By Everest Amaefule, Abuja
The graph of life is never straight and steep as many human beings would prefer it to be. There are the straight parts, the curves and then the twists. Economies also behave in similar fashion. We call the growth period economic prosperity. When it contracts, we say there is recession.
So, recession is not only a regular occurrence in economies; it is also a universal phenomenon. It occurs in different places at different times. This means that both developed and developing countries often take their turns on depression or recession.
Oftentimes, countries are already out of depression before statistics confirm that they had even suffered one. That’s when it is a short spell of recession.
The National Bureau of Economic Research (United States) actually defines a recession as “a significant decline in economic activity spread across the economy, lasting more than two quarters which is six months, normally visible in real gross domestic product, real income, employment, industrial production, and wholesale-retail sales”.
You may not be a student of economics but chances are that you have heard about the Great Depression. What make the Great Depression stand out are its endurance and its geographic spread. It is one of the longest depressions in history, lasting for a period of three years and eight months
While the Great Depression originated in the United States, it spread to many countries of the world. What really caused the Great Depression? Economists are not agreed. While some opine that the sudden collapse of the stock market was responsible, others said the collapse was only a symptom of the malaise.
However, what is clear was that on October 29, 1929, the Black Tuesday, the United States Stock Market crashed. From then, many economies around the world struggled for the next three to four years; some even till the late 1930s.
Some countries lost as much as 15 per cent of their Gross Domestic Products.
Wikipedia noted, “By mid-1930, interest rates had dropped to low levels, but expected deflation and the continuing reluctance of people to borrow meant that consumer spending and investment were depressed. By May 1930, automobile sales had declined to below the levels of 1928.
“Prices in general began to decline, although wages held steady in 1930. Then a deflationary spiral started in 1931. Conditions were worse in farming areas, where commodity prices plunged and in mining and logging areas, where unemployment was high and there were few other jobs.
“The decline in the U.S. economy was the factor that pulled down most other countries at first; then, internal weaknesses or strengths in each country made conditions worse or better.
“Frantic attempts to shore up the economies of individual nations through protectionist policies, such as the 1930 U.S. Smoot-Hawley Tariff Act and retaliatory tariffs in other countries, exacerbated the collapse in global trade. By late 1930, a steady decline in the world economy had set in, which did not reach bottom until 1933.”
One skill required of leaders during a period of depression is communication and the capacity to sell hope. This is because recession is often triggered or exacerbated by loss of hope and confidence in the economy.
One of the best known American businessmen, John D. Rockefeller, for instance, said after the crash of Wall Street, “These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again.”
However, communication was not one of the best skills of the then self-effacing President of the United States, Herbert Hoover.
Writing in the Prologue Magazine, Richard Norton Smith and Timothy Walch said, “Usually cast as a president defined by his failure to contain the Great Depression, Hoover’s story is far more complex and more interesting.
“Hoover was an activist reformer, albeit one without the political skills needed to sell himself and his programmes to Congress and the public.
“A shy man, he insisted on keeping much of his life and good deeds out of the public eye. Only in politics is this a character flaw, yet it prevented those around Hoover from portraying him as a compassionate leader, or warding off portrayals of him as a cold, uncaring figure responsible for nearly everything that was going wrong in the American economy.”
The day of reckoning came for Hoover when he lost the 1932 presidential election to Franklin Delano Roosevelt in a landslide.
Roosevelt knew a strategy that Hoover did not. He talked the United States out of recession. He started a series of radio evening programme. The programme that has been captured as Fireside Chat addressed several problems of the economy and the president was able to give hope, confidence and strategy to the people. This enabled the nation to overcome the Great Depression.
Argentina suffered its own Great Depression between 1998 and 2002.
“The depression, which began due to the Russian and Brazilian financial crises, caused widespread unemployment, riots, the fall of the government, a default on the country’s foreign debt, the rise of alternative currencies and the end of the peso’s fixed exchange rate to the US dollar.
“The economy shrank by 28 per cent from 1998 to 2002. In terms of income, over 50 per cent of Argentines were poor and 25 per cent, indigent; seven out of 10 Argentine children were poor at the depth of the crisis in 2002.
“By the first half of 2003, however, GDP growth had returned, surprising economists and the business media, and the economy grew by an average of nine per cent for five years,” Wikipedia noted.
Through debt restructuring, the country was able to come out of its debt crises. Although most debts owed multilateral agencies had been settled by 2006, bond holders had to exercise patience with the country until April 2016 when it cleared the payment of the bonds.
One of the most recent and sensational recessions in the world is Greece’s. The recession in Greece was triggered by debt crisis and loss of confidence in the European nation. On June 30, 2015, Greece went down as the first European country in modern times that defaulted on paying its creditors.
Greece failed to pay the sum of $1.5bn to the International Monetary Fund when it was due.
The Guardian of the United Kingdom reported that the long-running debt debacle left Greece on the brink of financial collapse, worsening recent years of wrenching austerity. This represented a historic blow to Europe’s 16-year old single currency.
Some of the drivers that exacerbated the problem of Greece were budget and trade deficits. Both trade and budget deficit grew from below five per cent of Gross Domestic Product by 1999 to about 15 per cent of GDP by 2009.
The immediate factor that had triggered the Greek debt crisis was the realisation in 2009 that the debt figure had been deceptive. The implication of this was that statistics coming out of the country could not be reliable as the debt level had been underestimated.
This crisis of confidence eroded the capacity of the Greece government to borrow new funds. As the risk increased by the perception of investors and lenders, the cost of borrowing increased in the country. In the final analysis, the country required a bailout..
Writing in the New York Times on July 9, 2015, Liz Alderman, Larry Buchanan, Eduardo Porter and Karl Russell painted the picture of Greece.
They wrote, “The economy has been in disarray. People have been out of work for years. The banks have been running out of money. It sounds a lot like the Great Depression in the United States. But it is Greece – and in some ways, the situation is worse.
“Government spending helped pull the United States out of the Great Depression starting in 1933, and decoupling the dollar from gold helped. Though the economy slipped back into recession in 1937, the onset of World War II and furious military spending helped the country recover for good.
“Greece hasn’t had its own currency since it joined the euro, and an inefficient bureaucracy has long failed to improve tax collection or to trim its bloated government. At this point, Greece is just struggling to pay its bills, as it tries to secure aid from Europe.”
For Greece, diplomacy mattered so much at the period of recession. This worked. European authorities knew the implications of allowing the country to fail. The implications were going to be disastrous to the economic bloc.
By debt rescheduling and fresh loans, Europe is helping one of its own to glide through the difficult times. By January 2016, a fresh package of $3.4bn was agreed for the nation by European authorities.
The earlier the Nigerian policymakers learn from such experiences and devise the best strategies to deal with the present hard times, the better for the nation’s future.