Overview and Causes of the Recession - Literature Review Example

2021-07-27 20:08:36
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Carnegie Mellon University
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Literature review
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The global financial crisis of 2007 cast its shadow on the economic development of many nations resulting to what is known as the Great Recession. Notably, it began as an isolated turbulence in the subprime segment of the United States housing market but later developed into a recession towards the end of 2007 (Streeck, 2011, p 10). In a broader note, the credit crunch had such a more significant impact on the US housing market to the extent that it affected the nation economy as well as that of other global south countries. These effects spread around the world through debt obligations and the financial markets around that world which had relations with the financial markets that were impacted in the United States. According to Palley, (2011), at the time of the recession, the periphery of many nations had asset bubbles in the time and contributed to the recession, with the capital flowing from the stronger economies to the weaker economies. This economic growth promoted the policymakers to increase public spending. As the asset bubbles popped, the vast bailouts precipitated as a result of the substantial bank losses. In the same way, the bailouts facilitated the deficits that were already huge based on the tax revenues and high levels of spending. The fall in the consumer and businesses confidence resulted from the financial instability. In the European Union, the single currency established additional problems because of the over-valued exchange rates and high bond yields.

The effects of the great recession on the Capitalist Nations

The great recession posed both adverse and positive impacts to the capitalist nations. Moreover, the implications cut across the: political, social and economic dimensions of the countries. First, the recession brought about high levels of unemployment, by the end of 2009, approximately 20 million jobs were lost in various sectors like real estate, construction industries, and financial services industries (Streeck, 2011, p 17). As a result, the total number of unemployed people at the time was approximated to be higher than 200 million. In comparison to December 2007 unemployment rate of 4.9 %, the late 2009 statistics of 10.1% shows a worrying drastic increase in the employment rate; the latter data took into consideration every factor as it gave an accurate analysis on both barely employed workers and workers working part-time due to economic constraints. Nonetheless, according to Palley, (2011) intensive research indicated a disturbing economic effect of the recession in some European nations like Spain where the unemployment rate was at 18.7% by May 2009. However, efforts by the government in improving the education system enormously paid back, the profoundly affected nations were able to equip their workers with the necessary skills to fairly compete workers from more developed countries hence realizing a drop in the unemployment level. Also, the government played an active role in ensuring that changes are made at the management levels of different organizations, this move triggered a considerable employee turnover. Consequently, the step worked to their advantage as several people were able to fit into various agencies thereby reducing the unemployment rate.

Furthermore, the great recession led to political instability in several nations. For instance, Greece was faced with great civil unrest in December 2008, by January and late February, a good number of Greeks had already participated in massive strikes, demanding to know why institutions like schools were shutting, and why they faced hard economic times. Similarly, In January 2009, the government of Iceland was obliged to organize for an election two years before the exact time for it to be done. According to Gamble, (2009), the government bowed to unrelenting pressure resulting from the mass protests by its citizens complaining about how the government handled the economy. A similar wave hit France, the economic policies put forward by President Sarkozy was not met in good faith by the citizens who took to the streets to protest against them. It is worth noting that, the current springs of civil unrests do not only narrow down to countries like France, Iceland and Greece , but also many other Eastern European nations, whose governments lack adequate policies of addressing the consequents of the crisis.

On the other hand, the recession has had a positive impact on the environment. About the International Energy Agency report, the level of environmental degradation is projected to decline due to low emissions of human-made greenhouse gases. The report anticipates a remarkable decrease of the gases emission at 3% in 2009, pegging their primary cause as the financial crisis. Compared to the other recent years, emissions of the human-made greenhouse gases had consistently been rising by 3% per year (Palley, 2011, p 6).

The great recession effects on the global south.

The great recession did not spare the global south either which includes: Africa, some developing Asians countries and Latin America. Before the recession that had its roots in the Us financial markets, a notable section of the global south like Africa, had most of its economy cope up well. According to Cho & Newhouse, (2013), African economies had a pleasing general growth trend of about 6% as inflation rate dropped below 5%, factors such as favourable external conditions, adequate grant inflow, debt reliefs by specific international communities, and stable macroeconomic policies, immensely contributed to the growth. However, in 2009 just like other parts of the world the global south experienced a new dreadful face of the economy.

The recession saw a significant part of the global south like Africa suffer a decrease in the overall demand for the distinct primary exports. Consequently, it witnessed a decline in the prices of the commodities, and drop in the remittance flow. Also, as the recession continued to take shape, several international trades proved to be more costly as different foreign investors could not risk investing in the business (Cho & Newhouse, 2013, p 43). In equal measure, the recession negatively affected the portfolio flows given the aversion of the credit risk during the period. The continents struggling and trending markets that were more attached to the global market significantly felt the adverse consequences of the great recession as they recorded a growth drop of close to 4.5% in 2009.

Opposed to other Global south, most of Latin America did not undergo financial crisis during the recession period due to the significant number of commodity exporters. However, the continent was faced with severe agricultural times on the eve of 2008, resulting from less demand of the agricultural produce (Aysa-Lastra &Cachon, 2015, p 7).Nonetheless, there was an increase in the food prices because there was lack of adequate arable land. The high production cost of biofuel enormously contributed to the agricultural land loss. However, to cut the production cost of biofuels, the government has enacted the generation of the second generation biofuel program which is less cost-effective.



Streeck, W., 2011. The crises of democratic capitalism. New left review, (71), pp.5-29.

Palley, T., 2011. Americas flawed paradigm: macroeconomic causes of the financial crisis and great recession. Empirica, 38(1), pp.3-17.

Gamble, A., 2009. The spectre at the feast: Capitalist crisis and the politics of recession. Palgrave Macmillan.

Cho, Y. and Newhouse, D., 2013. How did the great recession affect different types of workers? Evidence from 17 middle-income countries. World Development, 41, pp.31-50

Aysa-Lastra, M. and Cachon, L. eds., 2015. Immigrant vulnerability and resilience: Comparative perspectives on Latin American immigrants during the Great Recession (Vol. 11). Springer.


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