The Global Economic Crisis: A Brief Introduction

In previous modules, we have alluded to the global economic crisis and the impact
it had on the various sectors in the financial and manufacturing industries. This
article introduces readers to the global economic crisis and subsequent articles
deal with the various dimensions to the crisis and the causal factors that were
responsible for the crisis.

The global economic crisis started in summer 2007, though the full impact was not
felt till the bankruptcy of the investment bank, Lehmann Brothers in September
2008. The next couple of years witnessed heavy job losses and contraction in the
GDP (Gross Domestic Product) of many countries in the West as well as in the
developing world. What started off with the subprime mortgage crisis quickly
morphed into a full-fledged crisis of historic proportions prompting many
commentators to draw parallels with the Great Depression of the 1930’s.

The global economic crisis was caused by the coming together of several structural
as well as business cycle factors that conspired to produce a “perfect storm” of
epic proportions. These factors ranged from the collapse of the housing market in
the United States, imbalances between the West and the East in terms of trade
deficits, reckless and risky speculation and finally, the sovereign debt crisis
that was a culmination of years of fiscal profligacy and loose monetary policies.
The point about the global economic crisis or the Great Recession as it is also
called is that the crisis exposed the chinks in the armor of the global economy and
highlighted the pitfalls of too much integration and interconnectedness. Nowhere
was this more apparent than in the aftermath of the collapse of Lehmann Brothers
when the entire credit system froze and the global financial system came perilously
close to collapse.

The global economic crisis basically originated in the West but had its effects on
all economies of the world. Of course, the US and the Europe were the primary
victims of the crisis and it can be said that countries like India and China were
relatively unscathed in the wake of the crisis. However, this is not to say that
these countries have successfully “decoupled” from the west since the tightly knit
global economy and the dependence of China on exports to the US for goods and India
for services means that these countries have a fair amount of work to do before
they can be called safe. The point here is that the United States and Europe were
badly bruised by the crisis and it is still not clear when these countries and
their economies would be out of the woods, if at all they would.

Finally, the global economic crisis has undone the many gains that have been made
by globalization and hence there are renewed calls for protectionism and for
erecting trade barriers in the West as well as in the East. This means that the
global economic crisis has dealt a body blow to the global economy which might take
years to regain its earlier prosperity.

he article is Written By “Prachi Juneja” and Reviewed By Management Study Guide

Content Team. MSG Content Team comprises experienced Faculty Member, Professionals
and Subject Matter Experts.