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The Losers - And a Few Winners - of the Global Financial Crisis

The global financial meltdown is now playing out in dozens of different countries in hundreds of different ways. No country is immune, but the damage will hit some harder than others. Emerging market states, which usually lack the independent and mature political institutions needed for credible and coherent response plans, are among those in greatest immediate danger. Some of the problems the crisis generates will be with us for years to come.

Start with the likeliest losers. In several countries, relatively unpopular governments may soon find themselves at the mercy of political rivals with the power to obstruct their recovery plans. In Argentina, President Christina Fernandez de Kirchner has enemies even within the ranks of her Peronist Party. In Malaysia, the United Malays National Organization-led governing coalition faces a serious challenge from popular opposition leader Anwar Ibrahim. In neither country is the government committed to the longer-term economic reforms needed to inoculate their economies against future crises. The governments of South Korea and Thailand would probably implement effective reform plans if they could. In both cases, domestic political upheaval will probably interfere.

A second group of likely losers includes countries in which upcoming elections are diverting government attention from economic woes. In India, the embattled Congress Party faces national elections in the next few months. Substantial off-budget spending on petroleum subsidies, debt relief for farmers, and higher wages for public-sector workers may boost the party's electoral fortunes, but it shifts energy and resources from much-needed longer-term reforms.

In Turkey, a wide range of political challenges to the ruling Justice and Development Party has the leadership more focused on corruption charges, a battle with the opposition-dominated media, and terrorist attacks by Kurdish separatists than on the economic plans needed to ensure that Turkey avoids a tough economic hit. In Ukraine, rivalry between former political allies, President Viktor Yushchenko and Prime Minister Yulia Tymoshenko, has allowed the country's two most powerful politicians to hold economic reforms hostage to political games -- though help from the International Monetary Fund may finally be on the way.

The third group of losers includes badly governed authoritarian states like Iran and Venezuela. For the time being, in neither country does the current political leadership have to worry much about elections -- or any credible domestic opposition. Both have amassed deep financial reserves over the past several years, and neither is in immediate danger of serious civil unrest. But gasoline rationing and 30 percent inflation will take a longer-term toll on the popularity of Iran's theocrats. In Venezuela, high inflation and a shortage of consumer products -- the country imports virtually everything except crude oil -- will eventually pose challenges for Hugo Chavez. When oil prices reached $147 per barrel in July, both governments could afford some complacency. With crude now selling for less than half that amount, both are aware that longer-term problems loom.

The "winners" from the crisis are those well placed to absorb the global shock. In several countries, some democratic and others authoritarian, governments have deep enough reserves of political and financial capital to weather the near-term storm. China, Russia and Brazil fall squarely in this group.

In China, growth has slowed for five quarters in a row. But three decades of successful economic liberalization ensure that "slow growth" still equates to a 9 percent expansion for the third quarter of this year. The Chinese Communist Party has earned plenty of credit with China's people over that time, and the triumphalist pageantry of this summer's Beijing Olympic Games has added to the leadership's popularity. Nearly $2 trillion in foreign exchange reserves will allow the government to continue to create jobs and generate growth via spending on ambitious infrastructure projects.

In Russia, Prime Minister Vladimir Putin and President Dmitry Medvedev remain broadly popular, and the August conflict with Georgia has helped swell national pride. Stabilization funds created from windfall state oil profits over the past half decade have helped the government support a stock market that has lost two-thirds of its value in recent weeks and inject much-needed cash into banks now under heavy stress.

In Brazil, President Luis Inacio Lula da Silva remains popular, and his adherence to conservative macroeconomic policies over the past several years helps the country attract foreign investment and keep inflation in check. States like Saudi Arabia and Singapore have deep enough pockets and enough social stability to avoid serious turmoil, as well. Unlike fellow OPEC members Iran and Venezuela, the Saudis have stuck to conservative estimates on oil prices when planning state spending.

Second are smaller developing states, where green-field investment opportunities and a low-cost business environment allow for durable high growth. The financial crisis will slow them down, but economies that are not dangerously dependent on agricultural exports or the price of base metals will bounce back most quickly. That's true for Cambodia, Kazakhstan and Kenya.

But the global slowdown will also have transnational effects. In the medium term, it will provoke a shift in global migration patterns. As rich-world economies contract, fueling the frustrations of local workers who already face dwindling employment opportunities, large numbers of unskilled and semi-skilled foreign laborers will leave these countries to compete for scarce jobs at home.

This trend will benefit some emerging market economies now plagued with labor shortages and domestic wage inflation, like several countries in Eastern Europe. But there's a downside for others. The migration will slow the flow of remittances (payments from workers abroad to their families back home), which are a substantial source of income for many of these states. It could also fuel unrest in several developing countries as the return home of low-skilled workers adds to unemployment problems. This trend will create near-term risks for Turkey, Pakistan, the Philippines, Mexico and several states in Central America.

A final longer-term risk to consider: In recent years, growing middle classes in several Middle Eastern and South Asian countries have fueled a backlash against radical Islamists who would rather attack the global economy than profit from it. Coordinated (and well-funded) counter-terrorist efforts have helped to cripple terrorist cells from Iraq to Indonesia.

But in countries that have been counting on generous international aid for continued stability, this process could be thrown into reverse. Iraq probably faces the greatest danger, but this could prove a problem in Nigeria, Syria, Algeria, Bahrain, Lebanon, Yemen and other countries.

Most observers will measure the depth of the financial crisis by the fluctuations of global markets and policy responses from rich-world finance ministers. But its impact will touch workers and consumers all over the world, and its longer-term consequences will emerge only over time.

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Related Topics: africa | argentina | asia | brazil | china | financial markets | globalization | india | latin america | middle east | russia | syria | ukraine |

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