# **6. Conclusion: Alternative Sources of Demand and Policy Responses**

Stiglitz (2009) has noted that the recent downturn was the first economic crisis of the era of globalization, in that the crisis was felt globally (rather than in just some regions) and spread in part as the result of the globalized nature of financial markets. But his characterization holds true also for the production and trade sides of the economy. This has been the first economic crisis since the globalization of production (the expanded use of global value chains) has become extensive and sophisticated. It occurs with highly export-dependent developing countries participating in the world economy largely through these global value chains. Our analysis of the effects of the economic crisis on export-oriented developing countries confirms that the economic crisis that began in the US in 2007 and quickly translated into a large drop in demand for exports from developing countries has had a magnified effect on trade because of the prominence of GVC-based trade. Trade volumes rose much more rapidly than GDP for 25 years and the reverse occurred in the recent recession. The reverse effect has been more pronounced and the upturn more delayed in the recent downturn.

While this magnified effect is observed across sectors, there appears to be considerable variation based on recent US import data. Motor vehicles and parts imports and construction materials imports were falling by over 50% at an annual rate, while apparel and food imports have fallen by 10% or less and professional services imports continue to expand. The effect to date on developing countries thus depends on their export profile, that is on their role in global value chains, on the nature of the value chains (buyer or producer-driven) and on the net effect of the forces of import demand and substitution.

We have argued that because of structural changes occurring in this recession, there are reasons to be concerned about the possibility of a longer recovery of trade than previously. Moreover, the recession has occurred at a moment when global value chains are expansive and are subject to consolidation. We have found evidence that some consolidation of global value chains occurred in 2008, especially in buyer-led chains. China’s expanded market share across a spectrum of product categories, which seems to have come at the expense of other East Asian countries’ exports, supports this finding. Producer-led chains appear to be continuing the longerterm trajectory of diversification.

If trade volumes do not rebound symmetrically with the economic recovery, then the consolidation of GVCs is more likely, since the consolidation in the downturn will lead to a longer period of time for surviving suppliers to expand capacity and raise productivity.

Three policy conclusions emerge from our preliminary analysis: (1) Declines in export demand translate immediately into declines in foreign exchange reserves. In an environment where developing country foreign exchange reserves are growing more slowly or declining, the provision of $250 billion in trade credit by the G-20 is a useful stopgap measure and should be allocated quickly. The expanded resources of the IMF should also be tapped quickly and with reduced conditionality.

(2) Countries need to find other, non-export, sources of demand, or to diversify trade patterns to focus more on trade among developing countries. One source is expansionary fiscal policy. China’s large stimulus package is a prime example, and China’s growth has picked up following a large increase in unemployment from the initial shock to world trade. But China’s success in domestic stimulus in some ways points out the difficulty of drawing any general conclusions about the possibilities for stimulus across the developing world. Capacity for stimulus depends to a great extent on the prior accumulation of foreign exchange reserves. China is of course exceptional in it reserve accumulation over the past 15 years. Most developing countries have very small reserve stocks.

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