Economic Meltdown- Why now?
Introduction
Studies show that the global gross product is significantly high than it was before the pandemic, that is, before 2019. The question that arises is, why are economies collapsing now, when everything has normalized and the global output is higher than before?
Before we find the answer to the above question, we need to have an overview about how the economies work, what are the factors leading to such a situation or which countries are vulnerable for facing an economic collapse and why?
Different Economies
According to the data, the GDP has risen to an ever high figure of a hundred trillion dollars making an average person twice as prosperous as they were almost a generation ago. The problem basically lies in the unequal amount of share of such a prosperity. Some people have more than what is required, whilst others can’t even afford a day’s meal. So, as this prosperity increases, their are chances of an increase in this unequal distribution. Hence, there is not a collapse in the economy globally but individually affecting the livelihood of millions of people as happened in the case of countries like Pakistan, Sri Lanka or Lebanon. A broader similarity in all these economies is that they all are developing countries. Does that mean developing countries are at a higher risk of facing an economic crisis in comparison to developed or under developing countries?
No doubt the above statement does have a potential, since the developed economies have more advantages than the developing economies, the under developing countries, on the other hand are at constant economic breakdowns. When we look at the key reason to why these countries are under developing, this can largely be because the producers there are not selling their product in the market but are consuming it directly. Majority of people in such countries are involved in the primary sector consisting of jobs, like cattle rearing, agriculture, fishing, pottery etc. They produce the amount sufficient for their own sustenance and do not add a value in the market. For eg., if you cook for yourself at home it doesn’t add value in the market until you take money for the same service from someone else. Thus, it is important to become not only a consumer but a producer as well. The basic difference, hence between these two type of economies is that developed ones render services to the market while in the other one people produce services for themselves.
Developed economies rarely face such a crisis since they are home to many fast growing industries which add a lot of value to the market which in return maintains their foreign income. These countries also cater world-class infrastructure and services which attract a lot of skilled employees from around the globe in case of any type of shortage as well. Advanced economies take loans at lower interest rates or from their people and that too in their own currency. So, it doesn’t even concern them with foreign taxes. According to the data, there have been major economic collapses in developing economies where the trade in U.S. dollars has been restricted. There is clearly no reason why a company would set up its industries in a country which has similar fate like Sri Lanka rather than investing in a country where the government is paying high yields. This adds to the economic pressure of developing countries where the governments are supposed to offer higher rates for attracting such corporations. Also, even in case developing countries want to attract industries, they need to make transaction in currency accepted worldwide like the U.S. Dollars, Euros and not in their own currency. This worsens the situation in economies where the value of the country’s currency is lower than the U.S. Dollars or Euros.
Role of Government in a Strong Economy
Strong responsive government is crucial to any economy and one of their key roles is to provide excellent infrastructure needed in the operation of an industry like well maintained traversing modes for the purpose of shipping materials, healthcare facilities, fast internet , best education for highly skilled labor, etc. Of course, a lot of capital is needed to fulfil these necessities, however, the tax generated repays everything back along with a lot of profit. Developing economies can decide what projects can actually be in the pipeline and which ones need to get rejected.
According to the research of two economic scientists, Robert Fogel and Douglass North, the advanced economies are a result of powerful democracies(except the oil rich states, which aren’t really advanced economies, they are just rich economies). All the decisions taken by the representatives require a lot of time and discussions before they are implemented in order to meet the demands of a larger group and also so that every detail is double checked.
Coming to the main question, Why now?
The institutions that fund the countries won’t lend loans to an economy which is weak or where the probability of clearing the loan is low. Bad investments, corruption , poor economic conditions all add up to making economies vulnerable to a collapse. Some institutions even say, “They won’t give the countries enough ropes to hang themselves” which is quite a dark metaphor. The situation can worsen or become better by what we call as an “ECONOMIC SHOCK” — which is broadly classified as supply shocks and demand shocks. A supply shock is an unexpected circumstance which results in a sudden change in price while a demand shock is basically a situation which causes sudden changes in number of demands. Shocks can be either positive or negative. In the case of a negative shock unemployment increases, thus further weakening the economy. The economic shocks over the past three years have been major. There always lies a possibility of upcoming economic failures because of the same reasons. But all in all, the GDP would rise globally with of course, an unequal distribution of prosperity.
Bonus Information: Currencies like U.S. Dollars, Euros and now even the Chinese Yuan are being using for world trade. This strengthens the economies of these countries(also strengthens their dominance over World Bank and IMF). But do you know, even the Indian Rupee is now being used for trade globally by a few countries like Nepal, Bhutan, Myanmar, Sri Lanka, Maldives, United Arab Emirates, Iran, Iraq, Yemen, Bahrain, Oman, Qatar, Saudi Arabia, Syria, Jordan, Lebanon, and Egypt. What are your views regarding the “RUPEE SWITCH” ? Do comment below!
