Impact of Financial and Economic Crisis

A financial crisis involves massive changes in the credit value and prices of commodities in the market. A financial crisis affects the majority of a nation’s firms, sovereigns, and liquidity of assets. Two major factors that drive financial crisis are macroeconomic imbalances and changes in the internal or external market. On the other hand, an economic crisis is a downshift of a country’s economy as a result of a financial crisis (Chen et al. 2016, p. 65; Hubrich & Tetlow 2015, p. 111). This downshifts of a nation’s economy occurs due to a slowdown in the exchange of goods and services. During an economic crisis, there is a decline in the interaction between people, companies, and banks. Financial and economic crises are interrelated in that they occur due to economic recovery that involves the prosperity of the economy, overproduction, crisis, and depression. This essay describes the impact of financial and economic crisis.

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A financial and economic crisis affects the gross domestic product (GDP) and investment. For instance, the subprime crisis and the great recession that occurred in the United States highly affected the housing market and global economic growth and investment (Gurdgiev, Leonard & Gonzalez-Perez 2016). A decline in the GDP and investments also affect social interaction and peace in a nation. Following the cycle of the interrelationship between financial and economic crisis, between 1995 and 2000, the economy had prospered due to the overproduction of new communication technologies (Chen et al. 2016, p. 66). These technologies included fibre optics, internet protocol, websites, and mini-laptops. Inflation was the major crisis, which led to the cut down of the expected profits in the second quarter of 2000, leading to depression and collapsing of the market (Gilchrist et al. 2017, p. 797). The bursting of the internet bubble in 2003 led to a decline in investment incentives, a decrease in demand for the product, and an increase in uncertainty on the capital returns (Hubrich & Tetlow 2015, p. 111; Wolfson 2017, p. 82).

Financial and economic crisis leads to closure of companies facing unfavourable financial capital. These firms lack access to credit facilities and also access to overseas market. Banks and currency value face the depression during an economic crisis since the investments are below one per cent per financial cycle (Hubrich & Tetlow 2015, p. 112). Politics in a country also play a major role in a financial crisis, which lead to the closure of some firms, especially among the countries with low income. Political instability leads to civil war creating an unfavourable environment for economic prosperity. The political leaders may loot the company resources or hinder further investments of the firm through increasing the land rate tax, tariffs, production cost, and denial of incentives (Hernández & Kriesi 2016, p. 213).

Financial and economic crisis leads to a decline in macro-economic relations. The trade between countries decreases among the countries facing financial and economic crises (Ahmed, Coulibaly & Zlate 2017, p. 133). Moreover, support from the World Bank and IMF becomes limited due to unfavourable report on ways of managing the financial crisis and enhancing economic growth. Employment rates in a country decrease, and the majority of financial institutions undergo recess to reorganise their financial structures to meet international requirements (Hall 2015, p. 319). The banking sector plays a major role in the analysis process on the cause of the financial crisis and the decline in the economic growth of a nation. For instance, some European nations grew their economies after the financial and economic crisis. These positive growth trends of productivity indicate a restructured financial sector.

Financial and economic crisis decelerates industrialisation and import of goods and services. Industrialisation declines due to hefty external debts to the international community, which imposes sanctions on imports and exports. Poverty reduction strategies, as stipulated in the millennium development goals, limit developing countries from getting external support (Ahmed, Coulibaly & Zlate 2017, p. 137). These strategies advocate the formulation of internal solutions to boost the economy. Poor countries have limited alternatives for possible solutions of alleviating from a financial and economic crisis in the future. Moreover, the location of major countries facing a financial crisis and decreased economic growth is within the tropics. These countries are endemic to diseases such as HIV/AIDS, malaria, dengue fever, which weaken the economy of a nation. Additionally, these countries face catastrophes such as crop damage, famine, civil wars, and constitutional crises, which prevent them from participating in global trade and investments (Lins, Servaes & Tamayo 2017, p. 1799).

A financial and economic crisis makes a country face an increased marginalisation from the international market. According to Castells (2017, p. 39), economic growth and financial increase should occur in all parts of a country to avoid future crisis. However, if some nations face economic and social regression due to cultural causes, then it is difficult to formulate policies for handling a financial and economic crisis in the future (Castells 2017, p. 39). A bubble burst in the international market has a large impact on developing nations. A stable country with weak financial policies has a high likelihood of undergoing a financial crisis and slow economic growth due to a bubble burst in the international market. In this case, social dimensions, cultural factors, and demands of a country determine the pace at which it develops.

A country’s population plays a major role in the emergence of financial and economic crisis. Countries such as Brazil, Russia, India, and China have a high population density; hence, the high likelihood of undergoing a financial crisis and declining economic growth (Fasano & Galloppo 2015, p. 449). In this relation, these countries with a high dependency ratio have a relatively high probability of facing a financial crisis and the slowing of economic growth. A country may develop policies that will decrease the dependency ratio and increase the working ratio population. Improving the health sector and increasing the innovation hubs will increase the working population, limiting incidences of financial and economic crisis. The developing nations and continents, including Asia, face the highest imbalance between the working ratio and dependency ratio in a population. This lack of balance limits the growth of exports due to the lack of diversification of available opportunities and lack of competitiveness. The social needs of a country’s population, such as the need for education, housing, hospitals, roads, and water, may indeed lead to a financial crisis and slow economic growth in a country with a high population growth rate (Mera & Renaud 2016, p. 101).

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In conclusion, it is essential to understand the financial and economic position of a country and its financial policies since they contribute to the financial crisis and the decline in economic growth. A low GDP affects the exchange of goods and services as well as international relationships with financially stable countries. The cycle involved in inculcating financial crisis may not apply in developing nations due to their geographical position, which makes the countries prone to disease and adverse climatic conditions. Moreover, political instability in a country does not enable it to achieve financial and economic growth since it frightens investors. When investors realise that a country is characterised by a hostile political environment, they keep off of it and put their investments in other nations that have favourable politics.

References

Ahmed, S, Coulibaly, B & Zlate, A 2017, International financial spillovers to emerging market economies: How important are economic fundamentals? Journal of International Money and Finance, vol. 76, no. 5, pp.133-152.

Castells, M 2017, Another economy is possible: Culture and economy in a time of crisis. John Wiley & Sons, Hoboken, NJ.

Chen, Q, Filardo, A, He, D & Zhu, F 2016, Financial crisis, US unconventional monetary policy and international spillovers, Journal of International Money and Finance, vol. 67, no. 12, pp. 62-81.

Fasano, A & Galloppo, G 2015, ‘Active Investing in BRIC countries’, Procedia-Social and Behavioral Sciences, vol. 213, no. 7, pp. 448-454.

Gilchrist, S, Schoenle, R, Sim, J & Zakrajšek, E 2017, Inflation dynamics during the financial crisis, American Economic Review, vol. 107, no, 3, pp. 785-823.

Gurdgiev, C, Leonard, L & Gonzalez-Perez, MA (eds) 2016, Lessons from the great recession: At the Crossroads of sustainability and recovery, Emerald Group Publishing, New York, NY.

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Hall, SM, 2015, Everyday family experiences of the financial crisis: Getting by in the recent economic recession, Journal of Economic Geography, vol. 16, no. 2, pp. 305-330.

Hernández, E & Kriesi, H 2016, The electoral consequences of the financial and economic crisis in Europe, European Journal of Political Research, vol. 55, no. 2, pp. 203-224.

Hubrich, K & Tetlow, RJ 2015, Financial stress and economic dynamics: The transmission of crises, Journal of Monetary Economics, vol. 70, no. 3, pp. 100-115.

Lins, KV, Servaes, H & Tamayo, A 2017, Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis, The Journal of Finance, vol. 72, no. 4, pp. 1785-1824.

Mera, K & Renaud, B 2016, Asia’s financial crisis and the role of real estate, Routledge, London, England.

Wolfson, M.H., 2017, Financial crises: understanding the postwar US experience, Routledge, London, England.

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