Consequences of the Global Financial Crisis - Essay Example

What are the most significant consequences of the Global Financial Crisis for global economic governance? Recession in economic terms is, in essence, a slowdown in the economic movement in a country over a sustained period of time, or a business cycle contraction. During recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household incomes and business profits all fall during recessions. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation. If one was to go by the Keynesian theory, a fall in AD then will mean there will be a fall in Real GDP. In the following essay one will look at the causes of the recent global financial crisis, described by economists around the world as the worst recession to have hit the global scene since the Great Depression on the 1930s. In this context, the essay will first analyze the meaning and the context of this recession. This would entail a brief into the reasons explaining the recession and the havoc it played on the current system of global financial management. Next, the essay will look at the details of issues such as financial engineering and corporate governance, given the fact that these were catapulted into the limelight when the recession struck. Finally, the essay will link these to the concept of global financial management and the fact that the recession was in fact a manifestation of the failure of the global system of financial management and in this context the paper will look at the future of financial management around the world.   The primary cause of the recent economic downturn can be traced back to an entire range of factors. It was in essence, a combination of a numerous issues. These factors are inclusive of the extreme debts that were taken on by people, an over inflation in property values and prices, immense greed at the corporate level coupled with ignorance ( or lending firms deceit ) to accept loans that they could not afford and the ignorance and unwillingness to act on part of the Bush administration. Dependence on foreign merchandise and energy are also responsible for the crisis to a certain extent.     Regulation and corporate Governance With the recession and the impending research also came the wave of scholars who focused on the importance of corporate governance (Clarke,2004), for example focused on the need for governance of large corporations by way of increasing accountability. According to his estimates, the idea remains that focus on reforms is a cyclical eventuality. Waves of reform and regulation tend to go on the upswing, during periods when recession and economic crisis hit markets. These periods, he says are characterized by re-examination of the practicability of regulatory institutions, whether or not these are sufficient for regulating the economy.   On the other hand, when the economy is on the upswing, during periods of boom, there is little to no active interest in the conformance aspects of governance, especially given the fact that in these periods, companies as well as governments tend to become more focused on the maximization of profits and wealth generation, instead of making sure that there is a mechanism to ensure proper working of institutions that guard the retention of wealth, and its use for agreed purposes. The cycle, tends to rotate around the enduring agency and stewardship dilemmas of governance. Complacency concerning corporate governance during confident times compounds ensuing crises (Crawford and Young, 2008). While recognizing the fact that economic crisis originated from the financial turmoil linked to the real estate bubble in the United States, and the ensuing lack of trust in the existing banking credit and instance systems in the United States and by extension in the other Western market economies, the widening and deepening of the crisis into a worldwide global recession resulted primarily from the presence of macro imbalances in the fairly integrated, but poorly regulated global financial market. Shriveling trade flows enlarged even more the deflationary impact of the crisis. As a result, the gravity of the downturn relieved the need for a thorough overhaul of most national and international aspects of the present systems of economic governance. As noted by US president barrack Obama, “No country has a bigger stake in what we do in strengthening international institutions-which is why we pushed for their creation in the first place and why we need to take the lead in improving them”. It has to be understood in this context that the present systems of global economic governance were designed to a large extent in response to the global realities that were being faced more than 60 years ago. Since then the world has changed beyond recognition but the multilateral institutions of economic governance have changed little or have adapted slowly. In order for them to respond to the challenges being faced there are reforms that are needed. For one thing, democratic deficits as regards voice and voting power need to be redressed in recognition of the growing weight of developing countries in the global economy. But the actual functions of the major institutions also need reform. Such a reform cannot but take into account the irreversible reality of the globalizing economy as well as the existing form of regional economic integration. It must respond to the need for a sustainable global financial system based on trust at the different levels of economic activity. It must also reflect reality of wider areas where increased international cooperation has become unavoidable, like the issues of trade in services, investment, free movement of persons, worldwide food and supply, global warming, energy, security and more. And no reform of international economic institutions and regulations will be possible or effective without the collaboration of the large majority o countries in the world that have become active participants in the world economic activity and exchanges, yet, at the core of this effort for reform are the two economic entities that have initiated and strongly supported the existing economic system-the UK and the USA. The same can be said about other areas of international economic governance. Many economic sectors have been affected by the international crisis and would benefit from more efficient international cooperation. Their present degree of international integration and exposure are fairly diverse and no single set of new arrangements should or could effectively cover all of them. Rather, a number of comparable and coordinated efforts are needed. Some of these have already been launched (Tindall, 2009). But it is important that they be conducted as components of a comprehensive concept of multilateral cooperation and be guided by specific and realistic goals, building upon the foundations o existing international arrangements. The primary goals is to close the yawning gap between the increasingly global dimension of most sectors of human activity and the inadequate nature of international governance. This is most conspicuous in the economic and the financial areas. There the problem afflicts nearly all multilateral organizations set up since the World War II including the international monetary fund (IMF) and the world trade organization (WTO) as well as the UN Food and Agriculture Organization (Tindall, 2009). What is interesting in this context is the fact that in the last decade the IMF and the World Bank were said to become increasingly irrelevant (Stokes, 2010). The volume of private capital flows in the world dwarfed the resources of these two institutions making them seemingly obsolete. It is little wonder therefore that the IMF initially reacted slowly to the recent economic crisis even though by statute and composition, it had the authority the legitimacy and the expertise to take up the leadership role. Instead, even before the crisis erupted the G-20 had begun to function as an operational arm of the IMF, with some informal help by the Financial Stability Board (FSB), whose membership of 24 governments include the United States and six EU members (and the European Union). This thought was replicated by the United Nations, which in a Report (2010) stated that a more effective system of global economic governance needs to be built, through an intrinsically political process. In trying to arrive at a global order that would be insulated to the global impact of a local mismanaged economy, which was the case with this recession, while keeping intact the settled market forces, there are strong ramifications that one could gauge for the global financial crisis. In trying to do so, the impact would have to keeping in mind the values and the principles on society has so far been based, inclsuing a market economy and a system of safety nest for citizens in need, as well as the parallel but most asymmetric developments that wuld tale place in different areas including those of finance, trade, investment, geostrategy,security, religion culture and others. It is these components that would be future of the coherent global system of multilateral economic governance. First there is the need for globalist and its consequent stakeholder ship. States can no longer confront global challenges alone. In other word, global challenges call for responses s part of a process that must be kept as inclusive as possible. Notwithstanding the essential EU-US leadership role, this implies in essence that the notion of a broadly based community of law and the collective responsibility of all of the members toward the all accomplishment of that goal. The efficiency and durability of the endeavor shall depend on the respect of that commitment. Again all democratic agreements that are conclude between sovereign states would be most effective if they were to be taken through a process of consensus, although lacking consensus other two-and three tier agreements may be sought on specific issues of particular interest to a group of countries. Democracy and stakeholdership will be strengthened by the close association of the citizens of the countries involved in the implementation and accountability of policies. Also the nature of the decisions that have to be taken would require that special attention be paid to their efficiency on which will depend the relevance of the governance measures within the states in the global world. Special institutional arrangements will be need to acheieve this goal depending on the complexity and the urgency of the relevant issues, this imply the creation if a dispute settlement system with appropriate enforcement skills. Finally, the global financial crisis has an important impact on the financial institutions along with the economic governance of the developing countries of the world. Research on the issue has stood in firm support of the fact that banks in the these developing economies will see their credit lines from foreign banks squeezed and the increasing financial flows that these economies have been experiencing are going to dry up (Rasmus, 2008 ;Yifu Lin, 2008). As developing countries Asia and Latin America are at a crossroads, and the next twelve to eighteen months will be very difficult. The perception that they had broken the links with the larger economies has been painfully refuted by the hard facts of the last 18 months. Financial markets of the world are closely interconnected, and the impact of the world financial collapse on Emerging Economies is a witness to this fact.   The downturn in the world economy has been the first such cycle since the idea of CSR came under the scanner in the world of corporates (Stephanie B and John Peloza, 2008) With the news of collapse of the Lehman Brothers corporates the world over have gone into a frenzy thereby raising major doubts about the future of SCR in this kind of an unstable environment. Mounting losses and cost cutting are the buzzwords in world economy. Layoffs seem to be everyday occurrences. What then is the future of CSR initiatives, CSR that was in any case considered useless expenditure by many. The answer is not simple. Strategically managing CSR in downturns requires an approach that is bold and aggressive. First businesses need to ensure that CSR efforts are in with the core purposes of the business. CSR activities that can help support the company’s cost saving methods have to be increased and others discarded. Programmes that help in a better management of employee owner relationships have to stay. Cues have to be taken here from companies such as Wal-Mart that attribute their CSR related efforts with huge cost savings that run into millions of dollars. Business portfolios have to be broadened to be inclusive of activities that contribute to tangibles successes. Research and development assume big responsibility here. CSR initiatives can be linked to R&D efforts. The easy way out is probably to duck out of CSR commitments but it has to be remembered that brand loyalty and commitments are not built in a day. Tough times and the company deals with it is what decide a firm’s credibility in the market, not just in the mind of the consumers but in the mind of the stakeholders. In theory at least discipline and capacity building sound like the ideal ways to deal with the issue at hand, this can be implemented in practice as well as has been demonstrated by big names such as Toyota and GE. But there will still be a number of CFOs that will say clearly that CS initiatives have been abandoned as cost cutting measures. What will be interesting to see in fat is how it is that companies deal with the downturn and CSR. It will in all probability turn out to be a so called real test of corporate character. In conclusion, therefore one could reiterate the fact that the principle of common but differentiated responsibilities should be major guide throughout the reform process which is crucial for fairer and sustainable globalization. Also the crisis is emblematic of the fundamental weaknesses which require not only a retooling of the multilateral trading regime and deep-reaching reform of the international financial architecture but also the closing of the present gaps so as to eliminate inconsistencies I the existing mechanisms if the global economic governance. This may necessitate the creation of a new mechanism for dealing with these deficiencies. Examples would be the creation of multilateral frameworks through which to govern international migration and labor mobility international financial regulation ad sovereign debt workouts. The essay has demonstrated that these steps are necessity given the fact of failure in economic governance and management in the backdrop of the financial crisis of 2008.   Reference: Stokes, B., (2010). Transatlantic Economic Challenge. CSIS Publishing. pp10-12 United Nations Report. (2009). World Economic and Social Survey 2009: Promoting Development, Saving the Planet. United Nations Publications. Pp188-190 Tindall, K., and Hart, P. (2009). Framing the global economic downturn: crisis rhetoric and the politics. ANU E Press Publishing. p137 Krugman, Paul (2009). The Return of Depression Economics and the Crisis of 2008. W.W. Norton Company Limited   Crawford, P., and Young, T., (2008). ‘Sub-Prime Mortgages and the Big Bang’. Journal of Business & Economics Research. 6(10). Pp67-72   Crawford, Peggy J. and Terry Young, (2006). “The Real Estate Market: House of Cards?” The Graziadio Business Report. January Economist, The., (2009). “Greed--and Fear: A Special Report on the Future of Finance,” The Economist, January 24, pp.1-22. Yılmaz, K., 2008, “Global Financial Crisis and the Volatility Spillovers across Stock Markets”. Rasmus, J., 2008, 'The Deepening Global Financial Crisis: From Minsky to Marx and Beyond', Journal of Socialist Theory, 36:1, 5 —2 Read More