Typical Responses to Economic and Financial Crises by Different Countries

Responses to the Crisis

As the recent few years have shown, economic and financial crises have become commonplace in the world. The onset of the global economic crisis in 2008 marked the turning point for the global economy as the underpinnings of the capitalist system came unstuck leading to the whole system itself being threatened. The responses to the crisis have differed from region to region and country to country. Whereas the western countries like the US and UK recapitalized their banks that had toxic assets, Asian countries like China and India kick started their economies by stimulus spending. This meant that the responses to the crisis ranged from bailing out banks to pump priming the economies using fiscal and monetary tools. On the other hand, the Middle Eastern nations ensured that they helped each other by offsetting the losses because of the financial crisis.

Commonality and Divergence

The key aspect here is that there are two trends that are visible in the way countries responded to the crisis. The first trend was to achieve commonality wherein the countries in the global economy decided that they would act in concert to resolve the crisis. This meant that the countries realized that they had to fight the recession using the tools available at their disposal so that the other countries also followed similar policies. The second trend was the specific nature of the crisis in each country, which meant that localized responses to the crisis had to be undertaken. Hence, the responses of the countries were to ensure that they had a global response and a local response at the same time. This was the dominating aspect of the response to the crisis from each country.

Examples from India and China and Europe and the US

Turning to specifics, India and China eased monetary policies so that they could fight the recession by spurring investment and growth. The massive fiscal and monetary stimulus that these countries undertook ensured that they could emerge out of the crisis relatively unscathed. On the other hand, the stimulus policies in the US and Europe were to bail out the banks and to undertake what is known as QE or Quantitative Easing which is another term for printing money and to pump the economy through easy and loose money. Of course, the resultant inflation because of too much money chasing too few goods meant that these countries had to be careful about how much money they actually pumped into the economy. This is the reason for the RBI or the Reserve Bank of India to hesitate to announce rate cuts and lower interest rates.

Final Thoughts

Finally, despite these trends, some countries are making protectionist noises especially some sections in India, which meant that this form of policy is going to be detrimental to the country in the longer term. Hence, the best way to ride the recession is through a judicious mix of policies that let foreign investment and at the same time take care of the domestic sectors without hurting either.

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