International Monetary and Financial Environments

International Monetary and Financial Environments~

One of the major challenges which have faced the world financial and monetary environments was the 2007 crisis which began in the US (Claessens, Kose,  Laeven & Valencia, 2014). This crisis was caused by several factors including the trade imbalance in the globe, harmful deregulation of the financial markets, and poor consumption patterns in the USA. The crisis affected the world economy negatively by reducing consumption leading to the collapse of industries, loss of employment, and the inability to access credit (Edey, 2009). To recover from the crisis the government instituted several fiscal and monetary policies. These included a reduction in taxes and interest rates and an increase in government spending (Claessens et al., 2014). Still, many challenges continue to exist as a result of this crisis. This paper provides an analysis of the causes, effects, and measures taken with regard to the 2007 global crisis.

Causes of the Global Financial and Economic Crisis

The world’s trade imbalance was a major contributor to the global financial crisis (IEG, 2012). This imbalance had been caused by China, which had joined the World trade organization six years earlier. The system allowed the country to flood the world market with its exports which were substantially cheaper than other products (IEG, 2012). To maintain its competitive advantage, the country maintained its low exchange rate. As more people bought Chinese products, the countries began registering an increase in their deficit while China’s trade surplus increased (Bilali et al., 2012). Additionally, there was a massive shift from the production industry to the service industry, as the producers of consumer and industrial goods could not compete with the Chinese producers (Bilali et al., 2012).

Moreover, despite the new developments, the United States did not alter its consumption patterns (Claessens et al., 2014). The citizens continued consuming more imports while exporting less to the global market.  As a result, the country borrowed extensively to finance its trade deficit and public budget (Claessens et al., 2014). Their main financier was China due to its success in the world market. China, on the other hand, bought the United States treasury bills and bonds using its substantial financial surpluses (Claessens et al., 2014).

In the same light, the period had been marked by unhealthy deregulation in the financial markets (Claessens et al., 2014). The United States had not only been a huge supporter of a liberated financial market but also led in it since the 1980s. The country was therefore characterized by a profoundly deregulated financial market with negligible monitoring and supervision by the FED. Under the GATS agreement, the United States was equally able to provide financial services to other countries(Claessens et al., 2014). Motivated by the new development and the expanding worldwide trade, the country was characterized by several innovative derivatives and financial products. This culminated in a bubble burst which froze the credit market.

Effect on the global economy

The crisis affected the global economy in several ways. First, the world financial markets grew risk-averse (Edey, 2009). This change altered the credit conditions making it hard to get financial credit and leading to dysfunctional markets in several cases. The businesses, as well as their consumers, grew less confident over the global economy leading to more grievous results.  First, people responded by reducing the amount of money which they spent on manufactured goods (Edey, 2009). As a result of the reduction in consumption, industrial production fell increasingly leading to significant shrinking in GDP in industrial economies.  In the agricultural economies, the producers recorded a decrease in their incomes leading to a similar decrease in production (Bilali et al., 2012). This change was mainly caused by the unwillingness of the household to buy the produce at previous prices forcing them to reduce their commodity prices. In the same light, the agricultural producers were also receiving less credit from the financial institutions, which amplified this situation (Bilali et al., 2012).  Finally, there was an increase in unemployment as many industries were unable to sustain their previous employees in the face of reducing consumption (Bilali et al., 2012). This led to a substantial decrease in the affected population’s living standards (Bilali et al., 2012).

Recovery of the global economy

The global economy took several steps to recover. First, the governments in place instituted practical fiscal policies (Cavusgil, Knight & Riesenberger, 2017). In this regard, the governments influenced their economies through their revenue collection and expenditures. They, therefore, modified their taxation levels to modify the amount of money which households had at their disposal (Liborio, 2011). They equally modified the taxation rates imposed on the firms. In the same light, they focused their spending on the areas which supported the growth of economic activity (Liborio, 2011). Additionally, the governments adopted several monetary policies. Under these policies, they used their currency boards or central banks to control the amount of money which was present in the economy. These regulatory bodies determined the monetary base and influenced the cost of borrowing to facilitate price stability and create trust in the currency (Cavusgil et al., 2017). These two activities were major contributors to the recovery of the global economy.

Fiscal and monetary policies instigated

Notably, the governments adopted expansionary policies to stimulate greater economic activity in the economy. First, the government lowered the tax rate imposed on the working class (Claessens, Kose, Laeven & Valencia, 2014). This ensured that the households had enough money to spend and thus boosting the economic activities in the country.  For instance, with increasing spending, the firms were able to sell greater amounts of their products (Claessens et al., 2014). Moreover, the tax rate imposed on the firms was also reduced, which acted as an incentive to operate and enabled them to employ more people due to the ability to earn greater profits (Cavusgil et al., 2017).  The governments also bought back their bills and bonds from the general population, which increased the amount of money which was circulating (Liborio, 2011). For instance, the provided incentives like subsidies to the companies operating in the manufacturing sector (Liborio, 2011). The regulatory bodies also lowered the interest rates which encouraged the industrial companies to borrow capital for production purposes (Claessens et al., 2014).

Challenges that remain for the global economy

Nevertheless, there are major challenges which remain in the global economy as a result of this crisis.  Foremost, the crisis has had significant effects on the fertility rates of the developed economies (Chen, Mrkaic & Nabar, 2018). According to Chen et al. (2018), these rates have continued to register a steady decline which is expected to affect the labor force in the near future. Additionally,  the income inequality which resulted due to the crisis is perceived to have increased significantly (Chen et al., 2018). This is especially true for the populations which experienced major losses due to the reduction in output and unemployment during the aforementioned period (Chen et al., 2018). Finally, the net migration rates within the advanced economies not only reduced significantly after the crisis but also continue to exist as such over the years.

Evidently, the global crisis had major negative effects on the countries. The crisis led to the collapse of major economies and a decrease in the overall economic activity (Edey, 2009). The governments, therefore, instituted various fiscal and monetary policies to address these challenges. While this improved on the overall situation of their economies, it has continued to affect the world in several ways.

 References

Bilali, H. E., Panin, B., Berjan, S., Driouech, N., Despotovic, A., & Zucaro, N. M. (2012).

Impacts of the global financial and economic crisis on the agro-food industry and rural

livelihoods in Serbia. APSTRACT: Applied Studies in Agribusiness and Commerce, 6

(1033-2016-84049), pp. 113-118.

Carmassi, J., Gros, D., & Micossi, S. (2009). The global financial crisis: Causes and

cures. JCMS: Journal of Common Market Studies, 47(5), 977-996.

Cavusgil, T.S., Knight, G. & Riesenberger, J. R. (2017) International business: The new

realities. Harlow:Pearson Publishers.

Chen, W., Mrkaic, M., & Nabar, M. (2018). Lasting effects: The global economic recovery 10

years after the crisis. International Monetary Fund. Retrieved from

https://blogs.imf.org/2018/10/03/lasting-effects-the-global-economic-recovery-10-years-

after-the-crisis/

Claessens, S., Kose, M. M. A., Laeven, M. L., & Valencia, F. (2014). Financial crises: Causes,

consequences, and policy responses. Washington: International Monetary Fund.

Edey, M. (2009). The global financial crisis and its effects. Economic Papers: A journal of

applied economics and policy, 28(3), 186-195.

MONETARY AND FINANCIAL ENVIRONMENTS 8

Indipendent Evaluation Group (IEG) World Bank | IFC | MIGA. (2012). The World Bank

Group’s Response to the Global Economic Crisis—Phase II. Retrieved from

https://www.oecd.org/derec/49755570.pdf

Liborio, C. S. (2011). Fiscal and monetary policy in times of crisis. Liber8 Economic

Information Newsletter- Federal Reserve Bank of St. Liciana.,(March), pp. 1-2. Retrieved

from https://files.stlouisfed.org/files/htdocs/pageone-

economics/uploads/newsletter/2011/201103.pdf