Don't take your eye off the ball

The global economy is still overwhelmingly driven by the USA, Europe and Japan - though you might not think so, given all the noise about the rise of China and India.

Even if one uses as the basis of calculation the fashionable but ridiculous idea of Purchasing Power Parity (PPP), the US and Europe account for around 45% of world GDP and 60% of global personal consumption spending in 2007. Over half of world exports and imports originate from these countries, as do nearly three-fourths of global outward foreign direct investment and a similar share of global mergers or takeover deals.

The rest of the world is inevitably dependent on what happens in the "driver or central economies".

The "marginal or peripheral economies" are always more badly hit than the central economies during a bust phase of the economic cycle, but the peripheral economies rise more quickly during the boom phase.

As the global economy at present bumps along an artifically-sustained bottom, the effects on the peripheral economies are patchy - the "leading peripheral economies" have maintained some sort of equilibrium overall though parts of their economies too have been hit. Meanwhile the "even more peripheral economies" have been uniformly hit.

Of course if your economy was dependent on exports, then it was more likely to be hit by the crisis.

And it is likely to continue to be hit by the crisis unless your government can stimulate internal demand.

Naturally, the more your government tries to stimulate internal demand by spending money or reducing taxes, the weaker it will get in terms of its finances (on China, which is reckoned to be an exception to this rule, I have written skeptically earlier).

A few such countries caught in this dilemma (e.g. Iceland) can try to rush into the arms of larger economic groupings for protection. Most do not have this option.

They should think seriously of adopting one or more complimentary currencies as a mechanism that can help their economies stabilise - and not just in the current crisis. Stabilisation is as much needed when nearing the top of a boom as it is needed when nearing the bottom of a bust. Sphere: Related Content