathed. It is in the real economy that the greatest impact is likely to be felt. Our economy depends critically on exports and inward remittances from our workers abroad. Trade will clearly be affected, but the extent of the impact is difficult to quantify at this stage. More than two million are directly employed in the RMG export-oriented industries, while more than 15 million in the backward linkage industries: their fate hangs in the balance. How will the crisis affect our expatriate workers? That is also uncertain, and will depend on the economic condition in the destination countries. While the external drama is yet to unfold, some clear policy measures are to be recommended at this stage.

The newly elected government will inherit a more challenging set of tasks than any of its predecessors in decades.