TABLE OF CONTENTS:
- Executive summary
- Literature Review
- Causes that led to the crisis
- Global Financial Crisis and Asia
Global Financial Crisis project report entails a detailed research on Global Financial Crisis, its causes. We selected Asia to undertake our research and included in detail Global Financial Crisis’s implications on Asia. It entails a comprehensive literature review on Global Financial Crisis. This project shows impact on and reaction from developed countries and emerging markets differ based on their global economic integration and policy responses.
Global Financial Crisis INTRODUCTION:
The Globalized economy has been predicted on unending expansion, and Inflation is inevitable consequence of economic growth. Keeping inflation low is a major problem for governments the World over. After the Great Depression of the 1930’s, Global Financial Crisis or the Credit Crunch is considered to be the worst financial crisis. In the middle of 2007 and into 2008, the Global Financial Crisis started to show its effects. Around the world stock markets have fallen resulted in the collapse of large financial institutions and Governments come up with rescue packages to bail out their financial systems. The housing market also suffered resulting in numerous evictions, foreclosures and prolonged unemployment. Global financial crisis caused failure of many key businesses, declines in consumer wealth estimated in the trillions of U.S Dollars, and a severe decline in economic activity which lead to Global Financial Crisis given the intercorrectedness of the global economy in trade, finance and investments.
The financial crisis was triggered by a complex interplay of valuation and liquidity problems in the US banking system in 2008. The bursting of the U.S. housing bubble, which peaked in 2007, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally. Questions regarding bank solvency, declines in credit availability and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined. Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion and institutional bailouts. Although there have been aftershocks, the financial crisis itself ended sometime between late-2008 and mid-2009.
Global Financial Crisis LITERATURE REVIEW:
Economic recession has consequences for the labor market in different ways depending upon the nature and extent of its impact and depth, and the sectors that tend to have suffered from the worst impact. Betcherman and Islam (2001) pointed out that during the Asian crisis unemployment increased, earnings of workers fell and workers rights were endangered; consequently various adjustments took place in the labor market such as internal and international migration and participation in informal sector. Jones, Hull and Ahlburg (2000) noted that unemployment rate increased in all the crisis affected-countries, mainly in urban areas and was concentrated in the construction, finance, real estates and manufacturing sectors. Knowles, Pernia and Racelis (1999) pointed out that employment in agriculture and services sector has increased in several countries during the financial crisis. Horton and Mazumdar (2001) found that labor participation rate decreased more for vulnerable groups, such as young workers, women and older workers compared to that of prime-age males in both absolute and relative terms in the South East Asian region during the time of crisis. Pernia and Knowles (1998) identified that female workers are more likely to lose their jobs than their male counterparts as they are mostly the secondary earners and they usually do not belong to labor unions. However, Moon, Lee and Yoo (1999) revealed that males were more adversely affected than female in Korea during the crisis in 1990s. Knowles, Pernia and Racelis (1999) found that the main form of impact of the crisis in the informal sector is the decline in the real income per worker rather than open unemployment. According to Betcherman and Islam (2001) the increased contribution of self-employed and unpaid family workers in the relative shares indicates that many workers move from formal to informal sector.
Overseas migrant workers, working in South East Asia, were seriously affected during the financial crisis. Manning (2002) found that three of four crisis affected countries (Malaysia, Korea, Thailand, Hong Kong) which imported workers had curtailed worker intake. Abubakar (1999) described that in some cases migrant workers were forced to work longer hours. Sek-hong and Lee (1998) stated that local workers were more adversely affected than the guest workers in Hong Kong. According to Battistella and Asis (1998) a large number of Bangladeshi workers who worked in the construction and services sector in Malaysia lost their jobs; as repatriation was not easy, most of them became undocumented migrant workers. Singapore’s migrant workers were not severely affected, and Hui, Weng-Tat (1998) mentioned that this mainly owed to Singapore’s emphasis on workers’ performance rather than nationality in case of retaining workers. Owing to the Asian Financial Crisis, there was a substantial decline in outward transfer of remittances from the affected countries (Ahmed, 1998).
CPD Occasional Paper Series 80 A survey of literature pertaining to the East Asian financial crisis of the 1990s indicate that in the context of a global economic crisis the most vulnerable areas of countries such as Bangladesh are likely to be export-oriented sectors, manpower export, remittance and domestic resource mobilization. Aid inflow could also be hit by the crisis. All such developments were likely to have adverse impact on workforce employed in those sectors and the labor market associated with those developments. It is important that a review of the repercussions of the current crisis is carried out both at the level of Bangladesh’s partners in the global economy, and also at the level of the domestic economy with its various sectoral dimensions.
CAUSES THAT LED TO THE CRISIS:
The main cause of the crisis was the bursting of the U.S housing bubble in 2005-2006. A collapse of the U.S subprime mortgage market and the reversal of the housing boom on other industrialized economies have effected around the World. Some financial products and instruments have become so complex and twisted, that the whole system started to fail. As a result, the World’s largest financial institutions have collapsed. With a globalized system, when the larger banks shown signs of the crisis, the entire economy turned a Global Financial Crisis into a Global economic crisis. The rise in food prices, high fuel rates and soaring commodity prices also caused global financial crisis.
The downturn after four years of relatively fast growth is due to a number of factors: the global fallout from the financial crisis in the United States, the bursting of the housing bubbles in the US and in other large economies, soaring commodity prices, increasingly restrictive monetary policies in a number of countries, and stock market volatility.
GLOBAL FINANCIAL CRISIS AND ASIA:
The financial crisis and Global economic downturn did not originate in Asia. Asian countries in structural terms are generally in good shape. Countries in Asia were worried about what is happening in the West. A number of nations urged the US to provide meaningful assurances and bailout packages for the US economy. This crisis has shown that in an increasingly inter-connected world means there are always knock-on effects and as a result, Asia has more exposure to problems stemming from the West. Many Asian countries have seen their stock markets suffer and currency values going on a downward trend. Asian products and services are also global, and a slowdown in wealthy countries means increased chances of a slowdown in Asia and the risk of job losses and associated problems such as social unrest.
India and China are one of the World’s fastest growing nations and after Japan, are the largest economies in Asia. From 2007 to 2008, India’s economy grew by 9%. Much of it is fueled by its domestic market that has not been enough to shield it from the effect of the Global Financial Crisis. By March 2009, India’s growth slowed quickly to 7.1%. China has also experienced a sharp slowdown and its growth slow down to 8%. However, China also has a growing crisis of unrest over job losses. Both spend billions into recovery packages. China started encouraging its companies to invest more overseas hoping it will reduce the upward pressure on its currency. Yuan. China also raised concerns about the World relying on mostly one foreign currency reserve and called for the dollar to be replaced by a World reserve currency run by the IMF.
Japan, which has suffered its own crisis in the 1990s, also faced Global Financial Crisis. Japan is so exposed that Japan’s industrial production fell by 10%, the biggest drop since their records began. However, with high unemployment and general lack of confidence, optimism for recovery has been dampened.
Towards the end of October 2008, a major meeting between the EU and a number of Asian nations resulted in a joint statement pledging a coordinated response to the Global Financial Crisis. As Inter Press Service (IPS) reported, this coordinated response is dependent on the entry of Asia’s emerging economies into Global policy-setting institutions. This is significant because Asian and other developing countries have often been treated as second-class citizens when it comes to international trade, finance and investment talks. Asian countries are potentially trying to flex their muscle, maybe because they see an opportunity in this crisis, which effects the rich west.
Asian leaders called for “effective and comprehensive reform of the international monetary and financial systems”.
The emerging Chinese superpower versus the declining US superpower will be interesting to watch. It would of course be too early to see China somehow using this opportunity to decimate the US economically as it has its own internal issues, While the Western mainstream media has often hyped up a ‘threat’ posed by a growing China, the World bank’s chief economist (Lin Yifu, a well respected Chinese academic) notes “Relatively speaking, China is a country with scarce capital funds and it is hardly the time for us to export these funds and our them into a country profuse with capital like the US.”
China used this opportunity to attempt to attract neighboring nations into its orbit by attempting to foster better economic ties. According to an IPS analysis, this has been a goal for a while but the recent financial crisis has provided more opportunities for China to set up to this.
Kazakhstan’s financial sector problems were coinciding with the emergence of a Global financial crisis. The banks’ problems arose from loan portfolios over weighted in domestic real estate projects, not from buying over-risky financial assets in the global market. Kazakhstan’s bank has been borrowers in the global financial markets rather than investing in toxic assets coming out of the financial system.
Asian countries are mulling over the creation of an alternative Asia foreign exchange fund, but market shocks are making some Asian countries nervous and it is not clear if all will be able to commit. What seems to be emerging is that Asian nations may have an opportunity to demand more fairness in the international arena, which would be good for other developing regions too.
A global economic meltdown should be seen and maybe something that we have never imagined. The consequences of the rise of commodities prices and the emergence of new powers should be realized. Globalization is now going alongside into our own societies.
- Government loans:
Funds allocated for bailout can be used to provide loans rather than buying the securities outright. This avoids the complexity of pricing the securities and enables interest from the loans to be returned to taxpayers or used for their benefit.
- Reverse Auction:
The government can invite lowest bids from many sellers for different categories of securities to overcome Global Financial Crisis.