Washington, 18 December 1998 (RFE/RL) -- 1998 began not on January 1st but August 17th.
That was the day that Russia effectively devalued the ruble and imposed a 90 day moratorium on repayment of many foreign debts -- unilateral actions which assured that the Asian financial crisis, which began in 1997, would become world wide in 1998.
The direct financial impact of Moscow's actions was almost insignificant in the totality of the global economy, but it was the psychological effect that did the damage.
Charles Dallara, Managing Director of the global organization of commercial financial firms, the Institute of International Finance (IIF), said investors and lenders who had become nervous over Asia's financial troubles went into full retreat after Moscow's moves.
Russia's unilateral action prompted a mass flight of capital out of all developing countries everywhere in the world, a flight that left virtually no credit or money available for normal business.
World Bank President James Wolfensohn said the change in investor mood and confidence reversed what had been a $30 billion flow of money into developing nations and turned it into a massive and sudden withdrawal of capital, flowing out at an even faster rate.
This sudden outrush of money, generally redirected to so-called "safe havens" in U.S. and German government treasury instruments, panicked major stock markets in the leading industrial countries and for a time sent their prices plunging as much as 20 percent.
The dramatic decline didn't last for long, however, and while the markets remained in turmoil for the rest of the year -- mostly in reaction to political developments as much as the continuing difficulties in Asia, Russia and elsewhere -- the major stock price average indexes regained everything that had been lost.
While stock prices generally recovered, the expected general economic growth of the world did not. Within a month of Russia's actions, the International Monetary Fund (IMF) lowered its forecast for global growth this year from three to two percent.
The fund said that the spillover effects of Russia's crisis on all the nations in transition would drop them from expected growth to a 0.2 percent decline both this year and next.
But as importantly, the fund said that when broken down by nation, it's forecast showed that those with the closest trade and financial ties to Russia would suffer far greater declines in output. Those countries which had progressed faster in their reforms and refocused trade and financial ties to the west, the IMF said, would continue to grow although at slower rates.
The World Bank, at the beginning of December, said the crises had taken a bigger toll on the global economy than anyone had expected and that it was too soon to tell if a world-wide recession might be in store in 1999.
World Bank Senior Economist Mick Riordon said developing countries were hurt worst than industrial countries, but that overall the outlook was not entirely bleak:
Riordon said the bank remains cautiously optimistic that the worst will be avoided provided there are no new emerging market country crises, that Japan doesn't deteriorate further and that there is a gradual resumption of capital flows.
The bank's Senior Vice President and Chief Economist, Joseph Stiglitz, said that while the crises prompted it to lower its forecast for world economic growth this year to less than one-half of one percent, the bank remains basically optimistic:
Stiglitz said that while the bank can't say when the world economy will recover from the current downturn, there have been crises before and the world has always recovered.
Japan, once a driving force in the global economy, experienced mostly downward trends in 1998, further contributing to the general Asian financial malaise. Western Europe, which has been in something of a slump for more than a year, still couldn't shake off the pessimism of slow economic growth and high unemployment.
Latin America began to feel the effects of the crises late in the year as well and Brazil, like Russia and the Asian "tiger" economies, needed an international rescue package to deal with it's problems.
The exception to the global slowdown was the United States, which throughout 1998 continued to chug along the tracks of strong economic prosperity, acting as the economic engine for much of the world.
U.S. President Bill Clinton said in early December that it had been another good year for the American economy:
Clinton said unemployment had remained below 5 percent for a year and a half for the first time in 28 years, inflation remained low and stable and more than 17.3 million jobs had been created in the U.S. in the last six years.
Even with the threat of impeachment hanging over Clinton, and the renewed fighting with Iraq at the end of the year, the U.S. economy continued to strengthen with the country's foreign trade deficit taking an unexpected drop and first time claims for unemployment going down again in mid-December.
Whether actions by the G-7 nations, in coordination with the World Bank and the IMF, to reform and improve the global financial system are helping to mitigate the effects of the various financial crises remains unclear. But the IMF will update it's world economic outlook again in late December and that is expected to be a far more comprehensive analysis of 1998 and the outlook for 1999.