Effects of the Current Financial Crisis to the Global Political Economy

Used alone, crisis refers to a point in a series of events when the direction of all future happenings is determined, or else, a turning point. These events might occur in the economical, social, political, and even international affairs leading to the implementation of a decisive change. A crisis can affect a certain country or a region. In certain instances, a financial crisis can affect almost all the nations in the world culminating into a global crisis. The world has over some periods in the past experienced phases of global crisis. Some of the memorable global crises that have shaken the world within the last century include both World Wars and the famous Great Depression in the 1930’s.

Political economy on the other hand refers to the interlocking disciplines of economics, sociology, history, and political science: everything that tries to explain the relationship and roles of political factors in influencing economic outcomes. Political economy involves the analysis of the creation and implementation of public policy to develop various social and economic systems like communism, capitalism, and socialism. The world is currently suffering from the effects of a global economic and financial crisis that hit it since 2008. With respect to the direct relationship between the two aspects, this current crisis has resulted to the implementation of various aspects in the pursuit of trying to maintain the stability of the global political economy.

The Global Financial Crisis

The current crisis in the world today is a downturn in economic activities which is actually a prolonged financial and economic crisis recorded in the world since the 1930’s Great Depression, that started in the year 2007/2008. Since its start, a number of sectors suffered negative effects: the housing sectors, employment, and international trade, among others. Not many people were expecting such a global crisis at this time in life. However, almost everybody has an explanation as to why it happened. Thus, the causes of this crisis depend on the views of different professionals depending on the perspective they give this issue and their tools of defining such a crisis.

For example, the economists have a simple explanation. They owe it to the flow of money into America from several Asian republics, especially China. This resulted to easy credit acquisition by most citizens who borrowed and bought properties that they could hardly afford. The bankers diversified the loan categories and sold them to investors without giving much explanation to them about the inherent risks those loans carried. With the high number of borrowers in the US, the number of defaulters went high too. In the respect of this, the defaulters started losing their houses and the investors from across the globe, especially financial institutions, lost their investments. The quest of understanding the actual cause of the financial crisis leads to a fundamental instinct present in all human beings, simple greed.

Understanding the Causes of the Financial Crisis

With much said about the current global crisis, it is easy to draw conclusions and analyze the most relevant causes of this crisis. The prime causes culminating in the financial crisis are many and related. Some occurred because of others happening, but some were completely independent. To start with, during the period before 2005, the period referred to as the Greens-span era, bad debt reduction through recessions never happened. This promoted the early ending of recessions and the elongated time of expansions. As a result, firms and individuals borrowed too much, foolishly taking advantage of the loose monetary policy, writes Merkel (2012).

The monetary policy’s contribution towards the financial crisis is of significant importance too. It resulted to the development of a culture that motivated people and institutions to risk in their economic undertakings. They confidently took the risks with the anticipation that the monetary policy at the period would come to their rescue if things failed to work out as anticipated. Therefore, such naïve hopes on the ability of the monetary policy to rescue them made investors to use the extreme ways of earning excess returns: short-term selling at the money volatility, accepting long-term mortgage-backed securities, and leveraging non-prime commercial papers.

The strategy for expansion of the Chinese industries also leads to the financial crisis. The Chinese government yearned to keep its currency cheap and thus indulged in extensive export. As a technique to keep their currency cheap, they bought a lot of US bonds. As a function of the economic theories, this lowered the interest rated allowing most US citizens to buy houses demanding low monthly payments, something that was impossible to handle in the presence of an economic turn down. The financial institutions lent too much towards the residential real estate sector, noted Dolezalek (2011, p. 42). As a counter move, the number of borrowers went up. The underwriting that goes hand in hand with lending went a tad loose as well. The moneylenders were too flexible that they made special arrangements even to borrowers who could not afford the normally expected pay rate.

The indebtedness that followed exceeded the former levels experienced during the Panic and the Great Depression. The increased growth in debts was due to numerous defaulters and depended on the Government Sponsored Enterprises (GSEs). They too charged lowly to allow residential mortgage debt qualification. In so doing, they did not think that it was low, only that they did not analyze and evaluate the economic situation before charging such lowly. This resulted in the falling of the housing prices and gave a false idea to the citizens that they could afford them and thus bought them with little or no considerations. The banks too started extensive mortgages, and the underwriting quality further deteriorated.

In the financial sectors, all the institutions dealing directly with the supply and demand of money in the economy operate under a regulatory authority. The regulatory authorities see to it that the activities of financial institutions do not jeopardize the functionality of the monetary system, by indulging in activities such as sloppy and substandard underwriting, writes Thomas, Hennessey, & Holtz-Eakin (2011). However, the banks and other depository financial institutions asked for permission to choose their regulatory authorities. They chose weak regulators who they easily manipulated and thus carried on with all the unfit policies they generated. In short, capital regulations by the lending institutions, such a as banks, went too loose. They trusted their internal models of regulating risks that eventually experienced a drastic fail on the onset of the financial crisis.

The Effects of the Financial Crisis in the Global Economy

The financial crisis, commencing in the US market as put by Ciro (2013, p. 55) and melting down into the entire global economy brought with it a number of effects with varying levels of recessional impact. The evidence of the crisis first surfaced with the falling of the Stock Market, followed by the excessive employment inadequacy fueled by the increasing number of downsizing companies. It achieved global status owing from the fact that the recession befalling one industry often marks the start of the recession hitting all the related and closely linked industries, says Danquah (2009). The world economy incorporates the close link up and coordination of all industries and sectors. The stability of the economy emanates from the cumulative efforts of all industries. Thus, the fall of one industry more often than not leads to the poor performance in another. In the light of the above, what started as an economic recession in the United States soon grew roots in other nations and affected the entire globe altogether.

In general, the level of activity in the world’s leading economies took a sharp turn towards the worst. The economic environment was subjected to many uncertainties resulting to the collective collapsing of consumer confidence and the business altogether. A major and key party to the economic development, the households, responded by reducing their expenses on discretionary spending: they especially cut down on their demand towards acquiring manufactured goods. As a ripple effect, the global production of industrial goods went down as the households continued to cut down their expenses. The world’s major economies, the G7 countries especially, experienced contractions in their Gross Domestic Product (GDP). This economic downturn affected the G7 countries’ economies so much that it eventually spread to the other parts of the world, says Edey (2009).

Effects on the United States Economy

According to high frequency surveys conducted in the quest of tracking the effects of the financial crisis in the United States, it is clear that the effects were tremendously adverse. The financial crisis first hit the banking sector, crawled into the stock market, and eventually toppled down the housing sector, wrote Hurd & Rohwedder (2010). Among the very first effects were on unemployment. Even with the partial stabilization of the stock market, the unemployment level continued to rise because many firms in various industries cut down on labor due to the decreased production. The US households suffered unemployment, arrears on mortgage payments, and very negative home equity. Their economic preparations with respect to retirement suffered the impacts too; losing most of their retirement savings to the collapsing stock market. The spending by the households went down drastically reaching the minimum ever experienced by the US.

Effects on the Chinese Economy

With China’s Gross Domestic Product (GDP) changing the way of economic activities distribution around the world, it is has emerged as a major contributor to the global economy over the last two decades. Unfortunately, China too suffered the effects of the world financial crisis and a considerable segment of its economy suffered significantly. Well, during the financial crisis, China had a very high economic growth averaging at 9.6% and 9.2% in the year 2008 and 2009 respectively. However, this reflected a significant fall from the pre-crisis records of 14.2% in the year 2007.

The Foreign Domestic Investment (FDI) for China dropped significantly, reaching a huge 42% in 2009. The risk attitudes alongside the economic outlook of the investors barred them from investing anywhere in the world, including China. The Chinese stock market crashed at end 2007, wiping out a fraction exceeding two-thirds of its value, said Li, Willett, & Zhang (2012). This affected the Chinese households that believe that it is safe to invest in real estate than saving money in banks, notes Shiller (2012, p. 69). The falling demand for imports between the advanced economies exposed China to substantial falls in its exports to its great global consumers. Thus, in 2009, China’s export had fallen by approximately 17%. The effects of the financial crisis in China relatively reflect on the situation in most of the fellow Asian economies.

Effects on the United Kingdom Economy

The United Kingdom economy is among the top seven largest in the world according to the International Monetary Fund (IMF). Since the inception of the financial crisis in 2008, the United Kingdom economy has suffered tremendous effects as is visible from its declined Gross Domestic Product figures. As a start, the economy in the United Kingdom shrunk with a notable 4.9% by the end of the year 2009 as compared to its position before the onset of the financial crisis. The poor economic performance and negative growth have continued to date.

Unemployment also rose to disappointing levels. By the time the financial crisis was hitting, the unemployed people in the United Kingdom averaged around 1.6 million people. However, by the end of the year 2009, that figure rose to almost 2.7 million people: the highest unemployment level in the UK for a period of 17 years. The United Kingdom manufacturing sector also suffered a huge blow because of the economic recession. The operations of the Small and Medium Enterprises (SMEs) in the United Kingdom also underwent a downturn. This resulted from the significant drop of bank loans received by the SMEs to carry out their activities. In fact, even at the present, the United Kingdom financial institutions are very cautious while lending since the economic outlook is still under the effects of the financial crisis.

Effect on the Latin American Economies

Like every other country, the Latin American nation also prone to financial crisis. Shortly before the onset of the crisis, these economies were experiencing better performance owing to the substantially significant improvement in export trade and prices of their primary products. In addition, for some countries in this Latin American region, the good performance also resulted from the development and application of active wage, fiscal and monetary policies. However, by the end of the year 2009, the Gross Domestic Products of more than two-thirds of all the 32 Latin American economies experienced massive drops: including the Latin American economic giants of Mexico, Argentina, and Brazil, wrote Guillén (2011). The main cause of the decreased growth majorly emanated from the poor terms of trade, especially the export trade, reduction in emigrant remittances, and the overwhelming withdrawal of capital by private investors, from the financial markets. Such practice leads to currency appreciation but results to the inflation of stock markets, making a very unstable economic environment, as indicated in The Street (2008).

Effects on African Economies

Most financial systems in Africa, especially sub-Saharan African economies, are underdeveloped. This however, does not mean that they have protection against the effects of the global financial crisis. The impact of this crisis diffused all the way up to Africa and the effects of the same are still visible. The impact in Africa was in several ways. To start with, the exports from African countries went down, both commodity prices and export volumes. Statistics have it that from midyear to the end year 2008, the prices of oil fell 69 percent. This general drop in experts happened across almost all African economies, reducing the export volume and prices of their primary export commodities.

It is quite true that most African countries were and still depend on remittances from the Western Countries and the developed Asian Economies such as China and Japan. However, with the global financial crisis hitting almost all the above economies, the African countries suffered a severe contraction in the flow of developmental funds. This decline resulted in a foreign exchange reduction and thus increased levels of poverty. There was a decline in Foreign Direct Investment (FDI) by foreign private investors, noted Ali (2009). This in return obstructed these economies from implementing projects aimed at improving the African industrial infrastructure. This affected especially the mining and the hydroelectric projects, dominant in most of the sub-Saharan African economies.

The financial crisis blocked the efforts by the African economies in raising the growth rates. They suffered fiscal balance problems as tax revenues sharply declined. The absence of enough resources due to the decline of external funds hindered social spending as well as affected their ability to attain their developmental goals of improving on industrial infrastructure and poverty reduction.

General Effects on Global Political Economy

With the onset of the financial crisis, a lot happened to the global economic outlook, the household pain, the unbelievable indebtedness, unemployment, and other social and economical strains. All this happened so fast without effective control over it. It also became obvious that the readjustment of the situation to its former position was not easy and could take a number of years. The entire financial crisis, coupled with that knowledge, caused a lot of strain on the governments and the people in the severely hit countries, especially members of the G7, world’s leading economies, wrote McCormack (2012). This culminated into fear of the stability of these governments’ politics.

Financial liberalization and trade, political integration and change in technological knowhow, all constitute to the forces of globalization. In this case, they all led to the wide expansion of the global financial systems that existed prior to the financial crisis. However, the extent into which the effects of the crisis that hit the entire world’s economy manifested itself in the various global regions as analyzed above, laid emphasis to the governments on the need to enforce strategies that enables them to revert to nationalistic policies under such economic pressures, in the future.

In the quest of finding solutions to the global financial crisis, the political economic policies had to change to allow effective and efficient change. The most relevant change in the political economic approach is introduction of political decentralization and the promotion of a participative culture, said Mina (2011). In this case, decentralization surfaces in the field of public service provision, the governing system as represented by federalism. It represents the principles that worked in the US back in 1950s and is in no doubt capable of working again even in the modern economy. The principle of a participative culture in running the economic affairs takes the path of public management through making reforms that enable private management guidelines to run even the public sector, underlines Kates (2011, p. 57). In essence, it includes the incorporation of public-private administration guidelines in all the governmental sectors, profit oriented or not-for- profit. This strategic adoption gives new hope to the severely affected political economic environment.

Conclusion

As reflected in the above discussion, it is evident that the world as a whole is still under the effects of the global financial crisis that hit it back in 2008. Although it started in the United States, it soon spread over to other advanced economies and eventually to the developing economies, even the weak ones in Asia, Latin America and the Sub-Saharan Africa. The effects on all the affected economies manifested itself in more than one way; all of them very vital in the effective operation of the global economic activities.

In the light of this, the governments, especially of the advanced economies such as the G7 member states, realized the deep concern created upon the political economic environment by the global financial crisis and its immense effects. In respect to this, various moves, strategies, and policies surfaced, giving the global political economy a relatively new face and foundation. This effort to reinforce the global political economy aims at both solving the current effects of the financial crisis, as well as providing safety measures towards effective insurance against the future onset of another crisis with such a global magnitude.

References

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