World Financial and Economic Crisis and Its Impact on Development - Literature review Example

The entire world is engulfed in a crisis and is one of the worst crises the world has witnessed since the Great Depression. The effect of the recession has been so strong that even after years economies are finding it difficult to fight the growth slowdown both in developing and developed world resulting in a credit crunch. There were various reasons which made the world economies move towards a downturn but the one which most severely affected the growth rates was the ignorance showed by economies towards corporate governance. The paper looks into the various causes of global recession that affected world economies and presents the different areas that the world economies are working on to ensure that the economies follow a trajectory which leads towards growth and helps to fight similar situation in the future. The world started to witness the start of the economic recession since the bubble burst in 2008 which resulted in the growth rates of economies falling and gave rise to unemployment (Ryuhei, 2009). This started from America and since the world is involved in international trade the symptoms spread to other economies and resulted in the world economies to fear the start of the global recession. The crisis started when prices of assets started falling continuously thereby decreasing consumption expenditure which led to postponement of capital expenditure, resulting in more unemployment and finally leading to contraction (Ryuhei, 2009). This made currency loose value and banks were finding it difficult to come out this situation. Banks started to feel the liquidity crunch as people started withdrawing money from the banks and creating a situation where the banks were unable to control (Kirkpatrick, 2009). During this period Enron also failed which multiplied the problem as it was evident that the failure of Enron was due to lack of corporate governance and the other economies feared that if they didn’t find out a mechanism to ensure proper corporate governance the problem could lead towards serious concern for all economies (Coffee, 2008). This highlights the fact that improper reforms and laws which could ensure that the organizations disclose the true and material fact made the crisis deepened and made economies feel the heat for years (Silva, 2004). One of the prime reasons which led to the crisis of 2008 was that the banks were reluctant and over relied on the agencies and the market. The banks invested heavily in CDO’s without looking into the risk profile related to each investment led to the downfall of banks and created a situation where banks were witnessing their money being wiped out from the market (Kirkpatrick, 2009). Banks were of a different view and didn’t complete their entire process that would help them to check whether the risk associated with the different investment avenues were safe. The relied on the agencies and thought that the rating of AAA and AAA- meant that the funds are safe” (Moxey & Priddy, 2008). This proved to be misconception as during the crisis the risk associated with this investment multiplied leading to a liquidity crisis. On the global front it was seen that the different bodies also didn’t interfere with the working of the banks. For example, there was a lack of involvement from the World Bank which could have ensured that the banks were able to identify the risk and take different measures to curtail it (UN Conference, 2009). There was even lack of coordination and help from other agencies which could have helped to mitigate the risk to a large extent and create a situation where growth was permitted. A situation also occurred prior to the crisis where the world economies could imagine a situation where the growth rates could backfire and the economies could be engulfed into a global recession. The world economies were of the view that the world market won’t crash and they relied heavily on it. Even after receiving signs of the downturn the economies didn’t plan for it. This shows a complete lack of corporate governance and ignoring matters which if identified could have helped the world economies fight the global recession better (Fairfax, 2010). The organizations on the ground level were also lacking the required resources to fight the downturn in case such a situation arose. This was primarily due to the fact that the organization such a situation could never arise. The shortcoming from the board and the internal management especially in the banking sector (Kirkpatrick, 2009) highlights improper management policies and poor risk management. This shows the negligence on the part of the management to have a policy in store which could help to fight the worsening situation (Ryuhei, 2009). This in culmination with a lack of back up plan further intensified the crisis. The organization didn’t look towards fixing responsibilities on each member of the organization and developing a method which could help to fight the crisis in a better way (Fairfax, 2010). The lack of will and desire by the organization to fight the recessionary condition further intensified the problem. They were of the view that the government of each respective economy will devise a strategy which will ensure that the recessionary conditions are not prevalent and they need not do any work on their part. The organization even went to the extent and misused the funds that were primarily for the shareholders by compensating the employees and the executives at the higher level before time and irrespective of the profits earned (Moxey & Priddy, 2008). This shows a complete lack of transparency and highlights the fact that the organization was working for the benefit of a few instead of the entire society. This shows the lack of linkage between the remuneration and the profits generated by the business which led to widespread criticism. This shows that the organization didn’t have ways to generate the required profits and to compensate the employees and executives they breached the corporate governance norm (Judd, 2010). These case further shows that apart from profits the employees and the executives were given bonuses irrespective of the organization incurring loss resulted in a downturn crisis. This is seen from a finding which shows that in European bank shows that the total salary was divided as 24% fixed salary, 36% cash bonuses and 40% incentives (Kirkpatrick, 2009). This pattern was followed and had no linkage with the performance. Even employees underperforming were compensated similarly showing the fact that the organization took corporate governance as a tool which they need not follow and breaching it will have little or nor effect on the growth path. This was not to be and the entire situation led to a crisis. The economies didn’t make it compulsary for the organization to determine the share holding pattern. This resulted in the CO holding more share than executives and was able to mould the salary in his favour. This resulted in the CEO being compensated more heavily then he should have been (McGrath, 2010). This problem intensified as the different auditing and accounting firm also didn’t disclose the same to the public for their own benefit (Mitton, 2001). The lack of disclosure by firms and the support they received from the agencies and auditing firm made them take advantage of the corporate governance reform leading to a serious crisis (Austin, 2008). This is addition to the incorrect information provided by the rating agencies made it difficult for the economies to fight with. Credit agencies are entrusted with the responsibility of “verification, certification and evaluation of the different services and instruments in the market” (Austin, 2008). Instead the rating agencies provided information which was incorrect. They were of the view that economies were growing and taking advantage of it could have little or no impact on the growth rates even if it was identified in the future. This has made economies look towards developing policies and strategies which helps to fight the current economic situation. Economies are also looking to develop reforms and ways which will ensure that such mistakes are not committed in the future and a mechanism is developed which will help to improve monitoring and ensure that the goals of the economies are correctly directed. The economies have formulated different “tax reforms, macroeconomic stabilization and government policies” (Silicon Valley, 2009) to ensure that the effect of global recession is reduced. The economies are also looking to develop their infrastructure like aviation, auto, banking and others by providing some shield so that they are able to take the shock of global recession and ensure a better reform which ensures growth in the future. The government of different economies is looking towards using the fiscal reform so that demand pattern can be influenced. The governments are of the view that strengthening the spending pattern will help to provide the boost and create positive sentiments among the masses. This will ensure that that the reforms developed by the government provide double benefit and will ensure speedy recovery (Moses, Viegi & Nicola, 2009). To ensure a better reform the government is looking to have a trade off between the long and short term goals so that the production can be determined before hand and steps taken to ensure that the economy follows the path of growth (Mankiw, 2008). The government is also of the view that determining the policies which is a mix of both monetary and fiscal policy will ensure better return in the future. On the global scale the different agencies and world bodies like the World Bank has increased its presence and interferes in matter that could have serious effects on the growth of different economies. The agencies and bodies are looking towards improving the monitoring process and developing a mechanism which will ensure that the world body is able to face it in a better way. The increased importance being laid on corporate governance and the policy of disclosure by tightening of different norm will also provide a path that will ensure that the economies are able to fight global recession in a better way (Mankiw, 2008). Thus, the world economies have realized the impact of global recession and are looking towards developing strategy which will help them to fight it out. Organizations have started to lay stress on corporate governance and have a code of practices which will help to reduce the magnitude of risk to a large extent. This along with the different strategies that have been taken on the government in relation to expenditure on consumption, taxation, development of infrastructure and others will help the economies to fight the downturn in a better way and will help them to face similar situation is a more developed way. References Austin, R. 2008. The credit crunch and the law, Corporation and Taxation law monograph series, Sydney Coffee, J. 2008. 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