Table of Contents
- Russian Crisis
- Financial Globalization
- Role of GKO-Eurobond Swap
- The Role of Russian Banks
- The Moral Hazard
- Capital Inflows
- Impact on Government Debt
- Impact on Enterprise Sector
- Argentinian Crisis
- The Role of IMF
- The Role of Global Financial Crisis
- The Role of Credit Rating Agencies
- The Lack of Access to International Capital Markets
- Subprime Crisis
- The Role of Financial Institutions
- The Role of Financial Regulators
- Greek Crisis
- East Asian Crisis
- The Influence of Oil Exporters
- The Role of IMF
- The Role of Banking Institutions
- Commonalities in Five Crises
- Differences in Five Crises
- Related Free Economics Essays
Economic globalization refers to the increase in the integration of international markets through international trade and other global investments. The aspect of economic globalization arises with high competition, productivity and innovation in the world thus raising the living standards of all citizens of the countries involved. Therefore, the primary aim of globalization is to reduce poverty levels by 72 million people annually. However, this objective has been faced with challenges that end up spoiling the mission of economic globalization.
Economic globalization has caused a lot of the financial crises including East Asian meltdown. This incidence has become the focal point of creating the reference of the implications and the role of the globalized economy to the fall of world’s formerly big economic powers. The four significantly affected economies are Greece, Argentina, Russia, East Asia and the global subprime mortgage crisis.
This paper seeks to discuss the role of economic globalization in the crises in East Asia, Greece, Argentina, Russia, and the subprime mortgage crisis. Therefore, the paper will focus on different perspectives regarding the causes of economic crises and the role of economic globalization in these crises. In addition, this paper will analyse commonalities and differences of the crises that happened as a result of economic globalization. Finally, the paper will use comparative charts to create a clear impression of the implications of the crisis in these countries.
The Russian crisis was one of the significant implications of economic globalization that saw the country almost hit the ground. It was accompanied by the meltdown that left the whole world wondering about the next move of the Russian economy that was initially attracting plenty of investments. Several factors contributed to the Russian crisis, but of the greatest influence was the role played by the globalized economy through various aspects of the international market drivers. The following factors indicate the role of the globalized economy in the Russian crisis (Blum 2008).
Several international organizations and financial institution like IMF were more than willing to lend money to Russia despite it being a stable nation. The primary objective was to create a financially globalized pool of capital inflow into Russia, which later affected the indebtedness of the country. The result was upsurging capital inflows and resulting speculative attacks causing a spill over crisis. It was part of the crisis that saw Russia contributing a debt of $16 billion to the crisis. With increased cases of debt crisis, it became certain that Russia was in a serious solvency problem. In addition, fundamental aspects of Russian economy continued to worsen as the amount of money lent continued to increase.
Role of GKO-Eurobond Swap
Treasury bonds significantly reduced their value with the citizens who held the government bonds choosing to keep them and face the risk of devaluation. This crisis was escalated by the rescue package and the globalization of the GKO-Eurobond. The result was the creation of a vulnerable reserve of foreign exchange. Moreover, the crisis depended on an unsustainable position of fiscal policies and fixed rates of exchange. Only foreign commercial banks were left in the banking business thus causing a crisis in Russia (Rajan, & Institute of Policy Studies Singapore 2003).
The Role of Russian Banks
During the crisis in Russia, banks used foreign capital to lend money to the domestic investors, which caused huge losses due to non-performing loans. Fixed foreign exchange rates with mismatch of currency left Russian currency devalued causing higher local interest rates than foreign interest rates. This situation created a limited link with Russian real investors leading to the total collapse of Russian banks. The government never bothered to bail the banks out, since the majority of the accounts were state owned with domestic local accounts being only 7%. Thus, bailing out such institutions was meaningless, since it could not cause any significant change in the fiscal sector (Kouzmin, & Hayne 2000).
The Moral Hazard
Russia faced an economic instability following the aftermath of the globalization crisis. The increasing drift in policy and economic crisis caused a lot of worries among investors in Russia. Moreover, the problem became a fundamental one when things were beyond control of the Russian government producing the rate of interest on government bonds that approached a disparity in comparison with other countries’ rates. Additionally, this deterioration significantly affected the international market with Russia’s increased foreign debt of $16.4 billion. Therefore, Devaluation and default financial risk continued to keep investors at bay (Stiglitz 2010).
The Russian assets continued to attract money despite the globalization crisis it faced. Russia had weak fiscal fundamentals with little liquidity in the international market. The next tragedy was fall in the market price of oil in the international market. There was a lot of dynamism in the debt crisis of Russia with current accounts deteriorating at a fast rate leaving the investors with small reserves. This forced the government to issue Eurobonds to help improve the situation. Appendix 2 shows the generalized cash inflows during Russian crisis as a result of the globalized economy fundamentals (Lewis 2009).
Impact on Government Debt
The globalized economy caused significant crises in the government debt of Russia. Russia faced a tremendous increase in its debt level with huge primary fiscal deficit failing to rescue the economy of the country. The state registered negative growth with high interest rates of payment. Later, an explosive path was witnessed with the debt to GDP ratio remaining relatively constant (Schaeffer 2009).
Impact on Enterprise Sector
The globalized economy led to the privatization of non-performing state corporations in Russia that ended up causing crisis in the private enterprise sector. However, the collateralizaion of loans with shares held in the leading companies in the oil sector, metals sector, and telecommunication industry seemed to transfer the risk of massive debt of loans to the private sector. Banks were given the advantage of taking the shares of these companies should if the loans were not repaid. This further threatened the survival of the private sector. This situation caused more crisis by the financial institutions creating an auctioning method of determining the size of loans and other long-term processes of settling loans.
Argentina is the country that was significantly affected by the globalization of the economy leading to the financial crisis. Its debt has risen to $140 billion by 2011. It accounted for $85 billion in the public sector. Globalization played a significant role in the Argentinian crisis through the several financing arrangements of IMF that were made to keep Argentina on toes with the capital markets being misjudged. International Monetary fund (IMF) worsened the debt situation by endorsing a scheme for Argentinian economy that had failed for a number of reasons in the past. The economy of Argentina was referred to as a lost economy due to the increased levels of public debt. Moreover, there was a high level of inflation in Argentina (Rajan, & Institute of Policy Studies Singapore 2003).
The Role of IMF
The significant contribution of the IMF to the crisis in Argentina was the implementation of a policy that was not sustainable. It caused a lot of adverse shocks for Argentina that were not easily solved. Moreover, the IMF failed to stop the implementation of the unsustainable, rigid and inflexible economic strategy. It is shocking that even after the IMF had evaluated potential vulnerabilities that were inherent to the regime of convertibility, they went ahead to support its implementation, despite the increase in public debt (Rapley 2004).
The Role of Global Financial Crisis
The imbalance in global current account of Argentina is as a result of the global financial crisis caused by economic globalization. It was facilitated by the Asian countries exporting oil who determined the international market prices and exchange rates. Moreover, Argentina suffered from shocks related to savings and investments. The conclusion was that the liquidity glut heavily contributed to the financial and global crises that Argentina faced. Globalization helped elucidate this risk through a lot of capital inflows into the international market (Pleyers & Touraine 2010).
The Role of Credit Rating Agencies
These agencies escalated the crisis in Argentina through the creation of a lot of securities rated in a triple manner. Moreover, they attractive yields were provided to attract investors. Low interest rates they offered blindfolded the investors in Argentina who took the loans and credit facilities without imagining the potential risk involved. The small prices risks caused crisis in the long run, when investors realized they were offered low-quality instruments at high values (Michie 2011).
The Lack of Access to International Capital Markets
The economy of Argentina was strangled by the lack of access to the international capital markets. This happened during the convertibility regime causing series of shocks from the global economy. As a result, the competitiveness of exports from Argentina to the international market suffered profoundly. Devaluation of Brazilian currency coupled with the appreciation of the US dollar destabilized the exchange rate of Argentina. This convertibility caused rigid response to the domestic policy (Mahtaney 2013).
Subprime mortgage crisis was worsened by credit rating agencies. These institutions played a crucial role in the manufacturing process of securities that were triple related through the provision of attractive yield. In order to avoid being in the possession of excess money, banks implemented unregulated lending policies, thus increasing the amount of money circulating in the economy. There was also an upsurge in the number of originators and brokers who pressured banks to resort into lowering the rates of underwriting standards. The banking business became familiar with securities and mortgage lending without any security for repayment. It was not necessary for the lender to establish the creditworthiness of an individual for the fear of losing customers. The result was bad companies driving away the successful companies (Lane 2003).
The Role of Financial Institutions
Unregulated shadow banking played the role of interlinking security structures that amplified and influenced the subprime financial system in case a mortgage failed. A storm was looming with the sudden stop in interest rates. Those who had borrowed were locked in the economic crisis and were unable to repay their loans. The aftermath was a crisis that saw collapse of the whole securitization.
The Role of Financial Regulators
The financial regulators significantly contributed to the crisis of subprime lending which became known as subprime meltdown. The regulatory institutions tended to blame third party institutions based on the argument that the problems of the crisis were a result of mismanaged agenda of another person’s jurisdiction. Furthermore, the US security exchange failed to regulate over 35,000 financial institutions. In addition, insurance companies also failed to control insurance settlement claims to customers. The excessive supervision of national banks also failed to yield results (Kouzmin, & Hayne 2000).
The global financial crisis in Greece is seen as an extension of all the problems of economic crisis in America. The European nation used the advantage of then globalized economy to buy the debt of Greece believing that Greece was an economically stable country. This move saw the fall in interest rates and inflation rates. The Greek interest rate reached the same level as that of other European nations who had borrowed heavily from Greece. With little left to spend, Greece was forced to venture into extra borrowing to cover its domestic expenditures. This situation was escalated by the assumpption that all bonds from European Union countries were safe (Kim 2000).
The increase in debt in Greece was a result of the globalized economy that gave birth to the budget deficit. The Greek economy lost its competitiveness due to the solution of the global market players to appropriate the euro. What followed was the regional imbalance in exchange rates. This lack of competitiveness in the international market has caused a crisis in Greece making all industries operate at deficit balances in their current accounts (Kavalski 2009). Globalization has also led to the Greek economy’s poor ranking in the world market. Nontariff barriers, high investment regime and deteriorating rule of law due to economic globalization were some of the reasons.
East Asian Crisis
The East Asian crisis was the most widely discussed issue that was blamed on the economic globalization. The effect of the globalized economy was majorly felt in the young developing countries that had not properly fixed their economies. Moreover, the East Asian crisis created a lot of ripples in the global economy with each demanding answers from the people believed to have had a significant role in the crisis. The following are some of the ways through which the globalized economy played an important role in the East Asian crisis (Feenstra & Taylor 2014).
The Influence of Oil Exporters
The East Asia consists of economies exporting oil to other countries. These countries tend to control the world market with a lot of emphasis on the creation of high cash flows. The East Asian countries have adopted the method of devaluating their currency to encourage other countries to buy their oil products. This has resulted in a lot of money flowing into the countries with very high national public debt balances. The governments of East Asian countries have had a lot of challenges when reversing this problem with the ever increasing public debt burden (Fouskas & Dimoulas 2013).
The Role of IMF
The financial institutions like IMF have also had a hand in the economic crisis in East Asia. It was coupled with the increased amount of money spent on implementing unsustainable economic policies that ended up shoving these countries into massive economic crises. Moreover, the IMF has continuously offered several loans as financial assistance to those states forcing them to have huge debts and unrepaid loans that put them into this economic crisis (Cline & Wolff 2012).
The Role of Banking Institutions
The role played by banks and regulatory institutions cannot be overlooked. Just like other countries that have faced economic crisis due to globalization, banking institutions and regulatory authorities have failed to curb the ever increasing financial crisis in East Asia. These financial institutions are driven by the international lending rates set by foreign financial institutions. In order to remain competitive and relevant in the financial sector, local banks have to reduce their lending rates to avoid losing customers. The result is multiple unrepaid loans emanating from the non-creditworthy clients who are awarded these loans (Chufrin 2006).
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Commonalities in Five Crises
The four crises discussed above have some common characteristics. To begin with, they are the genesis of the infamous East Asian crisis that led to the financial incapability in which most Asian countries found themselves. It means that the four crises could have reinforced each other or acted as a driver for each other, but the countries in East Asia struggled to combat the globalized economic crisis.
Secondly, the East Asian crisis seems to be connected to the American economic policy or the European economic policies that influence the global market.
Moreover, the decision of European countries to get access to Russian economy and manipulate it for their own benefit can be equated to the move by the American government to implement punitive financial policies with an aim of controlling the global economy.
Finally, all crises seem to share the blame of the emergence of the crisis in the respective countries. Each country is facing a financial crisis caused by a globalized economy as a result of implementing punitive economic policies that never worked for them before. In addition, the trend of crisis seems to be taking a similar direction with the four crises showing the same magnitude of impact. Moreover, the economic status was negatively affected with several citizens remaining unable to repay their loans. The aftermath of the global economic crisis caused a severe decrease in the quality of life (Caprio & Caprio 2012).
Differences in Five Crises
Crises in the above instances tend to differ in some way, which can be explained by the statistical analysis. While Russia was a subsequent case after a long battle with a falling economy, East Asia was seen as a set of nations recovering from post-crisis that had adversely affected its economy. The case of Argentina is also different from that of Greece. In fact, Greece was a victim of circumstance in the implementation of policies championed by the European Union and subsequent sale of euro bonds. On the other hand, Argentina was suffering from internal problems that were significantly influenced by the globalized economy.
Another difference among these crises is the fact that all five of them occurred in different economies with varying policies, fiscal discipline, democracy levels and values. Thus, the implications of the crises were not homogenous (Blum 2008).
The role played by globalized economy in the East Asian crisis had different dimensions. To begin with, financial institutions, banking institutions, and other regulatory agencies implemented the proposals of international monetary funds and the will of influential countries concerning unsustainable economic policies. The overall implication was an adverse effect on lives of citizens of the four countries. The extent of the role played by the globalization in the Eurozone is apparent given the current problems being witnessed. Nonetheless, the implications are painful and still adversely affect the economies all around the globe.