International Production and Governance - Essay Example

International Production and Governance The extent to which the financial crisis of 2008 has undermined international production and governance and why global financial stability is important to the furtherance of international production and globalization According to Nayyar, the period between 1870s and 1914 the movement of people, goods, services, capital and even labor across national and international boundaries occurred unhindered. As thus, economies seemed more open, leading to rapid trade expansion between countries. This promoted cross-border investments, leading to high economic growth in the countries involved. As a result, a steady increase got registered in the output of world trade. The above situation presents a similar case to one of the pillar causes of the Financial Crisis of 2008: mortgage lending in the United States of America. According to Murphy (2010), the availability of credit with low rates of interest encouraged people to seek loans. The upward trend in prices of houses further prompted them to invest in houses and homes. This trend, coupled with standards of lending that seemed relaxed encouraged the exploits. As such, when the financial crisis hit, a lot of lending institutions suffered. The genesis of the crisis, as thus, lay in the marketing policies of the mortgage market. The freestyle and casual manner in which the mortgage financing options and paperwork got done exposed the financial markets to high levels of risk. The lowered standards of accessing and the use of the word of mouth in confirming ability to repay the mortgage led to many people buying houses they could not afford (Murphy 2010). As thus, when the financial crunch descended the financiers suffered. This affected the ways in which international governance and production got looked at, in matters financial. The handling of financial affairs got a wake-up call. All the procedures and paperwork got a thorough look up before issuance of not only mortgages and loans, but also other financial transactions. Tangible, and in some cases physical property, got attached as evidence of the ability to repay loans, Murphy (2010). According to Nayyar (2006), the last half of the past century underwent unprecedented expansion and growth in flows, in international trade. World exports experienced astronomical increases, from $61billion in the 1950s to $883billion (1975) and $6338 billion at the turn of the century. Through this epoch, more growth got observed in world trade than in output. This explains the trend that results when the conditions that favor economic and financial growth got fulfilled. The above case best explains the Housing Bubble and the prominent part it played in causing the financial crisis. The high and steady rise in the prices of houses encouraged the taking and issuance of mortgages. According to Murphy (2010), this rush presented a void whereby the means of repaying the mortgages got pegged on reselling the acquired houses at a profit, then repaying the mortgages. This promoted a sense of security to home owners. However, the bursting of the bubble served as a double tragedy; to the financiers and customers. According to Nayyar (2006), the last twenty five years of the last century oversaw a tremendous growth, in international finance, and cross boundary movement in finance exceeded both investment and trade by far. This clearly defines the massive share of the finance market occupies in international circles. This gigantic market share exposed the financial market to extremely high losses in cases of crises. The global financial crisis led to the Capital Market in the United States to suffer direct losses. Countries, like China, that had invested in such markets suffered terrible losses, some amounting to high as twenty billion US dollars. This drastically changed the way investments got done in America by foreign nations. More short-term bonds got a boost as these got considered safe and less prone to risk (IMF 2010). As such, trade in long-term bonds suffered upon investments in short-term bonds. The impact of the global cash crunch manifested itself in the first quarter of 2008. At this time, international trade started to feel the financial strain (WTO (2009). The rate of growth in trade recorded a downfall from about 6.4 per cent in 2007 to 2.1 percent the following year. By the last quarter of 2008, the effects of the crisis got felt in all parts of the world. This dip in international trade affected the developing countries. This resulted due to their dependence on the developed countries to attain financial stability. The employment industry got affected in the crisis. There occurred massive job losses in both the developed and developing countries. However, the bite became felt in the developed countries than in the developing countries (ILO 2011). The fall in job opportunities in the developed countries fell by as much as six million while the record for the developing stood at two million jobs. This fall created a slight difference from the expected output, thereby affecting industrial productivity. The loss of jobs and the small rate of growth in the employment sector affected the poverty level of people around the world. According to the World Bank (2010), more people, about sixty four million, could remain entrapped in poverty due to the slow economic growth. The World Bank further estimated that between one hundred and thirty million and one hundred and fifty five million could get into poverty. This increases the vulnerability of poor countries to financial shocks. The effects of the financial crunch on the Official Development Assistance, ODA, left more third-world and donor-dependent nations at crossroads. The flow of ODA from key donors got constricted, drying up in some cases as they grappled with the crisis. This affected the projects that depended on funds from donors. This brought about a change in governance in the donor and the supported countries. Further, a dip in international production dipped during this period. The crisis affected the import-export trade, thereby causing disruptions in the interdependence cycle between the importers and exporters. At a time when the importer could produce what the importer needed, the importer lay in financial despair, thereby causing the exporter frustrated and prone to the financial crisis (Isolda 2009). This case trickled down to the producer companies, and even individuals, thereby causing havoc on those depending on such commodities as tea in the exporter countries. The housing sector, which contributed significantly to the start of the crisis, got hard hit as the crisis started and continued to bite. The prices and value of houses and homes, that had skyrocketed, crashed so much so that some mortgage and lending institutions became bankrupt. In the process, there occurred massive financial loss and property whose value was at the mercy of the dwindling market prices. As such, production in the housing industry ground to a halt, affecting economies. According to WTO (2009), the crisis brought the dollar drought in the financial markets. Being an international currency, against which others get traded, the acute shortage of United States dollar affected international trade. The exchange rates rose significantly in the market, thereby causing fiscal imbalance in trade. Considering that international financial transactions get done in dollars, the effect of the dollar drought affected the whole world. The dollar drought left other countries grappling with adjusting their currencies against the dollar. The adjustments further piled pressure on the economies of the countries involved. The astronomical rise in the costs of energy, more so crude fuel, caused havoc in importing countries (WTO 2009). In cases where more industries depended on crude oil-derived fuels, production decreased to an all-time low due to the high production costs incurred. By the fact that the payment for crude oil got done in dollars that had suffered shortages, the energy prices shot over the roof for the common man. As such, the financial crisis of 2008 occurred in a manner that led to promotion of globalization and the Great Depression in the early nineties, in line with Nayyar’s approach. In all instances, the occurrence of free reign in trade and the steady rise in financial borrowing led to crash in the financial market. The reconstruction period exposes the world to significant financial realignment so as to break even and continue in growth. The creation of the Financial Stability Board, FSB, in 2009 marked the first step that intended to bring together leading world economies in promoting financial stability in the world. The responsibility of spearheading the recovery process from the financial crisis got rested in the G-20 state leadership. This seemed a bold move, though understandable since these nations control much of the global finances. The FSB formation got spearheaded by the United States, and faces daunting tasks in carrying out its duties (Helleiner 2010, p.288). According to Helleiner (2010), the FSB provides a target for challenges. These challenges, if not monitored, can spell doom for the whole process. The development of adequate and effective means in enhancing monitoring and encouraging compliance present a challenge. The attainment of international standards and their contents, and the challenge of consensus with both members and non-members prove a thorn in the FSBs side. As such, without the help and compliance of the members to the board, the effort of the board toward attainment of its objectives may lie in jeopardy. In instances where the challenges facing the FSB develop into daunting tasks, Helleiner (2010) assures that the board can play a lesser role of promoting cooperation within the international community.’ This focuses on the need that all countries participate to avoid the recurrence of the situation experienced in 2008. The rise and improvement of world economies, in one way or another, depends on the effectiveness of the FSB to carry out its mandate. The attainment of global financial stability leads to an increase in world trade, thereby improving and promoting both production and integration in all sectors (Helleiner 2010, p.285). References Edward V. Murphy (2010) CRS Report RL33775, Alternative Mortgages: Causes and Policy Implications of Troubled Mortgage Resets in the Subprime and Alt-A Markets, Helleiner, E. 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