IEI: Economic Crisis

 Economic Crisis: How were we impacted and the policies adjustment?

    An economic crisis represents a situation in which a nation’s economy passes through a sudden decrease of its force brought about by a financial crisis. The economic crisis may have the shape of a stagflation, of a recession or of an economic depression. Under this topic, there are 5 types of economic crisis that have severely impacted the international economic performance including The Great Depression (1932), International Debt Crisis (1982), Asian Financial Crisis (1997), The Global Economic Recession (2007), and the outbreak of the Covid-19 pandemic (2019).

    There are several theories of international trade and finance during the economic crisis. First, exchange rate fluctuations which influence the price of goods and services. For example, currency depreciates will lead to cheaper exports and expensive imports. Besides, the trade barrier. The policies to protect domestic industries which lead to drop in the supply and consumption should be alleviated to encourage more economic activities. Next, comparative advantage. Comparative advantages is a condition where countries specialize in goods which they have a comparative advantage. However, it might cause inverse impacts during the crisis due to decline in available resources. Additionally, balance of payments (BoP). Economic crisis will lead to a trade deficit along with a fall in consumer spending. Hence, the government should adopt expansionary monetary policy to regulate interest rates and currency as well as maintain BoP. Moreover, a fixed and flexible exchange rate. During a crisis, fixed rates are more effective for developing countries such as Malaysia. Lastly, international capital flows. Instability or declining returns on investment will affect FDI and eventually capital flight as investors prefer safer assets or jurisdictions.

    For impacts, the Great Depression (1932) illustrated the economic contraction reached its highest point in 1932. Impact can be seen quantitatively on indicators such as GDP across the Federated Malay State (FMS). To highlight, export of rubber and tin sectors were affected the most, causing fall of average price and suspension of tapping activities. Next, the International Debt Crisis had affected the developing world and started with a breakout in Mexico. Malaysia was the country that was affected by the high oil prices, high interest rates and deteriorated exports, as well as developing countries became heavily indebted to developed countries and multilateral creditors such as IMF and world bank. To highlight, the adoption of expansionary fiscal policy to curb recession and boost GDP had caused Malaysian outstanding debt to reach 80.7%. Prior to the East Asian Economic Crisis, Malaysia was among the "miracle economies" having GDP growth rates at 8.9% and low inflation around 3–4%. However, the stock market plunged and reached a new low, RM4.88 per US$1 in the post of the crisis. In 2007, the Global Economic Recession also impacted Malaysia’s economy. Since the crisis' effects led to a decrease in trade and FDI from the US to Asia's developing nations, therefore, Malaysia’s overall GDP growth rate dropped to 0.1% in Q4 2008 and further to -1.5% in Q4 2009. Also, compared to the US dollar, the ringgit fell 6% in value. When it comes to the COVID-19 Recession in 2019, Malaysia economic output in 2020 dropped 6.3%, or RM196.8 billion, to RM2,907.1 billion from RM3,103.9 billion in 2019. In order to stop the COVID-19 chain, businesses have reduced operations and laid off workers, which has increased the unemployment rate to 4.6 in 2021 while wages paid decline by 3.6%.

    The economic crisis in Malaysia was solved by successful policy responses. First, the Great Depression was curbed by the opening of a new Malay settlement at Sungai Buloh, to help Malay smallholders and other unemployed Malays in agricultural activities and handicraft work. For illustration, the government increased the production of rice in the FMS to reduce imports and create job opportunities. For the International Debt Crisis, the central bank raised the interest rates and pursued a tighter monetary policy to curb inflation and stabilize the economy whereas the East Asian Economic Crisis was calm by cutting government spending by 2%, delaying mega-projects and implementing a credit plan with the goal of reducing the expansion of credit generally in the economy. Next, the Malaysian government curb the global economic recession (2007) by increasing domestic demand, stimulating the economy and closing the recessionary gap as well as lowering the unemployment rate. Following this, the Global Economic Recession 2007 first expansion agenda wants to support and sustain domestic economic activity whereby it encourages private sector initiatives and guarantees Malaysian citizens' wellbeing. Lastly, the government had implemented a fiscal stimulus and economic recovery plan in response to COVID-19 outbreak. The main purpose of intervention work at different stages of recovery is to reduce the burden on society and reduce the percentage of people M40 to B40. The steps taken are through the Prihatin Rakyat Economic Stimulus Package (PRIHATIN), Economic Stimulus Package (PRE), and the National Economic Recovery Plan (PENJANA). About 20% of GDP was injected into the economy and higher government spending through direct fiscal injection to mitigate the effects of the Covid-19 crisis.

    In a nutshell, the economic crisis has severely impacted the global economy, particularly those developing and underdeveloped countries. Hence, the governments and central banks should strengthen their engagement to ensure global standards for regulatory and prudential oversight of banking organizations. Not only that, long-term international cooperation is also needed for the proper functioning of financial markets and sustainable economic activity. Essentially, the suggestions aim to prevent the recurrence of economic crises in the future.

QnA

1) The increase in the cost of living had been intensified by Covid-19.

-  As an individual, how do you cope with this event?

Individuals can deal with the expense of life during COVID-19 by avoiding debt. As the cost of necessities rises, it may be tempting to use your credit card to cover the difference. For instance, individuals always fall into credit card debt because of unexpected medical bills, emergency expenses and even just everyday spending.  In fact, if you aren't able to pay your bill before the end of the month, you'll have to pay a lot of interest on it. As interest rates rise, you will have to pay more to borrow money. As a result, by avoiding debt, individuals might reduce their burden of survival during a pandemic.

Additionally, identifying local communities helps. Several community programmes are frequently offered to assist during a financial crisis. These can include cash reserves for unforeseen expenses like rent, food, and utility payments. Find out what you will require and check if there is a facility, group, or person that can provide it, even if only temporarily. Understanding the resources in our society can make the difference between possible financial catastrophe and financial survival. Keep a current list of those resources on hand for future use.

- As a policy-maker, suggest one solution for this problem to help individuals and households.

As a policymaker, the solution to help individuals and households solve the problem of the increase in the cost of living which had been intensified by Covid-19 is that the government should set the ceiling price on the necessities of food such as eggs, rice, fish and chicken. The ceiling price will cause the price of these goods to be maintained and will not rise in the short run. To maintain a lower price level, the government must give more subsidies to these goods. Hence, this can also benefit the seller. The seller can maintain the lower price level for these necessities of goods for a longer period. Hence, the cost of living for individuals and households will decrease and they can buy more goods. 

Aside from ensuring supply of food necessities, providing subsidy assistance for education and transportation are also necessary. Since the unemployment rate was hiking during the pandemic, some students had trouble taking online lessons because they lacked technological gadgets owing to budgetary constraints. On the other hand, there is a significant expansion of the gig sector, particularly during the lockdown. Despite providing wage subsidies, the toll fees and public transport fees should be disposed of in the short term. This would enhance employment by enticing the unemployed to participate in the workforce (gig economy) during that period. Meanwhile, reduce reliance on wage subsidies to ensure a sustainable workforce in the future.