Recession impact on developing economies

As businesses operate within economic atmosphere of the country, any effect on the economy overall results in changing businesses. Gray et al (2007) state that recession is where incomes and output start to fall.

Businesses might experience a fall in demand for their products and a decline in profit. This may further trigger rising unemployment as most of the companies start laying off their workers. They further indicate that it is all a business cycle as everything in the economy gets affected because of one being related to another.

The recession basically affected all countries either directly or indirectly depending on the trade openness of the country.

However, there were some countries that did not get affected by recession and Poland is a good example for that. Because Poland is the only country in EU that avoided a decline in GDP, it created the most growth in GDP in 2009 (Wikipedia 2009).

According to analysts, the reason for countries that did not enter into recession is mainly because of the following factors:

• Extremely low levels of bank lending
• A relatively very small mortgage market
• Lack of over-dependence on a single export sector
• A tradition of government fiscal responsibility
• A relatively large internal market
• Low labour costs attracting continued foreign direct investment

Riley (2009) states that open economies, which are highly trade dependent and export only a small range of products to few markets, are affected most by the trade transmission mechanism. This helps to understand the wider economic and social effects of the 2009 global downturn.

Riley (2009) also further mentions the following influences of recession on developing countries:

1. Foreign Direct Investment declines resulting in reductions in access to loans from banks. However, some developing countries have their own wealth funds to spend in this kind of cases. This leaves businesses without liquid funds or new projects may not be realised.

2. Export revenues fall due to lower demand (and falling prices) for commodities and a sharp reduction in demand for manufactured goods from many emerging market countries. The companies may not be able to sell their products due to lower demands for their products.

3. Recession cuts export prices – but another key effect has been increased volatility of prices – this increases revenue uncertainty for commodity-dependent countries and acts as a barrier against much-needed capital investment.

4. A recession in global tourism – often a significant share of GDP for many poorer nations. And huge numbers of developing countries are tourism or export dependent nations who get affected the most because of falling demand.

5. Increased unemployment, under-employment and loss of income. Many laid-off formal sector workers are forced into low-income jobs in the informal and rural sectors.

Businesses have to lay off certain proportion of their workforce due to lower demands for their products.

The effects of the recession vary widely across the developing world – some countries have avoided recession and have started to recover more quickly than expected. Moreover, according to Lin (2008), one effect of recession on developing countries is a substantial reduction in their exports.

IMF report (2008) indicates that world trade volumes of just 4.1% in 2009 was much lower than the previous year when it was 9.1 %.

Another effect of recession on developing nations was its adverse impact on investments in emerging markets. All of the main external investment and investment portfolios fall as greater risk aversion makes investors keep money closer to home.

Developing countries also face the problem of paying higher interest rates if they have an access to external sources of loan which puts extra burden on their neck.

The recession adversely impacted on many businesses globally either directly or indirectly. In the first quarter of recession, many businesses already went into liquidation as their receivables account from their customers went collapsed.

And the hardest hit sector of businesses was luxury goods and services. As recession made everyone to be careful about spending, people spend less money on luxury goods, such as watches, cars, houses and etc.

So the main effects of recession on businesses both in developing and developed countries were declined revenue, declined profit, less demand for the products, lay off some employees and others.

And businesses must always be ready for recession as recession is not forever and it is fluctuation in business cycle as it may come any time again.

References

• A Nigam, 2009, “Current Recession: How far, How deep?”, Viewspaper, US
• B Gupta, 2005， “Business Studies”， McGraw-Hill, Tata, third edition
• Carbaugh (2004) “International Economics”, Ninth Edition, Thomson, New York
• D. Hall, R. Jones, C. Raffo, I. Chambers and D Gray (2007), “Business Studies”, Pearson Education, Third edition, UK
• J. Lin, 2008, “the impact of the Financial Crisis on Developing Countries”, World Bank
• R Frank and B Bernanke (2001), “Principles of Economics”, McGraw Hill, New York
• S Denis, 2009, “Global Recession: What, Why and How?” Views paper, US
• Accessed on 01/07/2010:”http://tutor2u.net/blog/index.php/economics/comments/impact-of-global-recession-on-developing-countries
• Accessed on 01/07/2010:”http://theviewspaper.net/current-recession-how-far-how-deep