Problems of Economic Transition, vol. 53, no. 6, October 2010, pp. 45–62.

© 2010 M.E. Sharpe, Inc. All rights reserved.

ISSN 1061–1991/2010 $9.50 + 0.00.
DOI 10.2753/PET1061-1991530603

A. Rapoport and A. Gerts

The Global Economic Crisis

of 2008–2009
Sources and Causes

The authors consider the recent global crisis as the superposition of sev-
eral regional crises that occurred simultaneously but for different reasons.
However, these crises have something in common: developed countries
tend to maintain a certain level of social security without increasing real
production output. This policy has resulted in trade deficits and the partial
destruction of market mechanisms.

Overall state of the economy in developed and developing

countries in the precrisis period

American financial institutions are generally considered to be the main

initiators of the global crisis of 2008–9. Certainly there is much to
criticize in the behavior of these institutions, including commercial and
investment banks and funds, as well as rating agencies. But was this the
main cause of the crisis? After all, an incorrect diagnosis could have
disastrous consequences.

English translation © 2010 M.E. Sharpe, Inc., from the Russian text © 2009 “Vop-
rosy ekonomiki.” “Global’nyi ekonomicheskii krizis 2008–2009: istoki i prichiny,”
Voprosy ekonomiki, 2009, no. 11, pp. 18–31. A publication of the NP “Editorial
Board of Voprosy ekonomiki” and the Institute of Economics, Russian Academy
of Sciences.
G. Rapoport is a Doctor of Technical Sciences, professor, and consultant and
A. Gerts is a consultant for Rapidware Pty Ltd. (Australia).
Translated by James E. Walker.

45
46 problems of economic transition

Deeper analysis of the sources and causes of the crisis of 2008–9 raises
many questions that need to be answered before selecting tools that are
capable of alleviating the impacts of the crisis and preventing similar
processes in the future. It is important to determine whether there was
a single source of the global crisis or a coincidence of several more or
less unrelated events observed in separate regions as a result of various
causes.
Any corporate systems, including countries and political and economic
unions of them, are continuously fluctuating dynamic structures. They
go through all stages of development—emerging, flourishing, declining,
and collapsing—which determine the results of their interaction with
the surrounding world. A system in the stage of expansion will respond
differently to changes in the situation than a system in the stage of de-
cline or collapse. This phenomenon has to be considered in analyzing
the current crisis.
We consider changes in the mix of international production and trade
in the past twenty to thirty years. During this period new relations were
established between many corporate systems in developed countries and
their subsidiary firms in developing ones. Fragmentation of industrial
production became common, with divisions of the same firm in differ-
ent countries manufacturing many components and assembling the final
product. At the same time, the balance was altered between the costs of
producing and transporting the products, tariffs, and so forth.
This process led to a significant increase in the volume of foreign
trade in developed countries and a number of developing ones. However,
it must be taken into account that exports of industrial products from
developing countries are growing considerably faster than value added:
as before, the bulk of value added is produced in developed countries.
These conclusions agree with Jörg Mayer’s data.1 For example, in
1980–2000 the growth of value added by 37 percent outpaced the in-
crease in industrial exports from developed countries (the United States,
Germany, Japan, Great Britain, France, etc.). In developing countries
(China, Argentina, Brazil, Indonesia, etc.), total industrial exports grew
almost twice as fast as value added during the same time.2
Thus, the hypothesis that a number of developing countries are
catching up with and passing developed countries in the sphere of
industry is not confirmed. What is happening in the process of glo-
balization is division not according to the amount of gross domestic
product (GDP) or industrial production, but according to the level of
 october 2010  47

technological complexity and the “intellectual content” of the products

that are being made.

Economic structures and their social histories

All countries that are currently experiencing the effect of the crisis can
be divided into four groups.
In the first group are countries in which a capitalist market economy
was established many years ago, including the leading countries of the
European Union: France, Great Britain, and Germany, among others.
Their GDP is growing very slowly. For instance, average annual GDP
growth rates in 1997–2006 were 1.3 percent in Germany, 2.35 in France,
and 1.5 percent in Italy.
These countries have passed their economic heyday. Today they are
maintaining their level of prosperity not by means of industrial production
but mostly because of the service sector and income from investments
in developing and developed countries with innovation-type develop-
ment. They are actually becoming rentier states living on the income
from savings.
Since 2000, the rate of return on foreign investments has increased by
an average 5–6 percent per year.3 It is somewhat difficult to get precise
data on the flows and structure of these investments, or on the stores of
foreign assets and liabilities in individual countries and regions.4 How-
ever, based on the available information, it can be estimated how much
the exports of investments from these countries exceed their imports, in
value terms (see Table 1).
As a result of the increased profitability of foreign subsidiaries, espe-
cially in developing countries, the reinvested incomes of large European
transnational corporations in recent years amounted to about 30 percent
of the aggregate inflow of foreign direct investment (FDI). In 2006,
the foreign assets of British Petroleum (Great Britain), Royal Dutch/
Shell Group (Great Britain and the Netherlands), Total (France), E.ON
(Germany), and others reached 60–90 percent of their total assets. The
foreign expansion is continuing at present, in spite of the financial and
credit crises and the decline in FDI.
The second group is made up of countries with innovation-type devel-
opment, in which a capitalist market economy emerged approximately
100–150 years ago (the United States and Japan). These countries are
characterized by intensive economic growth, high per capita GDP, and
48 problems of economic transition

Table 1

Value of Exported and Imported Foreign Direct Investment (FDI; France,

Great Britain, Germany, and the Netherlands)

Total income from net

Exports Imports Net exports exports of investments*
Billion dollars % of GDP

1997 1,478 1,000 478 18** ($235 billion)

2007 6,218 4,527 1,691 40

Sources: “Priamye inostrannye investitsii,” Zapiski Mezhdunarodnogo Foruma, Ekonomi-

cheskie i sotsial’nyi sovet, 2009; United Nations Conference on Trade and Development,
World Investment Report: Transnational Corporations and the Infrastructure Challenge
(New York; Geneva, 2008); and authors’ calculations.
  *The average income from FDI is approximately 13 percent.
**Foreign portfolio investments are approximately equal to FDI.

a developed social safety net system. Imports of direct and portfolio for-
eign investments and debt securities exceed their exports.5 Since 1990,
information technologies have made a large contribution to the economic
growth of these countries. While they provided for about 15 percent of
GDP growth in 1973–75, this figure reached 18 percent in 1995–2002
and is still increasing.
In addition, the United States has been characterized by relatively high
average annual economic growth of 3.4 percent over the past decade.
This is significantly more than in other developed countries that belong
to the first group. When analyzing these data, it should be taken into ac-
count that “even small differences in the rate of increase in production
accumulate with time, determining the difference in per capita GDP and,
thus, differences in the standard of living.”6
At present, U.S. per capita GDP is the highest in the world in compari-
son with European countries and developed Asian countries. The United
States also actively receives FDI: imports exceed exports by more than
25 percent. Exports of goods, in value terms, are growing significantly
faster than imports (by 6.8 and 0.8 percent, respectively, in 2007).
The third group includes countries that have large reserves of natural
resources (oil, gas, metals, etc.) sufficient to maintain a comparatively
high standard of living, but lack high-tech production in their industrial
structure. This group includes countries with developed agriculture and
service sectors (Australia) as well as countries with almost no agrarian
 october 2010  49

Table 2

Gross Domestic Product (GDP) by Country

2006
Population 2006 GDP 2008 GDP per capita GDP
Thousand
Country Million Billion dollars dollars

Qatar 1.1 57 102 52.0

Venezuela 28.1 182 319 6.4
Russia 141.0 987 1,676 7.0

Source: Australian Government, Department of Foreign Affairs and Trade (2009), www.
dfat.au/geo/.

sector (oil-producing countries of the Middle East, Nigeria, etc.). It also

includes Russia, Iran, Venezuela, and so on, where raw material exports
make up a considerable share of GDP.
The standard of living and the social safety net in these countries
depend on population size: all else being equal, the smaller the popula-
tion, the higher per capita GDP and the standard of living. Per capita
GDP is highest in oil-producing countries (Qatar and the United Arab
Emirates) (see Table 2).
The GDP of countries in this group depends on international prices
for the mineral resources they export. When average oil prices rose
from $50 to $140 per barrel in 2008, their GDP increased substantially
in comparison with 2006.
According to S. Shafaeddin’s methodology,7 developing countries can
be divided into three groups. The first group includes countries that now
have a fairly developed industrial sector and are ready to export industrial
products (Southeast Asia). The second group consists mostly of countries
that, in spite of developed industry, still import basic machine-building
products (Latin America, the Middle East, North Africa). The third group
includes countries with a weak industrial base (Africa).
Since 1980, many developing countries have carried out structural
reforms and liberalized their trade relations to build up and diversify in-
dustrial exports. These attempts have been crowned with success only in
Southeast Asian countries and some Latin American countries. Moreover,
most countries of Africa and Latin America are being deindustrialized:
their output of industrial products and surplus value is declining, and other
50 problems of economic transition

crisis phenomena are occurring in the economy.8 In most Latin American

countries, exports are growing mainly because of mineral resources and
partially because of the automobile industry.
For example, in 1989–2000 developing countries of the first group
increased their exports of industrial products by an average 17.9 per-
cent annually, and total exports by 10.6 percent annually. During the
same period, the annual increase in industrial exports of countries in the
second group was 7.7 percent, and total exports increased 7.2 percent
annually. At the same time, for countries in the third group, industrial
exports declined by1.2 percent annually and total exports increased by
3.7 percent annually.
The fourth group is made up of rapidly developing industrial countries
to which a number of traditional types of production are being trans-
ferred, including unprofitable, laborious, and “dirty” industries (countries
with considerable labor surpluses and low levels of social protection:
China, India, Brazil). This is primarily because of structural changes
in developed countries’ manufacturing in favor of computerizing high-
tech sectors and consequently the opportunity to make higher profits.
For instance, in the United States the ratio of net profit to equity capital
in 1995–2000 was 15.5 percent in the aerospace industry, 14 percent in
instrument making, and 27 percent in pharmaceuticals, but at the peak
of the economic expansion in 2000 the textile and steel foundry sectors
operated at a loss (–2.7 percent).9
The transfer of unprofitable plants to countries of this group enabled
the latter to sharply increase their industrial potential and become world
leaders in cumulative GDP increase. In 1991–2007, average GDP in-
crease in China ranged from a minimum of 9,1 percent in 2002 to a
maximum of 11.4 percent in 2007. But this growth was not due to new
technologies and higher labor productivity, but to cheap labor and weak
social protection of the population, which is expressed in the extremely
low level of per capita GDP in comparison with the United States and
European countries.

GDP and assessment of the real state of the economy

Indicators of the state of the economy and economic growth have a sig-
nificant influence on decision making regarding a country’s management,
and therefore a bad choice may lead to undesirable consequences. Gross
domestic product as a whole and per capita GDP are considered the key
 october 2010  51

indicators of economic growth. These indicators have been subjected to

serious criticism. In particular, it has been noted that GDP characterizes
business activity, and not the overall state of the economy.10 A different
indicator has been suggested: genuine national product (GNP).
GDP reflects the degree to which the government is performing redis-
tribution functions and providing social support for the population, since
the tax burden lies on products of not only the real sector of the economy
but also the virtual one. Why it is wrong to use GDP as an indicator of
the state of the economy can be explained as follows.
GDP is defined as the aggregate volume of goods and services entering
the market during a certain period. GDP is created by three segments:
the real sector (production of goods, real services to the population, and
professional and scientific and technical services), the financial sec-
tor (finances), and trade. The real sector’s contribution is equal to the
output of goods in monetary terms (manufacturing, extractive industry,
agriculture, construction, etc.) and services (housing and utilities, power
supply, food service, repair shops, etc.). The contribution of the financial
sector and trade consists of distributing and managing flows of money
and goods.
Thus, the economic strength of any country in monetary terms is
characterized by the following indicators: the output of the real sector
of the economy and the volume of virtual “products” (distribution and
management of flows of money and goods). The amount of exports and
imports of investments indirectly indicates a country’s economic prefer-
ences and its economic health.
This approach is analogous to describing a system that provides elec-
tric power to a large region. All of the power generated by the region’s
electric power plants is, in fact, spent on providing it to real consumers,
auxiliary power that the power plants need to stay in continuous operation,
providing for transportation of power to real consumers (grid losses), and
exports of surplus power to regions where there is a shortage of it. It is
worth noting that power transmission is done through high-voltage lines
that handle wholesale distribution as well as through local grids.
No power engineer would ever think of counting auxiliary power or
grid losses as positive results of the power supply system’s operation.
On the contrary, power engineers everywhere try to minimize them, or
at least not add to them. Of course, if the power system’s capacity or
the amount of power transmitted to consumers increases, then auxiliary
power or grid losses will rise. Any estimate of the condition of a region’s
52 problems of economic transition

power supply uses the amount that a real consumer can receive. If the
parameter of installed capacity is used, then losses are estimated in some
acceptable average range.
Obviously, all else being equal, the less that is spent on managing
flows of money and goods, the more efficiently an economic system is
functioning. Consequently, the ratio of the real sector’s output to GDP
can serve as an indicator of an economic system’s efficiency.
The level of development of financial institutions and instruments
only indirectly describes the dynamics of an economy. The contraction or
expansion of credit functions as a tool for managing the economy, and the
financial and trade sectors are its mechanisms. The complexity of these
mechanisms meets the requirements of the economy’s development in
the conditions of its operation in a specific environment and determines
its potential economic dynamics. We believe that the main indicator of
the state of an economy should not be GDP, but the increase in the real
sector’s output plus the ratio of this output to GDP.
Export and import flows of foreign investments, primarily GNP and,
to a lesser degree, portfolio investments and debt securities, can be
considered indicators of this sort. Obviously, while imports of foreign
investments make it possible to increase the volume of monetary flows
and provide for development of the national economy, the effect from
exports is harder to determine because it is necessary to know the rate of
return on the investments. If it grows and exports of foreign investments
significantly exceed imports, a country becomes a financial rentier living
on rent from previous generations. This is reminiscent of the behavior
of countries that have large raw material resources and support the well-
being of their population by means of natural resource rent.
Consequently, another indicator of the state of an economy and its
development can be the difference between the amount of GNP exports
and imports, to which the averaged (smoothed) amounts of portfolio in-
vestments and debt securities are added. An excess of investment exports
over imports in these terms is equivalent to production of real products
at firms in the exporter country. This indicator can be defined as output
equivalent to real production.

The crisis in the United States

From an analysis of statistical data, it follows that the primary cause of the
crisis in the United States in 2008–9 was commonplace overproduction
 october 2010  53

of products of the construction and automotive industries, which occur

cyclically with a period of a few years (the Kitchin cycle). Why were the
consequences of such overproduction so adverse this time? When the
first symptoms appeared, market mechanisms did not communicate the
trouble in these sectors, due to an inaccurate assessment of the state of
the economy, because of not only the quality of financial mechanisms but
also an incorrect choice of indicators of its behavior. A commercial and
industrial crisis in the construction and automotive industries served as
a trigger for the financial crisis in the United States, which then turned
into a general financial and industrial crisis.
The financial mechanisms for managing the economy failed to operate
properly for the following reasons. For many years, the government’s social
policy had been focused on mitigating the effect of cyclically repeating
production phenomena and resolving the most important social issue:
providing low-income housing. The results of this policy were steady
growth of the main official indicators—GDP and per capita GDP—and
improvement of the social climate in the country. But at the same time,
the market mechanisms that provide feedback in the management system
were ruined and high latent inflation occurred. The complication of market
mechanisms led to a decrease in the risks of lending. With the growth of
GDP, the system for managing the economy became less efficient.
More than 63 percent of average annual GDP increase in the United
States in 1995–2000 came from financial services, insurance, sales,
leasing of real estate, and trade (see Table 3). Thus, efficiency fell from
83 percent to 67 percent during these years—that is, the economy be-
came less efficient because of the uncontrolled development of market
mechanisms and a decrease in the return from their use for servicing
the real sector.
While the real sector’s value added was 60 percent of GDP (in current
prices) in 1959, it fell to 55 percent in 1972, 52 percent in 1987, 48 per-
cent in 1995, and 41 percent in 2000. By 2008, this parameter had fallen
to 35 percent. The U.S. government was faced with a difficult dilemma:
how to restore and improve market mechanisms without permitting high
inflation, while solving social problems at the same time.

The crisis in developed countries of Europe

We now turn to an analysis of phenomena in economic rentier countries:

France, Great Britain, and Germany, among others. Their main source
54 problems of economic transition

Table 3

Share of Sectors of the U.S. Economy in Gross Domestic Product (%)

Sector 1997 2002

Financial and banking services 2.4 7.6

Real estate 7.5 12.6
Trade 7.2 12.7
Wholesale trade 1.6 6.0
Retail sales 5.6 6.7

Source: A.Iu. Davydov, “Osobennosti rosta amerikanskoi ekonomiki v epokhu globali-

zatsii,” Nauchnye doklady: nezavisimyi ekonomicheskii analiz, no. 177, Moscow Social
Science Foundation, Institute of the United States and Canada, Russian Academy of
Sciences (Moscow, 2006).

of income is previously accumulated savings (exports of investments),

and their level of social protection of the population is also high. In
contrast to the United States, lending policy in these countries was not
intended to solve difficult social problems, and there was no pronounced
overproduction of construction and automotive products.
To what extent was the crisis in these countries caused by the crisis in
the United States? In our opinion, there is little connection between them.
First, all of the signs of a recession in these countries started to show up
before they did in the United States. Second, this crisis was mainly of a
social and industrial nature, and there were no signs of failure of financial
mechanisms. The main cause of the crisis in the developed countries of
Europe was a significant decline in income from exports of investments
and industrial production because of a substantial rise in energy prices.
The price of oil was $20–30 per barrel in 1997–2001; then it began to
increase, and by mid-2008 it had reached $140 per barrel. The price of
natural gas rose at the same rate, with a certain lag, to $450–500 per
1,000 cubic meters. Because the cost of energy resources affects the
cost of production of industrial products and logistics, the rate of return
on investments began to fall, and the first signs of a recession appeared.
The recession turned into a full-scale crisis after the flight of portfolio
investments caused by the crisis in the United States, and production
began to decline and unemployment to rise in these countries.
The financial crisis in the United States brought on the beginning
of a new economic cycle and led to exacerbation of social problems.
 october 2010  55

Events unfolded in this way because the tax burden and, consequently,
the government’s ability to mobilize revenues and redistribute GDP
without detriment to economic development had reached its limit by the
beginning of 2000: more than 45 percent in Germany and Great Britain,
and more than 51 percent in France.11 In conditions when the annual-
ized decrease in GDP is 3–6 percent,12 these countries face a difficult
dilemma: to preserve the previously achieved level of social support for
the population, but sacrifice the possibility of further economic devel-
opment, or to cut back their social commitments in regard to pension,
family, and unemployment benefits, and government funding of health
care and education.

The crisis in energy-exporting countries

We now consider crisis phenomena in the group of countries that have

large reserves of natural resources but lack high-tech production in their
industrial structure. They are heterogeneous in their per capita GDP,
the percentage of exports in GDP, and their tax burden. The crisis had a
greater effect on countries where production and exports of raw mate-
rial products, primarily oil and gas, make up the bulk of GDP: Russia,
Venezuela, and Middle Eastern countries. In the second half of 2008
alone, Russia’s GDP fell by 35 percent, Venezuela’s by 32 percent, Saudi
Arabia’s by 21 percent, and Kuwait’s by 33 percent.13 It must be noted
that some Middle Eastern countries have hardly suffered at all from the
crisis. One is Qatar, which increased its oil production by 13.2 percent,
and another is Iran, which compensated for decreased earnings from oil
sales by increasing its output of industrial products.
One of the unique properties of oil and gas as objects of trade is their
commodity inelasticity. Elasticity implies a fairly smooth response
of commodity prices to the relationship between supply and demand.
Furthermore, oil and gas prices depend almost not at all on supply and
demand but are regulated by other mechanisms. In 1930–70, oil prices
(in constant 2008 prices) held steady at $15 per barrel.14 After the shock
at the beginning of the 1970s associated with the war in the Middle
East, it rose to $50 per barrel and reached a maximum of $90 per barrel
after the Iranian revolution in 1979. Until the mid-1980s, the price of
oil gradually declined and then stabilized at a level of $25–35 per bar-
rel until 2003, after which it jumped sharply to $145 per barrel and fell
just as sharply to $50–70 per barrel in 2008. Note that the price of oil
56 problems of economic transition

was not much affected by the invasion of Kuwait by Iraq in 1990 or the
Asian crisis of 1998.
What was the reason for the unprecedented rise and fall of oil prices in
the first decade of 2000? Some analysts suggest that its increase in 2003
was due to the beginning of the war in Iraq. It is easy to show that this is
not so. The drop in oil production in Iraq from 104 million tons in 2002
to 66.1 million in 2003 was short-term. In 2004, oil production almost
reached the 2002 level, with the decrease being compensated by a rise
in oil production in Iran (by 31.5 million tons), Kuwait (by 16.6 million
tons), Saudi Arabia (by 59.8 million tons), and other OPEC countries.
Maybe the significant rise in oil prices in 2003–8 was due to increased
demand for it in China and India. In fact, during this period, the cumula-
tive annual oil consumption in these countries rose from 384.8 million to
510.7 million tons (by more than 30 percent), but this was not reflected
in worldwide oil consumption. Thus, the difference between worldwide
oil production and consumption was almost unchanged and stayed at
almost the same level: in 2001, production outpaced consumption by 0.4
percent; in 2002, consumption outpaced production by 0.8 percent; in
2003, production outpaced consumption by 5.8 percent; in 2004, by 0.9
percent, and so on up until 2008. We can see that there was no economic
basis for a sharp jump in oil prices in 2003.
A similar pattern was seen with the sharp rise in natural gas prices and
the dynamics of its supply and demand. In 2005–8, gas production rose
faster than demand: by 0.3 percent in 2005, 0.8 in 2006, 0.2 in 2007, and
by 0.015 percent in 2008. In this case, the demand for gas hardly affected
its pricing in developing countries: China almost did not import gas then,
meeting demand from its own sources, and India imported gas on an
insignificant scale: less than 0.9 percent of its total production. But gas
prices, which were stable in 1990–2000, began to rise sharply in 2002
and had increased by almost 500 percent at the beginning of 2008.
This phenomenon can be explained as follows. Oil and gas ceased
to be a market commodity; their price is largely determined by the mo-
nopoly component in their production and transportation. The Internet
made a considerable contribution to the destruction of traditional market
mechanisms for trading in energy resources: short-term subjective factors
began to have a greater influence on market quotes, and they became
more sensitive to noneconomic effects, but at the same time the whole
economic system became more unstable.
A monopoly price enables the possessors of energy resources to
 october 2010  57

Table 4

Per Capita Gross Domestic Product (GDP) in 2006 ($1,000)

Approach Country Per capita GDP

First group United States 44

Great Britain 38
France 37
Germany 35
Second group Qatar 52
United Arab Emirates 34
Kuwait 30
Saudi Arabia 14
Third group Russia 7
Venezuela 7
Iran 3

Source: World Statistics, Country Comparisons, www.nationmaster.com/graph/eco_gdp_

percap-economy-gdp-per-capita&date-2006/.

become rentier countries living on natural resource rent. Oil and gas
consumption are fundamentally important for the survival of contem-
porary Western civilization now, and therefore monopolist countries
can set some “fair price” for them that is determined according to three
approaches.
1. The approach of consumers, primarily developed countries
of North America and Europe. A fair price is determined on
a competitive basis, for which all oil and gas delivery routes
should be free of government interference. For these countries,
the price can change in the following range: no lower than the
cost of production of oil and gas in the North Sea and in the
United States, but no higher than the value at which income
from investments and the previously attained level of social
protection of the population drop significantly. These countries
include those with high per capita GDP (see Table 4).
2. The approach of sellers, countries with large reserves of energy
resources but a small population. A fair price is determined
as a result of consensus. It is regulated in a range that makes
it possible to maintain the population’s social protection at a
58 problems of economic transition

sufficiently high level, but no higher than the value at which

income from investments in the financial structures of developed
countries (the United States and EU) drops significantly. The per
capita GDP of these countries corresponds to that of developed
countries in the European Union.
3. The approach of countries with large reserves of energy
resources and a large population. A fair price for these countries
is determined by the value that keeps social protection of the
population at the level of developed countries of Europe (mostly
by means of energy resources).
Starting in 2006, energy prices rose sharply, particularly for oil, the
price of which rose from $60 to $145 per barrel in a year and a half, and
for natural gas, the price of which increased by approximately 100–200
percent in the same period. The rise in the price of energy enabled this
group of countries to increase their per capita GDP by 50–100 percent,
bringing it close to the level of European countries: Russia and Venezuela
by 40 percent, and Iran by 37 percent. That was followed by the global
economic crisis, and prices returned to their 2006 values.
It can be stated that a price of energy resources above the 2006 level
generates a crisis in consumer countries and is therefore unacceptable for
rentier countries with small populations. A fair price at a level no higher
than the 2006 level led to negative economic and social consequences
for energy-exporting countries with large populations.
Political (and not just political) events of recent years are associated
with a conflict situation that can arbitrarily be called “a war for fair
prices”: the Georgian–Russian war, the Ukrainian–Russian conflict,
anti-Western reforms in Venezuela, the war in Iraq, and the conflict
between Western countries and Iran. The fight is not for possession of
the world’s oil and gas regions, but for fair oil and gas prices. And while
energy consumer countries are trying to create a competitive environ-
ment in this market, exporting countries are trying to set the price in a
monopoly way.
This is the essence of the “new cold war” that is developing between
Russia and its Western partners, which has a trade and economic nature
rather than an ideological one.15 The main objects of this “war” are not
only pipeline routes, but also gas liquefaction technologies, reduced
greenhouse gas emissions, energy-saving technologies, gas production
from nontraditional sources, particularly shale gas and coal methane, and
 october 2010  59

Table 5

Share of Sectors of China’s and India’s Economy in Gross Domestic

Product (%)

Industry Agriculture Small business

China 44 12 8
India 21 18 17

Source: United Nations Statistics Division, unstats.un.org.

so on.16 The outcome of this war is hard to predict now, but it can be said
that the losing side will have serious social problems.

The effect of the global crisis on the rapidly developing

countries of Asia

The fourth group of countries that have been integrated into the interna-
tional economy includes the rapidly developing countries of Asia: China
and India, where average annual GDP growth rates in the past decade
reached 9–10 percent or more. These countries have a large population,
so, despite their high GDP, their per capita GDP and level of social
protection are extremely low. In 2007, China shared second place with
Germany in the amount of GDP ($3.4 trillion, in current prices). But in
per capita GDP ($2,600) it is in ninetieth place, after Angola, Guatemala,
and Albania.17 In India, total GDP is $1.14 trillion (120th place in the
world). In contrast to developed countries, the tax burden in China and
India is 14 and 11 percent of GDP, respectively, which is not enough for
them to provide significant social support for the population, given their
large bureaucratic apparatus.
Despite such similar parameters, China and India follow different
economic development models. While in China GDP growth is associated
mostly with the development of industrial production and mining, with
a comparatively low productivity of agriculture and small business, in
India, agriculture and small business play a larger role (Table 5).
The contemporary Chinese economy depends more on the foreign
market. Exports provide about 80 percent of the foreign currency earn-
ings needed to develop industrial production. Though it was somewhat
60 problems of economic transition

late in getting there, the economic crisis of 2008–9 hit China hard: for-
eign currency earnings fell by more than 17.5 percent, and GDP growth
slowed from 11.4 percent in 2007 to 6.1 percent in 2009,18 and India to a
lesser degree: annualized GDP growth there decreased from 9.6 percent
in 2006 to 6.6 percent.
Analysis of the causes and sources of the crisis of 2008–9 raises a
question: can China and India be considered its victims or are they partly
to blame for its occurrence and development? In connection with this, the
opinion of Ben Bernanke, chairman of the U.S. Federal Reserve System,
is interesting. In March 2005, he noted that the global saving glut and
the current account deficit in the United States present a great risk for
the international financial system. In his words, although the American
economy is in good shape, fears are raised by the large deficit and the
associated foreign debt, which could lead to a crisis. A similar imbalance
arose as a result of a sharp change in the direction of monetary flows in
the late 1990s, when China disrupted the balance of international trade,
thanks to the extremely low cost of production of its products, and created
a significant current account deficit in developed countries, especially
the United States.19
Bernanke’s words proved to be prophetic. The monetary flow from
China was mostly invested in U.S. treasury bonds, which led to a surplus
of funds in the financial market. To cope with them, some market mecha-
nisms were changed, and the monetary flow gushed into the housing and
automobile market, which had no safeguards at all, creating an enormous
bubble in these sectors. In Bernanke’s opinion, this is the cause of the crisis
not only in the United States but also in Germany, Japan, and a number of
Asian countries for which trade with China is very important.
In 2008–9, the crisis might have had a stronger impact on China’s
GDP if the government had not taken measures to shift the emphasis in
its economic activity from foreign expansion to domestic development,
mostly to creating new infrastructure (railroads, highways, ports) in eco-
nomically underdeveloped regions. This policy was made possible by the
large monetary reserves accumulated in previous years, but it could not
guarantee the country’s dynamic development in the postcrisis period.
Infrastructure development presupposes an increase in exports or a
sharp jump in domestic demand for goods and services. As the crisis has
shown, the former is out of the question, and the latter involves a decrease
in the competitiveness of Chinese goods in international markets and the
transfer of production of products with low value added—for example,
 october 2010  61

in the textile industry—to other Asian-Pacific countries with cheap labor

(Vietnam, Bangladesh, Thailand).
The global crisis has worsened the social situation in both China and
India. According to United Nations data, about 130 million people in
China consumed less than $1 per day in goods and services in 2007, and
35 percent of the population spent less than $2 per day.
***
The global crisis of 2008–9 is two crises that were only slightly related
at first. The first one occurred in the United States because of China’s
economic expansion, which led to an imbalance in foreign trade and the
destruction of market mechanisms in the United States. The second crisis
occurred in Western Europe because of the social policy of governments
there, which tried to raise the level of social protection of their popula-
tion without increasing the output of real products. This policy did not
fit with the efforts of oil and gas exporting countries to set a monopoly
price for their energy resources. In other words, a conflict arose between
the interests of monetary rentiers and natural resource rentiers.
We will describe the potential consequences of the crisis of 2008–9. First
of all, the structure of the financial system will not change significantly.
Second, China’s economic expansion will be diminished, its GDP growth
rate will decline, and social problems will be exacerbated. Third, problems
will accumulate in the social sphere of West European countries, Russia,
and Iran, their opposition will intensify, and the cold war may develop into
regional hot wars. In these forecasts, we do not take into account conflicts
of the Muslim world and some developing countries with the countries of
European civilization. But, in our opinion, they are of a secondary nature
and are instigated by those who are fighting for “fair prices.”

Notes

1. J. Mayer, “Industrialization in Developing Countries: Some Evidence from

a New Economic Geography Perspective,” UNCTAD Discussion Papers, 2004,
no. 174.
2. J. Mayer, “Globalization, Technology Transfer and Skill Accumulation in
Low-Income Countries,” UNCTAD Discussion Papers, 2000, no. 150.
3. See United Nations, Doklad o mirovykh investitsiiakh 2008: transnatsional’nye
korporatsii i razvitie (New York; Geneva, 2008).
4. F. Lein [P. Lane] and Dzh. [G.] Milezi-Ferretti, “Izuchenie global’nykh
disbalansov,” Finansy i razvitie, March 2006.
5. Ibid.
62 problems of economic transition

6. A.Iu. Davydov, “Osobennosti rosta amerikanskoi ekonomiki v epokhu

globalizatsii,” Nauchnye doklady: nezavisimyi ekonomicheskii analiz, no. 177,
Moscow Social Science Foundation, Institute of the United States and Canada of
the Russian Academy of Sciences (Moscow, 2006).
7. S.M. Shafaeddin, “Trade Liberalization and Economic Reform in Develop-
ing Countries: Structural Change or De-Industrialization?” UNCTAD Discussion
Papers, 2005, no. 179.
8. Mayer, “Globalization, Technology Transfer and Skill Accumulation in
Low-Income Countries.”
9. Davydov, “Osobennosti rosta amerikanskoi ekonomiki v epokhu globalizatsii.”
10. See H. Henderson, “What’s Wrong with Market Economics and GDP?”
mimeo, 2008, available at www.hazelhenderson.com/editorials/market_economics_
gdp.html; C. Cobb, T. Halstead, and J. Rowe, The Genuine Progress Indicator:
Summary of Data and Methodology (San Francisco, CA: Redefining Progress,
1995).
11. E. Gaidar, “Gosudarstvennaia nagruzka na ekonomiku,” Voprosy ekonomiki,
2004, no. 9.
12. Department of State and Regional Development, “Gross Domestic Product
Growth Rates,” 2009, available at www.business.nsw.gov.au/aboutnsw/climate/
A3_gdp_growth_rates.htm.
13. Australian Government, Department of Foreign Affairs and Trade, 2009,
available at www.dfat.gov.au.
14. See also Voprosy ekonomiki, 2009, no. 9.
15. E. Lucas, New Cold War: The Future of Russia and the Threat to the West
(London: Bloomsbury, 2008).
16. “Tendentsii i perspektivy razvitiia mirovogo rynka prirodnogo gaza,” Energy
Strategy Institute, available at www.energystrategy.ru/old/materials/omr.htm.
17. United Nations Statistics Division, unstats.un.org.
18. See www.chinapro.ru/rubrics/12/2279.
19. A. Wood, “Crisis Was Made in China,” Australian, April 17, 2009.

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