The era of economic globalization has led to a rapid change in the global economic environment. These changes have resulted to capital movements becoming higher thus becoming less governable. All these changes were followed by a period of rapid increase in the number of financial crisis in the international scene. These crises have been in the form of Banking, twin crisis, currency crisis, and debt crisis since 1880 to late 20th century and even early 21st century. Banking crisis referred to bank runs or banking failures while currency crises refers to the forceful change in parity and the abandonment of a peg exchange rate system.
Diagram indicating the frequency of financial crisis from 1880-1997.
Source: Bordo et al, 2001, p.56
Bordo and others portrays the frequency of financial crisis ranging from Banking, currency and twin currency in the graph above. They computed the number of crisis divided by the number of country minus the year of observations. Thus, indicating that the issues of financial crisis have ascended since the year 1973.This is clearly shown in the vertical line on the far right, it depicts a frequency of 12.2% for 56 sample countries post 1972 making it nearly 2 ½ times the period of 1880-1913.(Bordo et al, 2001)
Since it has been clearly indicated from the above diagram that the issue of financial crisis seems to be more frequent in post Bretton wood era, but then are they any less severe than those of the early 20th century? To answer this question, this paper is aimed at doing a comparative analysis of the early 20th century major financial crisis to that of the post Bretton wood era major financial crisis and its impact and severity on the global economy. The comparison will be done by placing emphasis on the great depression of 1929 and the East Asian financial crisis of 1997. Taking into account the duration of both crises, how long did it take for countries to recover and what were the major losses indicating the various GDP after the crises.
The early 20th century major financial crisis
The issue of financial crisis was very visible during the 19th and early 20th century. Though some were more severe than others, but they all followed almost the same pattern as previous crisis. A misfortune of a projecting speculator will destabilize public confidence in the financial system. Since it wasn’t rare for speculations to double as bank officials, many concerned depositors will run to pull out their savings from any speculative associated banking institution. Since there were actually no federal insurance until late 1933, if a bank failed, concerned depositors had little or no hope of ever seeing their money again. With a lesser regulation by government of the financial system then we have today, many people were victims when a financial crisis took place.
Early 20th century experienced various crises ranging from the stock market crash of 1901, the panic of 1907, and the great depression of 1929. Following the economic panic of 1907, the great depression of 1929 was said to be the deadliest of crisis in modern history, given its length and severity. The depression which started as a decline in aggregate demand in the US (decline in consumer spending) due to the US tight monetary policy subsequently led to a fall in the production of goods as producers saw an unplanned rise in inventories. (Nicholas &Fearon, 2010) An economic shock of this decline was quickly transmitted to most countries through the gold standard. Investors begin liquidating their holdings due to the decline in prices, so by October 1929, the US stock market had crashed by 33% and higher interest rates were destabilizing both the domestic and international economy. (Romer, 2003) The stock market crash was followed by numerous of banking panics in fall of 1930.
Severity and Duration of the great depression
Measuring the severity of the crisis, I have taken into account its duration as well as the percentage of decline in various economies. The depression affected nearly every country in the world, table 1 indicates the dates the depression started in each country and the dates those countries started recovery since the great depression dates and severity fluctuates amongst nations. Table 2 on the other hand points to the decline in yearly industrial production during the crisis among states.
Table 1 – The duration of the crisis across economies
Country Depression Began Recovery Began
United States – 1929:3 1933:2
Great Britain 1930:1 1932:4
Germany 1928:1 1932:3
France 1930:2 1932:3
Canada 1929:2 1933:2
Switzerland 1929:4 1933:1
Czechoslovakia 1929:4 1933:2
Italy 1929:3 1933:1
Belgium 1929:3 1932:4
Netherlands 1929:4 1933:2
Sweden 1930:2 1932:3
Denmark 1930:4 1933:2
Poland 1929:1 1933:2
Argentina 1929:2 1932:1
Brazil 1928:3 1931:4
Japan 1930:1 1932:3
India 1929:4 1931:4
South Africa 1930:1 1933:1
Table 2 – the severity of the crisis across economies
Country Decline
Unites States 46.8 %
Great Britain 16.2 %
Germany 41.8 %
France 31.3 %
Canada 42.4 %
Czechoslovakia 40.4 %
Italy 33.0 %
Belgium 30.6 %
Netherlands 37.4 %
Sweden 10.3 %
Denmark 16.5 %
Poland 46.6 %
Argentina 17.0 %
Brazil 7.0 %
Japan 8.5 %
The US had a decline in industrial production of 47 percent leading to a fall in GDP by 30% during the period of 1929-1933. (Romer, 2003) The severity of the great depression cannot be fully discussed without mentioning the high rate of unemployment in concern countries. The unemployment rate in the US gallop from 2.9 in 1929 to a whopping 22.9 in 1932. (Nicholas & Fearon, 2010) The sudden loss of income and the uncertainty of employment subsequently reduce consumer spending.
Great Britain entered the depression in 1930 and had a decline in its growth of almost one third of what the US had. France experience was a bit short in the early 190s given that their recovery process started by 1932 and 1933. Prices fell and industrial production subsequently fell in France by 1933-1936. But this was not the case with Germany who slipped early 1928 and its decline was similarly equal to that of the United States. Many Latin Americans countries fell into the depression late 1928 and early 1929, faintly before the US decline in output.
The duration of recovery among countries varies greatly. The British started their recovery in September 1931 after the end of the abandonment of the gold standard. Many Latin American countries started their recovery process in late 1931 and early 1932. Seemingly Germany and Japan started recovery in the fall of 1932 followed by Canada and many other European countries which started the recovery process the same 1933 as the US.
Financial Crisis of the recent past (Post Bretton woods era)
The rise in frequency of financial crisis in the post Bretton wood era has been quite alarming. Equally so, although these crisis have risen in number, but it don’t necessarily mean that they have become more severe than those of the early 20th century. There have been series of crisis ranging from the OPEC nations oil price shock of 1973, the Latin American debt crisis of 1980s, the 1989 US savings and Loan crisis, the Japanese asset bubble collapse of 1990, the European exchange rate crisis of 1992, the east Asian financial crisis of 1997 and the Brazilian financial crisis of 1998.
Although before the crisis, many East Asian countries had pegged their currencies to the US dollar and ran current account deficits which subsequently had a downward pressure on their currencies. Till July 2, 1997 when the Thai baht was attacked by speculators by selling off its assets. Leading to the withdrawal of foreign investors dollar-dominated loans in institutions. The Thai government forcefully let the currency peg system go by devaluating its currency. Thailand had previously acquired a huge burden of foreign debts that had caused them to go bankrupt even before the crisis has spark up. The following year of 1998, financial contagion had spread to other East Asian countries like Malaysia, Indonesia, Philippians, Hong Kong, Korea and others.
Severity and duration of the crisis
As compare to the great depression which lasted for almost a decade, the East Asian financial crises lasted for just 3 years, from 1997-1999. South Korea, Indonesia and Thailand were the countries that mostly felt the severity of the crisis. By any measure, Indonesia was the hardest hit by the 1997 crisis. The reversal of growth from positive 7.8 percent in 1996 to -13 percent in 1998 is a level of decline few countries ever experience. Increased in unemployment and inflation, and eventually, poverty was the after math of the crisis in Indonesia. Estimation shows that 2.75 million students in primary and junior secondary school dropped out. Poverty increase from 11% in 1996 to 18.9% 1998 and unemployment also rose from 4% in 1996 10.7% in 1998. (Corsetti, 1999)
Unemployment rate across countries %
source: : PROF. M RAMESH, 2009
The crisis affected Thailand severely, next only to Indonesia in severity. The greatest impact of the crisis was in the form of increased unemployment, which rose from 1.5% in 1996 to 4.5% and a much higher under-employment in 1998. Prices of foreign and local pharmaceuticals rose by 51 and 43 percent respectively Poverty rose from 9.8% in 1996 to 12.9% in 1998
Data from the CIA World Factbook indicates that per capita income (measured by purchasing power parity) in Thailand declined from $8,800 to $8,300 between 1997 and 2005; in Indonesia it declined from $4,600 to $3,700; in Malaysia it declined from $11,100 to $10,400. Over the same period, world per capita income rose from $6,500 to $9,300.
The nominal GDP of ASEAN in U.S. dollars fell by US$9.2 billion in 1997 and approximately $218.2 billion (31.7%) in the year 1998. South Korea on the other hand, noticed a fall of $170.9 billion fall in 1998 which was equal to 33.1% of the 1997 GDP.
There was also a prompt rise in interest rates among these Asian countries, Philippians notice a rate of 32% rise in interest rate in mid-1997, and in Indonesia 65% in the heat of the crisis 1998, along with the depreciation of their local currencies, as South Korea Thailand and Malaysia whose interest rates was well below 20% during the crisis.
Conclusion
In previous financial crisis of the 1970s and 1890s, the GDP had return to its pre-crisis level in a period of 5 years’ time. But this was not the case with the great depression, the GDP of countries were still below its pre-crisis status even a decade later. This was how severe the crisis was. As compare to the East Asian crisis which the highest rate of unemployment across nations was 10.1 and that was in the Philippians, and the highest rate of unemployment across countries was 22.9 and that was experience by the US economy.
In summary, the severity in the early 20th century financial crisis can be attributed to the issues of extreme manufacturing/productions, excessive buildings and excessive financial speculations. And the frequency of financial crisis in recent post Bretton woods era can be attributed to the danger of financial liberalization of markets and the openness of capital accounts. So the Neoliberal theory of the post Bretton wood economies caused financial crisis to be more frequent and less severe.
References
- Michael Bordo, Barry Eichengreen, Daniela Klingebiel, Maria Soledad Martinez-Periaand Andrew K. Rose, “Is the crisis problem growing more severe”, Economic Policy, Vol. 16, No. 32 (Apr., 2001), pp. 51+53-82
- Barry Eichengreen and Michael Bordo, “Crisis now and then; What Lessons from the Last Era of Financial Globalization?” November 2001, pp. 24-26
- Nicholas Crafts and Peter Fearon, “Lessons learn from the Great Depression” Oxford Review of Economic Policy, Volume 26, Number 3, 2010, pp. 285–317
- Pablo, Bustelo “The East Asian Financial Crisis: An Analytical survey” October 1998, http://pendientedemigracion.ucm.es/info/eid/pb/ICEIwp10.pdf
- Christina D. Romer “Great Depression” December 20, 2003, pp. 21 http://eml.berkeley.edu/~cromer/great_depression.pdf
6. Corsetti, Giancarlo “What caused the Asian currency and financial crisis” April 1999, http://www.newyorkfed.org/research/economists/pesenti/whatjapwor.pdf
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