Effects of Global Financial Crisis - Coursework Example

The global financial crisis effect has been very severe. It started with the bubble burst and slowly engulfed the entire globe. With boundaries disappearing among countries the effect passed on. This impacted the growth rate and made the economy take a dip. This resulted in growth rate being negative and giving rise to unemployment. It ensured that developed and developing nations were hit by it. This resulted in decreasing consumption pattern and a decrease in investment. The downturn was so intensive that it swept even the far of economies. The reason attributed for such a downturn was “prices of assets falling continuously decrease in consumption expenditure due to this leading to postponement of capital expenditure, resulting in more unemployment and finally leading to contraction”. (Ryuhei, 2009) The whole globe engulfed into it as national boundaries began to disappear. The following international trade for Japan and US shows that “trade started to have a downturn trend after 2008 as the crisis engulfed the country”. (Ryuhei, 2009) Figure 1: Growth Rate of Japan and US It is seen that trade started to move down and even when we look at trade with different regions to see the effect of crisis it shows similar picture. We see that Japan’s trade with China, US and European Union started to fall due to crisis and it impacted deeply. This made the cycle to continue and it was seen that the entire globe felt the crisis. Immediate measures for the short term like easing out credit, selling off the bad assets and giving stimulus to check the effect were put in but with little success. The global crisis affected every country be it developed or developing one. The impact it created on developing countries is massive. When we look at Ghana we see that though the economy is still growing and was keeping itself away forms the crisis but slowly it fall victim to it. “The growth rate got affected due to weakening commodity market as it relied on Asia, US and European Union”. (Ernest, 2009) Even the Central bank had predicted the same for them and slowly Ghana also got affected due to it. The country also got affected due to “rise in crude oil prices as the country imports it”. (Ernest, 2009) This thus, puts pressure on foreign exchange and is affecting the growth trajectory. A study conducted in global financial crisis for Asia reveals that “there lies a link between growth rates of emerging Asian economies and OECD countries”. (Iikka & Jarko, 2009) Despite, both the economies working on different models the impact the crisis created was similar. This resulted in even far of economies showing below par performance. A study on financial crisis demonstrates that “the economic wave passes from a big economy to a growing and poverty stricken economy”. (Mario, 2009) This is seen in the recent crisis. US because of its sheer size are susceptible. It is seen that when US got into recession due to crisis the effect spread faster than expected. This was because “with economies dependent on other poverty and unemployment started to rise and this entered other economies thereby disturbing the pace of growth”. (Mario, 2009) The effect of downturn was so intense that economies even unrelated to this got into trouble. The effect started to pass on and as a result economies are looking for alternatives to come out of this situation. This can be seen from the following example. When we look at Korea the result are the same. It is seen that Korea was affected by financial crisis by different methods. The country was affected by “the world demand for goods and services, the domestic demand, exchange rate, the credit market which was hit badly and protectionism”. (Hwang & Im, 2009) This brought the neighbouring countries also face the brunt and resulted in depleting growth rates. The following table helps to demonstrate the effect of global financial crisis and the major causes and its effect which changed the way economies perform/ Figure 2: Growth rate of different nations and bodies Source: IMF The above chart shows that the effect of crisis was so strong that the predictions went wrong. The economies had determined a growth trajectory and planned things but it changed out differently. The growth path was broken due to crisis. It affected their strategies and resulted in dipping the performance. The crisis has been such that it has raised unemployment. This has affected growth. Looking at China the results reveal that “the export sector dwindled and millions were displaced from their work”. (Morrison, 2009) The reason for such was that the other economies were hit by the crisis. This had affected their demand for foreign goods. As a result China’s export was going down. This affected the foreign exchange putting extra burden. This finally led to negative growth and more displaced workers. The following currency fluctuations explain this. Figure 3: Decrease in Currency Valuation due to crisis Source: Economist Intelligence Unit The currency fluctuations and the decrease in the value give some important ramification. It highlights that due to crisis the value of money felt. This resulted in money being wiped off and currency loosing its value. This made things expensive and reduced consumption. This altered the way investments were taking place. The financial crisis had impacted the investments that were happening. “With the downturn prominent financial markets started plummeting, which resulted in more packages to bail out the economy harming the credit creation process”? (Maria & Ruxandra, 2009) This made a dent across all economies. People started to fear in investing and started to save for future consumption. This decreased the present consumption and investment started dropping. This was a cycle which is continuing and economies are looking for ways to come out of it. The financial crisis also affected “the current account deficit of countries due to pressure on exchange rates and inflationary conditions”. (Morrison, 2009) This hampered the growth as countries couldn’t reduce their interest rates further. This created a problem of getting further investments and pushed the economy further. It affected the reserves and it hampered the growth especially for Sub African countries. Countries due to the financial crisis got into turbulence. “Economies which relied more of investment from abroad, portfolios from abroad were hit hard”. (Morrison, 2009) Foreign investors started to withdrew investment. This resulted in less money in the economy and countries heavily reliant on this couldn’t cope up with the requirements and had to suffer as a result for this. To counter the financial crisis various steps were taken. A summit was held where various important decision were taken. One of them was “countries will not raise import tariffs as it will affect the exporting country and in lieu of that the exporting country will also raise the import tariffs which will hamper further growth”. (Ryuhei, 2009) It was decided that protectionism will not be used as a tool. This helped a lot and made countries to cope with the crisis. The other important tool which will help to reduce crisis will be by “strengthening the monitoring by WTO being more active and see that countries don’t resort to wrong means like protectionism”. (Ryuhei, 2009) Countries to face the global crisis also need to “have better monetary policies so that there is no credit crunch and people get money easily both for consumption and investment purpose”. (Ryuhei, 2009) It can be seen that Japan reduced the rate from 0.3% to 0.1%. This was done in lieu of Federal Reserve Bank’s policy of zero interest rate. This brought about a change in the credit crunch. In order to reduce such crisis and to counter it “United Nations need to increase its role and needs to participate in the economic reforms”. (UN Conference, 2009) This will give more powers in the hands. It will also ensure that immediate measures are taken and steps will be taken to prevent it from transmitting to other countries. Giving UN more powers will also ensure that that the governing body policies are drafted without biasness. This will give equal opportunity to the developed and developing ones. It is important that “World Bank and other banks mitigate to reduce risk”. (UN Conference, 2009) This bodies need to work together. They need to tackle the global situation as a single unit and focussing on all areas. These banks need to ensure that policies are in lien with each other and don’t counter the other. This will give uniformity and ensure that a common path is taken to come out of the global financial crisis. Economies need to ensure that “proper measures are taken so that financial contagion doesn’t pass on”. (Morrison, 2009) This will make better understanding among countries. It will also tempt more trade among countries but at the same time appropriate strategies are in place to combat such a crisis. Countries need to ensure that the people are affected least. This could hamper their motivation and the growth pattern would fail. “Economies need to ensure trust and motivation of all need to have social protection schemes where measures are taken to save the needy and steps are taken which will benefit all”. (Morrison, 2009) This will be a important step in the correct direction and ensure that people realize the steps the government is taking to come out of crisis. Countries also need to ensure that “there is a mix of open trade policy and protectionism so that the strategy brings about a mix of both and ensures that the growth path is strong”. (Veron, 2009) Recently, it is seen that economies are looking to protectionism to save from the crisis. This might help in the short run but in the long run it will mislead the economy. It will therefore make it difficult for the economy when the economy recovers as it will put extra pressure to cope with things internally. Thus, we see that the global financial crisis is creating havoc. Many conferences and meetings are held worldwide to ensure that steps taken in that direction yield positive results. The crisis has been so severe that it had created total unrest. It has thereby created a threat and the policies taken are taking longer. Different countries have taken different financial and monetary policies to reduce the impact. The results are seen with economies slowly reviving but still the growth rates are below. This crisis has so deepened that even the policies have failed and economies are taking steps for “political stability, security risk, and interest rate risk, monetary and fiscal policy”. (Nanto, 2009) The country is taking steps to ensure further shocks. Even the Federal Reserve is taking steps in this direction to prevent such shocks. Thus, economies all around need to unite and take necessary steps to prevent such an incident happening again. Important measures and watch need to be done by governing bodies. The situation also calls for more stringent norms so that the effect is less. Countries need to reduce by tightening the policies and ensure that proper measures are taken which covers all areas. Countries whether developed or developing need to have better polices. This also calls for a development of a body which has more powers and measures are taken to prevent such financial crisis from happening again in the future. References Ernest A, (2009), “The impact of financial crisis on developing countries: Ghana”, Social and Economic Research of the University of Ghana Hwang S & Im H, (2009), “Implication of financial crisis on Korea”, Asian Economics Paper, Volume 8, Number 3, Page 46-81, Massachusetts Institute of Technology Iikka K & Jarko F, (2009), “The impact of global financial crisis on emerging economies in Asian countries”, BOFIT Discussion Paper, Institute for Economies in Transition, Bank of Finland Mario E, (2009), “From a global financial crisis to global poverty crisis”, International Journal of Economic Research, Volume 4, Issue 1, Page 93-104 Maria C & Ruxandra M, (2009), “The impact of investment in global crisis”, The Ninth National conference on Investment and Economic Recovery, Volume 12, Issue 2 Morrison W, (2009), “China and the global financial crisis”, Congressional Research Centre, Asian Trade & Finance Nanto D, (2009), “The Global Financial Crisis”, Congressional research report, Questia Journals Ryuhei W, (2009), “International trade during the financial crisis: WTO supervisory functions should be enhanced”, Research Institute of Economy, Trade & Industry, IAA UN Conference, (2009), “World Financial and Economic Crisis and its impact on development”, retrieved on March 28, 2010 from http://weitzenegger.wordpress.com/2009/07/03/world-financial-and-economic-crisis-and-its-impact-on-development/ Veron S, (2009), “Impact of Financial Crisis on Investment & Trade”, Japan Center for Industrial Cooperation, Seminar Report Read More