fbpx

Day 11 – Q 1. The recession induced by the ongoing COVID-19 pandemic is different from the economic crisis of 2008. Do you agree? Critically comment.

  • IASbaba
  • June 22, 2020
  • 0
GS 3, Indian Economy, TLP-UPSC Mains Answer Writing
Print Friendly, PDF & Email

1. The recession induced by the ongoing COVID-19 pandemic is different from the economic crisis of 2008. Do you agree? Critically comment.  

अभी चल रहे COVID-19 महामारी से प्रेरित मंदी 2008 के आर्थिक संकट से अलग है। क्या आप सहमत हैं? समालोचनात्मक टिप्पणी करें।

Demand of the question:

It expects students to write about the differences between the recession induced by the ongoing pandemic and economic crisis of 2008 along with critical analysis about the scale, impact and other factors.

Introduction:

The global economy is already in a recession due to health emergency of COVID-19 pandemic and subsequent lockdowns, shut downs of economies across the world. According to the IMF, this recession triggered by the Great Lockdown will be more intense and more extensive than the Great Recession in the wake of the global financial crisis (GFC).

Body:

Differences between the recessions of COVID-19 pandemic and 2008 financial crisis also known as Global Financial crisis:

COVID-19 Pandemic recession Global Financial crisis
  • Origin and Transmission: It originated outside financial sector. It broke supply chains from china then multiple lockdowns and economy shutdowns, demand slumped. The ensuing distress in the real economy led to distress in the financial system.
  • The GFC originated in the financial sector as banks and financial intermediaries got carried away by irrational exuberance and recklessly piled on risk. It unfolded in rich countries. As people lost their wealth and savings in the financial meltdown, demand collapsed and growth slumped. Transmitted from financial sector to real economy. 
  • Challenge: central challenge is to beat the pandemic, and that solution has to come from science. Only when there is public confidence that the incidence of the pandemic has been brought down to a low-level equilibrium, will there be a resolution in both the real and financial economies. 
  • To restore faith in the financial system, this meant rescue and rehabilitation of banks and other financial institutions. Once that task in the financial sector was accomplished, repair of the real economy fell in place. Demand came back; supply resumed and growth picked up.
  • Asymmetry of the solutions: Every country needs to control the pandemic within its borders. But that is not sufficient because the virus can hit back from across the border. In other words, rich countries are not safe until poor countries are safe too. And no country is safe until every country is safe. The effort to contain the pandemic is exacerbating the challenges in both the real economy and the financial sector. The more stringent the lockdown to save lives, the more extensive the loss of livelihoods. Managing this tension is by far the biggest dilemma for governments battling the crisis.
  • Restoring financial stability in the US was necessary, and for the most part, a sufficient condition for restoration of financial stability everywhere. Other countries returned to normalcy eventually as by-product.  Solutions in the financial sector and in the real economy reinforced each other. E.g., RBI cut rates to stabilise the financial system, intervened in the forex market, government extended special concessions for housing and real estate sectors to provide stimulus in the real economy. 
  • Impact: It is more widespread than the economic crisis of 2008, almost every country affected badly. 
  • China and India were less affected even as all rich countries were in a financial meltdown. In fact, one of the less acknowledged facts of the 2008 crisis is that it was the stimulus provided by China that kept the global economy afloat.

However, Nature of the crisis or the reason, origin of the crisis may be different but the burden on the economy is very much similar rather more intense compared to economic crisis of 2008. The Global Financial Crisis originated in the subprime mortgage sector of the US and then, rapidly engulfed the world. The current pandemic originated in the Hubei province of China and rapidly engulfed the world. 

  • Uncertainty: Both crises share uncertainty as a key factor once they emerged in one of the two leading economies and spread globally. Uncertainty is a risk that cannot easily be traced so that its probability of occurrence and its impact can hardly be predicted. This applies both to the new non-visible corona virus and to the subprime virus.
  • Debacle of the stock markets across the world is similar link between two events which often remains sensitive to the disruptions in the financial market.  
  • Response of the governments: Stimulus packages announced by the governments across the world after both calamities. It eventually will increase inflation and interest rates will hurt the poor most.

As per various studies current recession is much bigger than 2008 financial crisis rather than different:

  • Economic shock of COVID-19 pandemic is not just a demand shock but also a massive supply shock. Propping up demand may contribute to flattening the contagion curve by helping people stay locked down, but there is a limit to how much it can help the economy. Supply chains impaired due to mass exodus of migrants in India. 
  • According to World Bank data, the COVID-19 recession will be the deepest since 1945-46, and more than twice as deep as the recession associated with the 2007-09 Global Financial crisis along with contractions in annual per capita gross domestic product (GDP) and the global rate of unemployment will likely climb to its highest level since 1965.

Conclusion:

There is also ray of hope in V-shape or U-shape recovery predictions of various economic models which might reduce the time of recovery from current recession as compared to the 2008 crisis at much faster rate. Effective drug to treat the disease even before the breakthrough of vaccine can save the world from economic downturn.  

For a dedicated peer group, Motivation & Quick updates, Join our official telegram channel – https://t.me/IASbabaOfficialAccount

Search now.....