Hi everyone!!
I'm working on a project on financial crisis. I would really appreciate to view other people's opinions regarding about financial crisis. Feel free to post your view.
Thanks
The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults. Financial crises directly result in a loss of paper wealth; they do not directly result in changes in the real economy unless a recession or depression follows.
Global economic crisis calls a stronger case of global economic reform, an economic reform that helps developing countries look beyond stability. Without undermining the stability concerns, the world order should now look at stability as a means to an end. End is growth, poverty reduction.
Current financial and economic crisis pose serious development challenges to the developing world. The slow down of economic growth is perhaps the single most important impact of the crisis. The slow down in the growth in turn has multiple impacts and is caused by multiple reasons. Key impacts include increasing poverty, increasing human development challenges, increasing complex emergencies as a result of increasing inequality. It is estimated by the World Bank that in 2009 an additional 55 to 90 million will be trapped in extreme poverty and the number of chronically hungry people is expected to climb to over 1 billion this year. One of the key reasons for the crisis is the nature of the link between the developing world and the developed world.
An analysis of the growth patterns in developing world reveals that one of the main reasons for the growth, in the recent past, is the booming commodity prices (which continued to be so until late 2008). Demand in the developed world has come down due to the financial crisis and this is felt in the developing world, primarily in the form of, reduced exports and thus the earnings. This summarises at a very broad level the nature of link between the developing world and the developed world (from a very specific perspective). Strengthening of economic governance systems could thus take the form of developing countries focusing on developing policies that allow for diversification of the economies and value addition to the traditional tradable products and increase the focus on new products. This could be done by increasing spending on the productive sectors of the economy and not just limit to maintaining macroeconomic stability concerns. UNDP’s work in the area of fiscal space offers more insights into this kind of thinking.
Macroeconomic policies adjustment focusing on fiscal retrenchment measures is not the ideal solution during the time of a crisis and recovery from a crisis of this nature. This could potentially lead to human development crisis because fiscal retrenchment takes the shape, most often, coming from development budgets allocated to sectors like health, education, water and sanitation etc. Instead spending has to be increased on infrastructure that could help in building domestic demand and increasing employment opportunities. However, LICs face serious budgetary constraints to expand spending on the infrastructure and also at the same time shield the macroeconomic stability concerns. One possible approach as a way forward to strengthen the economic governance mechanisms is for the developing countries to improve on
prioritization and efficiency and effectiveness in spending. For example in the case of Uganda, the drivers of growth have been the manufacturing and construction sectors. However 80% of the population in the rural areas depends on agriculture as a primary source of livelihood. In the wake of crisis it becomes more prominent to support such sectors where people depend the most for livelihoods. This however should also be balanced with an explicit attempt to build the non
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traditional export base of a country and role of state is to promote more participation by the productive segments of the population in such diversification processes. Another impact aspect that merits attention is the ability of the governments to engage in interventions that impact production capacities. For example, in many of the developing countries, poverty is inextricably linked to limited utilization of land. Land is by far the most fundamental asset. Reality is that in many of the countries bottlenecks exist in unleashing the full potential. For example issue of community ownership Vs individual ownership, land title and registration etc. While respecting the existing cultural dimensions, it is important to find innovative ways in unleashing the full potential of land.
One other challenge for the governments is to ensure that the population engagement doesn’t move away from the export led dynamic sectors to those sectors which are less productive. Decades of work by many international agencies has gone into to achieve this movement in the economies. Current crisis clearly impacts this movement and makes it difficult for engaging in non
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traditional products. This is detrimental for long run growth and sustainability. Using the economic policy instruments, especially monetary and fiscal policies, government should keep alive the focus on sectors that can influence more production and revenues.
Governments in the developing countries also have to focus on the increasing trends of poverty because of the slippage of the increasing number of vulnerable segments of the population into poverty. 2 important routes through which the crisis increased vulnerability is by job loss and reduced remittances. Fiscal stimulus packages coupled with employment guarantee schemes (such as those introduced by the congress led government in India) and productive investments in infrastructure will help in maintaining employment in the country. For instance in the case of countries like China, Vietnam fiscal stimulus packages announced account close to 5% of the GDP and in countries like India, Armenia it counts for roughly between 2 and 5 % of the GDP. Key issue is fiscal stimulus packages allow for quick stability but in order to activate the long run growth and poverty reduction, governments should ensure efficiency and effectiveness.
Crisis offers a unique opportunity in many ways: to design macroeconomic policies that help and allow investments to come into the productive sectors of the economy to facilitate long run growth and sustainability, opportunity to diversify the economies, opportunity, as Dani Rodrick says, ‘poor countries become rich by producing what rich countries produce’, opportunity to engage more in the SME sector to keep employment scenario floating as well as create domestic demand. Also, an opportunity to revisit role of state.
From the beginning of summer 2008 there has been a slew of bad news in US that caused ripple effects across the globe. It all started with the housing subprime mortgage and now it trickled into the entire financial market. The US unemployment rate hits 6.1% and the industrial production fell to 1.1%, its largest decline in the past three years. The Indian IT and BPO companies get more than 60% business from US and 20% from UK, the rest comes from other European countries, Australia etc. With US already in recession and European economy edging towards recession, all these will affect the global economy
The share of own revenues in the total revenues of the local budgets has been decreasing
over time. In 2008, these accounted for 47% of the total and only 29% if Chisinau
municipality is excluded. In most of the districts this share was set to decline even more in
2009. Moreover most of them, this ratio has been declining in the last 5-6
years.
The key development of the second half of 2008 has been a dramatic worsening of the first of the dimensions mentioned above; the financial crisis based on the accumulation of debt. The main cause of this has been growing recognition that the quantity of bad debt in the system was much larger than was previously thought. This in turn led to confusion amongst the US ruling class about the way to respond to the rising number of loan defaults. Unwillingly forced to nationalise the mortgage companies Fannie Mae and Freddie Mac (largely as a result of pressure from Chinese and Japanese investors in these companies) they then switched abruptly to allowing a leading investment bank, Lehman Brothers, to fold.
The result of this has been an abrupt change in policy towards bailing-out the banks. The form of this has varied across countries. The US response, led by Treasury Secretary Henry Paulson, who is rooted in Wall Street, has been particularly shameless (the original proposal by Paulson was simply that the US government, funded by taxpayers, would buy up the worthless debt from the banks – a straightforward subsidy with no control over future bank behaviour whatsoever). The UK government plan, which has effectively been adopted by the EU, provides some potential leverage for political debate in that it involves buying shares in the banks. This allows for discussion about the nature of state control over the banking system and about who should pay for the crisis. But it is clear that the initial aim of the government was to have the minimum amount of state involvement in the financial sector and to provide funds which would then be used to restore the banks to profitability in the hope of a quick sale of the governments’ stake. The model was the Scandinavian restructuring of the banks following the financial crisis there in the early 1990s.
Minimal impact for me and most people in Singapore. During the "crisis", one can see that most restaurants are still packed full, needing to queue up during peak hours.
At the same time, it was the greatest buying opportunity for a great number of assets. It was a candy store on sale at that point in time.
The greatest impact probably comes in the form of inflation, as prices of commodities continue to shoot up, leading to rises in food prices. Apart from that, this crisis affected mainly the Western countries, and not much locally. However, certain employers do make use of this opportunity to fire off redundant and expensive staff to train and employ newer and cheaper ones. At the same time, they could do certain actions that reduce net reported profits (cashflow not reduced) so as not to give much perks to employees, and con them by saying that net profit has dropped significantly due to the crisis.
But I guess most people wouldn't really understand :x