Capacity Constraint, Export Subsidies and World Recession

Abstract

During the global recession that began in September 2008, the world economy started to operate significantly below full capacity, and many industries around the world faced closure or else were forced to slash capacity to cope with the reduction in demand. As reported by United Press International (11 May 2009), the capacity utilization rate for industry overall in the United States fell to 69.3 per cent, a historical low since these statistics began to be compiled back in 1967. Collapsing world trade and the corresponding impact on industrial production has led the recession to spill over into export-led economies such as Bangladesh and Pakistan.¹ Such exporting countries have faced low capacity utilization caused by the global recession, and in response they have raised their export subsidy rates to promote their exports and help soften the low capacity-utilization problem. This simply indicates that export subsidy rates should increase with a fall in capacity utilization (or a demand recession).