Introduction
A financial crisis occurs when the prices of assets begin to decline in terms of value, consumers become unable to clear debts, and if liquidity shortages occur in financial organisations. In most cases, a financial crisis results in panic. During this period, investors tend to sell their assets. Some start withdrawing their bank savings due to fear of a further fall in their financial value (Claessens et al., 2018; Afonso & Blanco-Arana, 2022). On its part, an economic crisis arises when a given economy experiences unexpected downturn in its gross domestic product (GDP). This leads to a decline in income per capita as well as an increase in the level of poverty (Kasekende et al., 2019; Zhengui & Junhao, 2020). The current essay examines the positive and negative impact of financial and economic crisis.
Positive Impact Financial and Economic Crisis
In most cases a financial and economic crisis is associated with a negative impact. However, the crisis also has some positive effects. To begin with, it leads to a balanced economic growth (Claessens et al., 2018). If the economy of a country grows upwards for a long period of time without slowing down, it can cause some problems. For instance, it can result in payment of higher wages to workers. This can in turn cause a higher inflation, leading to an increase in the cost of consumer goods. An economic recession can play an important role in slowing down the rate of growth of the economy. This trend can give room for the resetting of commodity prices to a level that is reasonable and manageable to the consumers.
When the economy is not good, people experience problems that make them think about saving for the future (Afonso & Blanco-Arana, 2022). It teaches them a lesson so that they do not find themselves in the same situation again. During this time, the rate of borrowing goes down since people do not have money for the repayment of loans. Most people begin preparing on how to deal with the difficult times. This leads to low consumer spending. When people focus on long term consumption, it becomes necessary for them to make savings. A high saving rate results in a higher investment rate. This process leads to a balanced economy. By doing so, recession helps to steer a nation’s economy through a direction that is different.
Tough economic times also open some business opportunities (Afonso & Blanco-Arana, 2022). For instance, people get the opportunity of buying shares at a price that is relatively low compared to the time when the economy is normal. This is important for persons and businesses that have the intention of entering the market. During this time, investment principles also apply. After purchasing shares, the investors have to wait for the economy to recover before getting back to the market. This enables them to gain huge profits that can help them to expand their businesses and make more investments. Some can choose to use their investments in buying more shares when a recession occurs again in the future.
An economic crisis as well gives time for the reformulation of economic policies (Zhengui & Junhao, 2020). Bad times force the economic policy makers to rethink about the problem of relying on simple sources of income. They instead start planning on how to control inflation in the future time. It all depends on the kind of economic policies they adopt to deal with the situation. Better economic policies often help to normalize the situation by regulating the economy. In contrast, poor policies cause chaos by doing nothing to deal with the economic problem. Therefore, it is necessary for countries to be careful on the kind of economic policies they can use during the difficult moments as a result of recession.
Negative Impact Financial and Economic Crisis
An economic and financial crisis has several negative effects. To start with, a decline in the economy usually causes an increase in the rate of unemployment in a country (Kasekende et al., 2019). During this difficult period, some companies get bankrupt. As a result, many workers end up losing their jobs. The firms are forced to lay off workers in order to reduce their costs. For the same purpose, the companies also stop recruiting new workers. The rate of unemployment can be worse depending on the depth of the economic recession. If the recession is severe or long, unemployment is expected to be higher since there is no money for workers to get their payment.
During recession, companies also give workers low wages as a way of reducing costs (Zhengui & Junhao, 2020). In some cases, workers can experience wage cuts. This is common with temporary workers who are not on contract. Another reason for the low wages during tough economic periods is the high rate of underemployment that is often experienced. Even if some workers may be lucky not to lose their jobs, their working hours are often reduced to curb the situation. In other words, they may be forced to be part-time workers instead of fulltime ones. Working part time definitely leads to low wages since workers are only paid for the hours they work.
When there is recession, the rate of poverty goes high in most cases (Deshpande & Nurse, 2020). As already noted, people lose jobs during an economic crisis. Others are forced to accept wage cuts. Under such circumstances, poverty becomes inevitable. Without money, it becomes difficult for people to afford basic needs. For example, many find it problematic to afford food since the rate of commodity prices often goes up during the recession. Even if the price is low, some people still experience challenges without a source of income. In most cases, poor countries are the ones that get highly affected by poverty during the economic crisis.
An economic crisis often leads to low government revenue (Zhengui & Junhao, 2020). This is due to the fact that people and businesses to not have money to pay taxes. Companies make low profits in this period. On their part, workers go home with low income. Since the rate of tax revenue is low, the government is forced to borrow money for it to remain operational. This leads to an accumulation of government debt and a budget deficit. The most affected are countries that depend on taxes that come from the financial sector and properties. A fall in the property market is likely to make it difficult for the government to generate revenue.
A recession also results in a fall in the price of assets (Deshpande & Nurse, 2020). This is because of the fact that people do not have money with which they can purchase the assets. A relevant example is what happened during the Coronavirus era. There was a sharp decrease in the prices of oil. The demand of oil went down. This forced the countries that produce oil to sell their commodity at low prices. A fall in asset prices leads to a downward spiral in most economies. This in turn has a negative wealth effect. Nations or people cannot get wealthier if they sell their asset at a loss.
It is as well important to note that a financial or economic crisis can have serious psychological, social and health consequences on individuals (Deshpande & Nurse, 2020). For instance, losing a job can damage one’s morale. Thinking about how to get another source of income can be stressful if companies are not recruiting workers. Being a victim of such circumstances can lead to depression. Some people even think of committing suicide when life becomes unbearable for them. Thus, financial problems and economic recession can have such serious consequences on the people who are affected by the crisis.
Conclusion
Generally, economic and financial crisis has both positive and negative consequences. On the positive side, the crisis balances economic growth, leads to increased investment, opens business opportunities, and results in adoption of effective economic policies. On the negative part, the crisis leads to high unemployment rate, high poverty level, low wages, low government revenue, a fall in asset prices, and serious social, health and psychological consequences. This shows that the negative impact of the crisis outweighs the positive one. Thus, it is necessary for countries to do everything possible to deal with recess. This can help to ensure that their people do not suffer during the period.
References
Afonso, A., & Blanco-Arana, M. C. (2022). Financial and economic development in the context of the global 2008-09 financial crisis. International Relations, 30-32. https://doi.org/10.1016/j.inteco.2021.11.006
Claessens, S., Kose, M. A., Laeven, L., & Valencia, F. (2018). Financial Crises: Causes, Consequences, and Policy Responses. Washington, D.C.: International Monetary Fund.
Deshpande, A., & Nurse, K. (2020). The Global Economic Crisis and the Developing World: Implications and Prospects for Recovery and Growth. London: Routledge.
Kasekende, L. A., Ndikumana, L., Kamara, A. B., & Afrcican Development Bank. (2019). Mitigating the Impacts of the Financial and Economic Crisis in Africa: Proceedings of the Workshop on ‘The Global Financial and Economic Crisis: Strategies for Mitigating Its Impacts on Africa’: Held on 10th April 2009 in Tunis, Tunisia. Paris: L’Harmattan.
Zhengui, L., & Junhao, Z. (2020). Impact of economic policy uncertainty shocks on China’s financial conditions. Finance Research Letters, 35. https://doi.org/10.1016/j.frl.2019.101303.