An economic recession occurs when a nation experiences a lack of growth in consecutive financial quarters, or there is a genuine decline in the Gross Domestic Product. As capitalism experiences natural booms and busts in cycles, economic recessions create stress and strain in business cycles. Since the world’s economies are interdependent, an issue in one economy is contagious to other inter-related economies. As the economic system is revolving around the trade cycle, the recession is an expression of the economic cycle. Global economic recession, national and international, has a number of causes. It is heavily tied to the fact that globalization is a natural part of a more technologically connected world and it is irreversible. Mainly, this is tied to international capital markets where nations borrow, lend and build with the help of others. The causes of international recessions can be tied to factors that are hidden, obvious, immediate and perpetuating.
While an economist working on other nation’s economic problems is a hidden cause, an obvious one is that governments tend to mismanage money. For example, when a nation is in trouble financially, the International Monetary Fund (IMF) follows through with hiring economists to look at the problem and make a plan to fix it. However, they rarely understand the intricacies of other nation’s economies and also tend to neglect the more disparate parts of the nation. According to Joseph Stiglitz, a former chief economist for the World Bank, this quick method of fixing macro-economic problems is inefficient: “needless to say, a little number-crunching rarely provides adequate insights into the development strategy for an entire nation” (Stiglitz 60). Having an international team try and fix problems in a specific nation causes world recessions because it does not alleviate the real problems of the nation.
Another obvious cause of world recessions is the fact that governments tend to mismanage money. Because nations like Greece, Spain, the UK, and the United States borrow money from one another, they are not fully aware of all of the economic repercussions. Because these nations do not take into account how this impacts national balance sheets and spending patterns of citizens, “this means these countries are all in serious balance sheet recessions” (Koo 26). Ultimately, this type of borrowing does not fix problems; instead, it merely throws money at a bad situation without a realistic long term solution for the real problem.
An immediate cause of worldwide recessions is the fact that capital markets are much more liquid in today’s globalized world. For example, Stiglitz gave the example of East Asia in 1997 where nations were investing money in the area for its further economic development. However, when progress is not coming fast enough for the investors, people have the option to pull out their investment, such as the US government with their treasury bonds. Ultimately, this results in “a big economic problem” because “everybody tries to pull their money out at the same time” (Stiglitz 56). The ease in which investors and even nations can pull their money out from another nation in the form of funds or other capital markets surely causes an immediate impact in terms of stock and food prices.
A perpetuating problem when it comes to causes of world recessions is the fact that nations rely heavily on one another. When nations rely on one another too much for debt, borrowing and more, they tend to forget that the other nation’s capacity to lend or trade with them is variable as well. This results in what Koo called a “balance sheet recession,” that when “left untreated, will ultimately develop into a depression” (Koo 22). This has caused financial bubbles like the ones that are currently present in many nations, including the United States. Also, since other nations rely heavily on lending from other countries, they tend to leave these sorts of problems untreated.
A counter-argument to this may be that nations need to rely on one another for financing in order to function properly sine globalization is inherently irreversible. However, with capital markets being liquid and nations relying on one another, there are numerous organizations around the world that coordinate with one another. An example is the IMF and the World Bank. The problem goes back to the point of governments like Britain mismanaging money being given to them. This is therefore not a problem with respect to liquidity or reliance on capital markets; instead, it is purely a problem with respect to how these markets and nations are being treated by those that are in charge.
As we have seen, recessions are a worldwide phenomenon because of causes that are enduring, sudden, obvious and developed over time. Economists from countries that are enlisted to help other nations that they know little about is a poor means of solving real national problems. Also, governments mismanage money when it is given to them because there are little regulation and oversight in that arena. Liquidity in international capital markets also suddenly causes recessions because when investors and governments pull their money from international investments in nations, it causes an immediate impact in food and stock prices. Finally, reliance on other countries too much for debt and borrowing is a problem because it leads to long term development of problems when they are left untreated. Because of the inefficient means by which this is monitored, governments are further left to mismanage their resources and accelerate existing problems, not fix them.
Koo, Richard. "The world in balance sheet recession: causes, cure, and politics." Real-World Economics Review, vol. 58, no. 1, 2011, pp. 19-37.
Stiglitz, Joseph. "The Insider - What I learned at the world economic crisis." The Insider, 17 Apr. 2000. sandovalhernandezj.people.cofc.edu/index_files/egl_20.pdf.