Effects of Economic Recession Thesis

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Recession

The recent economic downturn has impacted different nations in different ways. Each nation's specific characteristics contribute to the degree to which the recession impacts it. Canada, for example, has suffered because of its dependence on exports to the U.S., but at the same time it has not suffered much because strength in its financial system essentially eliminated the possibility of an economy-crippling credit crunch (Zakaria, 2009). The economy of Greece has seen strong impacts of recession because that economy's inherent weakness and lack of strong governance was exposed when the recession hit key European trade partners (Flynn, 2008). In the developing world, impacts have been similarly different India's key economic drivers are tied to the global economic system, resulting in that nation struggling through recession. The rate of economic growth has been cut in half and the government has added significant amounts of debt (No author, 2009). Mongolia has fared very poorly during the recession, but not as a result of credit crunch or "toxic assets." A cyclical slump in commodities prices has been the key driver of economic slowdown in Mongolia, more a function of that nation's dependency on a handful of large mining enterprises than its tenuous ties to the global economic system (Bahree, 2009).

The Study

The study proposed will examine the impacts of the global recession in each of these different countries. This qualitative study will attempt to discern the reasons why some economies outperform during times of strong global economic downturn. In this study we have two developed economies and two developing economies. Each is at a different phase of development -- Canada is far more advanced that Greece; India far more advanced than Mongolia. Both Canada and Mongolia have economies driven by commodities, the other two nations by manufacturing and services. This mix of nations will allow for better cross-comparison of economies. The similarities and differences between these four economies are expected to help differentiate the reasons why some economies outperform others.

This type of study is vital to understanding the global economy and the way that catastrophic impacts spread around the globe. Economists and governments alike can benefit from gaining a stronger understanding of how such global economic events impact different nations. When we see that two completely different nations with certain similarities to their economies are impacted in the same manner, we can better understand the specific drivers of correlation with the world's largest economies. For example, the Indian economy is based substantially on exports to the U.S., as is the Canadian economy. Yet the Indian economy does not have the same robust banking sector that the Canadian economy has. If we can isolate the differences and similarities between nations and relate those to the ways in which the economic recession has impacted those nations, we can draw some conclusions with respect to the factors that drive a nation's economic performance in the wake of such events. This can help provide insight for governments, regulators and economists with respect to the steps that can be taken to insulate economies from the impact of such global economic events.

The International Monetary System

The international monetary system provides a means for exchange between nations. It also serves to offer the type of stability that facilitates international trade. What we have seen over the course of the recent recession is that the means to that stability -- a wealth of economic interrelationships -- also puts all economies at risk when one of the world's major trade partners suffers from recession.

The impacts of a recession, however, should be considered in their long-term context. For example, we have learned that a strong, regulated banking sector such as those in Canada and Australia can contribute to overall economic stability during a recession. Over time, nations that wish to insulate themselves from recession can take that lesson to heart and strengthen the governance of their banking sectors. This is one way in which recession can help the international monetary system.

Indeed, the creative destruction caused by recession can be very valuable to the international monetary system. A defining element of capitalist theory is that markets operate in long-run equilibrium. At times, markets can be exuberant and irrational. A recession snaps those markets back to their long-run equilibrium points. This in turn serves to bring equilibrium to the international monetary system. Currencies rise and fall to values more reflective of economic fundamentals; regulations that govern the system are adjusted to add or remove risk as needed. Recessions sting, but they are little more than the mirror image of a bubble. Each is a natural part of the world's market economy and serves purposes both positive and negative.

As negative consequences go, recessions expose the weaknesses in economies and in the international monetary system. We can see that Mongolia suffers drastically during the downturn because it is strong impacted by a slump in commodities prices. Canada, with a similarly commodity-oriented economy but also a stronger and more diversified economy, has not struggled to nearly the same degree. The weak nation suffers while the strong nation prevails. The Indian economy struggled some, but no more than the Greek economy, despite the former being official a first-world nation.

Literature

For the most part, the literature supports the theory that recession in a natural part of market activity. The international monetary system has been developed over the past century to facilitate trade and provide stability (Eichengreen, 2008). What we have seen in the past two years of recession has not changed that. The system, by virtue of the loosening of regulations and the free float of major currencies, is structure in a manner that decreases regulatory burden but increases risk. The point is not that the international monetary system will eliminate the possibility of recession, but that such recessions will have an impact on global trade akin to creative destruction. The weaknesses in economies will be exposed, and in general nations will trend towards the best practices. For example, nations will trend towards strengthening their banking sector as Canada did and will trend towards removing barriers to the flow of capital (especially foreign direct investment) as India did. Even Mongolia was able to boost its economy by signing a deal to open a new mine. Over time, and presumably a series of boom-bust cycles, economic growth will trend towards equilibrium as more countries adopt the best practices that have allowed various nations to weather the economic storm better than have others.

One interesting aspect of this recession is the way in which it was originally precipitated by utterly shoddy oversight on the part of U.S. banking regulators. Risk levels at American banks grew far too high, resulting in U.S. economic downturn. The spread of the recession derived from global economic interdependency, a function of the international monetary system as presently manifested. It is interesting to consider the impacts this may have on the future of the international monetary system. The first potential impact is that global dependency on the U.S. dollar might decrease. The monetary system relies on multiple hard currencies for stability; failures in one nation with respect to governance could lead to a decline in relevance for that nation's currency.

Another way in which the recession may impact the international monetary system is that the world's leading economies may install "circuit breakers" that would allow economic damage caused by proprietary events like those in the U.S. subprime market to be contained within that nation or bloc's economy. It seems almost preposterous that a nation like Mongolia could be affected by small American banks doling out bad loans in suburban USA. Yet this is precisely the event that the international monetary system, with its equal emphasis on risk and reward, promotes. As a result, a new vision of the international monetary… [END OF PREVIEW]

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Effects of Economic Recession.  (2009, October 23).  Retrieved January 21, 2020, from https://www.essaytown.com/subjects/paper/effects-economic-recession/6748574

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