Worldwide Economic Recovery - Literature review Example

Debate the View That Worldwide Economic Recovery is Imminent Contents Contents 2 Introduction 3 Theoretical Background 4 Arguments for the Motion 5 Arguments against the Motion 9 Conclusion of the debate 12 References 14 Introduction The financial crisis that the entire world witnessed had far reaching results on most of the economies of the world. The countries were posed with a number of challenges pertaining to taming of the economy in a stabilised manner. The advanced economies had to formulate their monetary as well as fiscal policy in such a way that they are able to combat the adversities arising out of the financial crisis. On the other hand the emerging economies also had to face a number of consequences of the global slowdown along with stagnation in the growth rates. In the recent times, however some of the signs of recovery are visible for the countries. Some of the significant indicators are the recovery of the Eurozone from the tough situation due to the improvement in the value of the Euro currency. Along with this the gross domestic product of the countries of the Eurozone is also on the rise. Signs of recovery are also visible in the US and the slowdown in the countries like China and India has also stopped. Most of the economists around the world have predicted that in the forthcoming years would witness an upturn in the global economy with global rate of growth of 3% to 3.3% in the coning couple of years. The stability and sustainability of the growth of the future and the trends of recovery is one of the most debated topics of the present times. Economists and practitioners have debated on the possibility of the recovery in near future. This essay tries to make an attempt to analyse the various prospects that the economies of the world may see in future and how far the economic recovery is inevitable. A theoretical background has been provided on the basic economic concepts to link the theories with the present day scenario that is taking place around the world. Theoretical Background Business cycle is a universal phenomenon that is experienced by all the economies of the world. An economy recovers when the various productive activities of the goods and services again surges after a period of economic recession. The business cycles represent recurrence or fluctuations in the economic activities which are stretched over a very long period of time. In this context it is essential to understand the various phases of a business cycle. First of all, an economy goes through a phase of economic expansion which is featured by the rise in the level of production of the economy. This occurs due to a high rate of money supply in the economy. Along with this the money supply in the economy is extremely high due to the low rates of interest and as a result of which the aggregate demand of the economy increases. This phase is followed by the phase of boom or peak in which the production of the economy reaches the maximum level. It is the time when the economy would be starting to upturn and take a downward trend. The next phase that an economy generally witnesses is a phase of contraction or recession in which there would be decline in the level of output in the economy and the incomes of the people of the economy. The economy faces a period of trough after this stage when there would be stagnation of the low growth rates and the level of productivity in the economy would remain low along with a rise in the level of unemployment (Colander and Gamber, 2006, pp. 129-188). The economy would commence a stage of recovery after this because the prices would be low and hence there would be purchases at this stage which would help in increasing the aggregate demand. In most cases of the business cycles the phase of expansion or the upward trend of growth last for about 45 month which is much longer than the periods of recession or slowdown which exist for the period of 11 months on an average as observed from the empirical data. In most of the severe cases like the Great Depression of 1929 lasted for about 43 month. Similarly the Great Recession that the world witnessed in the recent times had been occurring since December 2007. The economists used to consider that the business cycles generally follow a systematic pattern. However, in the present day there are irregular patterns and duration in which the business cycles are found to occur. While some of the economists consider that the present slowdown is a result of the downturn of the business cycle and hence would recover in near future, the others consider the patterns that the present situation is exhibiting to be irregular in nature (Blanchard, 2000, pp. 27-81). Along with this the unconventional strategies taken by the different countries, especially in the US, UK as well as the emerging nations have exposed the countries to a number of risks and uncertainties. In such situation, instead of recovering from the crisis the economies may face a double dip recession or any other unknown adversities. In such cases the recovery would not be likely to take place. The following section presents the arguments for and against the position that the recovery in near future is inevitable. Arguments for the Motion Signs of economic recovery are evident in almost all the countries of the world. Though most of the economies both advanced as well as emerging have been hit to a large extent by the financial crisis they have are at present moving towards the path of economic development and growth along with the technological progress of the countries. This recovery phase is true for almost all the countries of the world. This can be understood if the strategies that the central banks and the government of the countries have taken in the wake of the financial crisis is analysed. The International Monetary Fund has also predicted that most of the countries would be able to recover from the economic crisis. In the Asian countries like China various strategies like plans for economic revival has been taken up in order to inject a fiscal stimulus into the economy. The measures for economic stimuli have been provided which has been able to retain the growth rate at a level of 7.5%. The government of the country has also shown its intension of reducing the tax rates of the common people which would result in the rise in the disposable income of the people. Along with this the country also made several relaxations on the legal and regulatory front. This has helped the businesses of the country to reduce their costs of administration. Hence the costs of exports have gone down. This in turn has a positive effect on the level of exports of the country (Fried, 2012, pp. 61-93). The government of China has also been instrumental in promoting the railway construction programme. Therefore there is an increase in the level of production for the country. The country is experiencing a shift in the exports, excessive investments as well as government owned enterprises to that of an economy in which there is more domestic consumption, more decentralisation of the businesses and privatisation and free market structures. This has ensured that the country is not only dependent on the other nations for the GDP contribution but is also generating the national income from the domestic consumption and investments. The stimulus package that China has adopted has benefitted both the small businesses as well as the state-sponsored projects. Being one of the largest economies of the world and being one of the most populated countries, signs of recovery in this country would prove that the emerging economies of the world are moving towards this direction. Japan is one of the representatives of the advanced economies. The new economic policies under Prime Minister Shinzo Abe are aimed at creating inflation of the economy through quantitative easing for increasing the money supply in the country. This is because of the fact that the country is undergoing period of slowdown and the growth rate of the economy had bottomed down and the country is experiencing a phase of deflation with the rate of decrease in the price level of the economy being extremely high (Nakamichi and Fukase, 2013, p. 1). The success of the policy can be known from the high rates of inflation of about 1.5% which the country is reporting presently in the post-policy implementation phase. The stock markets of the country have also recovered by 40%. Along with this the weakening of the currency of the country Yen proves that the country is moving towards the right direction. The position of the Eurozone would represent the condition of 28 nations of the world. There are several positive signs that the Eurozone had been showing since the currency crisis. First of all the situations of the production of the manufacturing sectors of the economies have shown signs of improvement. The different indices have reflected the fact that the manufacturing sector was recovering with an increase in the output in most of the firms. Thus the Eurozone can be said to have pulled itself out of the situation of crisis. In France the level of unemployment declined which shows that the economic activity of the country had gone up more than it was in the last few quarters. This means that more people were engaged in the productive activities in the country. On the other hand, Germany where the services sector contributed to the major part of the GDP there was an increase in the employment and production in the services sector. Thus the aggregate demand in the economy was on the rise. The property market is considered to be one of the major indicators of the performance of the economy. In the country of Ireland the housing demand was also surging. Spain also exhibited a decline in the level of unemployment. UK reported an increase in the GDP in the recent times indicating a trend of recovery from the position of slowdown (McGuire and Peter, 2009, pp. 47–63). The US economy has also shows the signs that would prove that the country is moving towards the path of recovery (Orhangazi, 2008, p. 127). After the bursting of the housing bubble in the 2008 financial crisis the prices of the US housing market have shown the signs of increase. This increase is said to be the largest since the burst of the housing bubble. The sales of the housing in the country have shown a rise in the present phase. In the present scenario the rise in the prices has been steep and extremely fast. The sales of the housing properties saw an increase of about 8% which is considered to be one of the highest increases. The sale of the new houses however was lower than the sales of the resale properties. The places like San Francisco, Los Angeles, Las Vegas, Atlanta, Miami as well as Detroit have shown a rise in the prices by around 10%, though it was about 0.75 in New York. Some of the experts have stated that the increase in the housing at the present scenario is much more stable and steady that there is less chance of any bubble that might form in the economy (Zandi, 2009, pp. 12-43). A number of reasons have been cited for this increase in the housing prices. First of all the inventory of houses that were available for sale has been tight over the last months. Apart from this rates of mortgage in the country had been extremely low. The recovery of the market for housing is also attributable to the fall in the level of unemployment in the economy (Koller, 2012, p. 127). On the other hand the growth in the housing sector have helped the economy of the US to grow since the demand for the housing is forcing the real estate firms to employ more people in the real estate sector. Thus the renewed demand has been able to generate employment among the people in this particular sector (Pendall, Freiman, Myers and Hepp, 2012, pp. 49-82). Most of the builders of the new homes are thereby demanding skilled labour that would be able to meet the surging demand of the housing sector. Thus with the increase in the prices of the housing the wealth or the income of the individuals or the households is also increasing. The rise in the prices of the housing is also leading to an reduction in the number of individuals who are owing more on the mortgage that they have compared to the houses that they already own. Thus the people in this scenario have the opportunity to refinance the loans and mortgages at a rate which is lower than the rates of mortgage that they already have. This would leave the consumers with a lot of disposable income which can be alternatively used for the purchase of other goods and services. Hence the aggregate demand of the economy of US would increase leading to an increase in the level of production. Arguments against the Motion Despite the various attempts by the governments and the central banks of most of the major nations of the world, there are various instances which prove that there are ample reasons that are capable enough to hold back the entire process of recovery. First of all, the biggest problem that most of the economies of the world is inflation. The problems with inflation lead to problems of gaps in output and high level of unemployment in the economy (The Economist, 2012, p. 1). The rate of inflation that is prevailing throughout the world has been tamed over time. The rate of inflation in the United States as well in the European countries is low due to the lowering of the aggregate demand in the economy along with the rise in the level of unemployment in the economy (Wallison, 2013, pp. 74-108). On the other hand the emerging economies like India and China would face the problem of inflation because of monetary policies taken in the country to raise the rate of growth in those economies. The volume of the international trade that had been going on throughout the world is on the decline. This has resulted in the decline in the growth rate of the countries that are engaged in international trade with one another. Most of the developing countries at the present scenario are experiencing a sluggish rate of growth like China and India and the decline in the volume of the international trade is a result of the decline in the growth in these countries. This trend of international trade was much higher than it was in the pre financial crisis period (United Nations, 2014, pp. 17-25). Most of the major economic entities like the European Union of the Euro-zone, the Federal Reserve of the United States of America as well as the central bank of Japan have adopted the policy of quantitative easing which is considered to be one of the most unconventional strategies taken by the central banks of the countries. This policy was common for most of the advanced economies. There may be a number of negative effects of the quantitative easing policy which would affect these nations and as a result would affect the other nations of the world. The long term rates of interest in these nations would have a tendency to go up both in the developed as well as the emerging economies of the world. There may be a sharp decline in the equity markets because the price of the securities in such cases would go down rapidly and this would be true for all the economies (Nothaft, 2013, p. 73). Thus instead of recovering from the global crisis the countries might move towards a more declining condition of the macroeconomic variables. There might also be excess supply of money in the economy. The emerging markets as a result of this may also face a fall in the level of capital inflows. This kind of shocks in the economy would be transmitted to both the advanced and the emerging nations of the world. Many of the experts of the real estate or the economists have argued that the economy of United States is heading towards another economic bubble. They are of the opinion that the recovery that is perceived to be taking place throughout the world is not a stable one and is not sustainable in case of the real sector of the economy (Sowell, 2009, pp. 36-64). The rise in the prices of housing is said to be unsustainable as such leaps in the prices had led to bubbles which turned out to be unsustainable (Shiller, 2008, pp. 55-92). A large number of investors of the US are buying the housing properties at a very low price due to the distress sales. They are doing so with an expectation that the prices of the properties would rise in near future and hence they would be able to make huge amounts of profits by resale of those properties. However the economic agents who are presently involve in the real estate market are the speculators (Krugman, 2009, pp. 129-176). The real buyers of homes like the first time home buyers or those people who would buy the properties for shifting to larger properties are not betting on the real estate market at the present scenario. The reason behind this is that the level of unemployment among the common people has increased and most of them have run out of funds for making such investments in the housing sector. Thus as the prices of the houses rise in the future the prospective buyers may not be present to buy such properties due to shortage of cash or lack of income or proper employment. Therefore the housing bubble in the US is one the verge of bursting (Foldvary, 2007, pp. 117-161). Therefore the subprime markets of the US are mainly in unstable and are speculative in nature. Though there may be availability of cash at the present scenario, the future of the economy may also witness a bursting of the housing bubble that is being formed at present. The rise in the oil prices of the world have led to the increase costs of supply of oil throughout the world. Oil price of the world is no longer low at present. The significant rise in the price of oil has led to the disruption of the economic activities that have been taking place in the world at the present day. The prosperity of the economy is to a large extent dependent on the price of oil in the nations (Talbott, 2003, pp. 38). The energy sector has a significant role in the growth of the economy. The lack of availability of oil at a cheap rate may affect the level of growth of the economy. Though some of the economic associations have predicted that the growth the volatility in the prices of oil would go down in near future, there is a chance that there would be any situation of catastrophic complacence because of the too much dependence on the fossil fuel resources. For this it is necessary for all the nations to negotiate in the right manner. The perception that the oil sector is booming is to a large extent flawed. This is because it has been assumed that there is a huge amount of resources of oil in the countries of Iraq and Saudi Arabia. However, the costs of extracting oil from such sources may be extremely high. In the context of oil and fuel resources it is important to look for new sources continuously otherwise there would be scope of depletion of the resources. But the sources are getting exhausted with time. This might pose a threat to the entire world in the near future. Along with this the high levels of environmental damages and the climatic imbalances may lead to a very big problem to the nations. All this may arrest the process of recovery of the nations. Conclusion of the debate According to the eminent economists Paul Krugman and Joseph Stiglitz, though the inequality in the distribution of income in the economies were stagnant at the time of the economic recession of 2008, it started increasing at present with the slow recovery of the world. According to them the government of most of the countries have to try to curb this inequality and have to take policy so that there is equitable distribution of income. The main reason for economic growth according to Stiglitz is the spending by the general consumers. On the other hand in the present times of the crisis the middle class people of the world are not being able to indulge in such spending because of the rise in the level of prices. The decline in the income of the individual has also resulted in the decline in the tax revenue that the government of an economy collects from that of the common people. Due to the booms and the busts that the entire world is experiencing there is rise in the inequality in the distribution of income. Some of the major questions regarding sustainability and the actions of the government regarding the policy decisions have remained unanswered. There are situations of imbalances that are present in the different parts of the Eurozone making the recovery process an unstable one. This would leave Germany the most advanced of all the economies of the EU at a dominating position and ignoring the needs to address the crisis of the other nations like Cyprus and Greece. However, according to the economic theory most of the economies of the world must recover from a phase of recession. Most of the countries in the different parts of the world had witnessed this kind of situation and has also recovered from such situation. Therefore, it is expected that at the upturn of the business cycle the world economy would also recover and move towards a path of growth. The international financial institutions like the World Bank and the International Monetary Fund also predicts this kind of upward trend for most of the countries. The government and the central banks of the economies have also taken the necessary steps to take their respective economies out of the trap of slowdown towards a path of development and growth. Thus it is most likely that the recovery and further growth of the world economy is round the corner. References United Nations, 2014. World Economic Situation and Prospects 2014. Available at http://www.un.org/en/development/desa/policy/wesp/wesp_current/wesp2014.pdf [Accessed on 25 Jan 2014] Blanchard, O., 2000. Macroeconomics. Englewood Cliffs: Prentice Hall. Colander, D. C. and Gamber, E., 2006. Macroeconomics. Cape Town: Prentice Hall. Krugman, P., 2009. The Return of Depression Economics and the Crisis of 2008. New York: W.W. Norton & Company. Zandi, M., 2009. Financial Shock: A 360° Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis. Upper Saddle River, New Jersey: Pearson Education. Foldvary, F.E., 2007. The Depression of 2008. Berkeley: The Gutenberg Press. Shiller, R. J., 2008. The Subprime Solution: How Today’s Global Financial Crisis Happened and What to Do about It. Princeton, New Jersey: Princeton University Press. Sowell, T., 2009. The Housing Boom and Bust. New York: Basic Books. Pendall, R., Freiman, L., Myers, D. and Hepp, S., 2012. Demographic Challenges and Opportunities for U.S. Housing Markets. 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Why not to expect recovery anytime soon. Available at http://www.economist.com/blogs/freeexchange/2012/09/financial-crisis [Accessed on 25 Jan 2014] Bibliography Gerald, M. M. and Seers, D., 1984. Pioneers in Development. Oxford: Oxford University Press. Demyanyk, Y. and Hemert, O.V., 2008. Understanding the Subprime Mortgage Crisis. Supervisory Policy Analysis Working Paper, Federal Reserve System. Read More