Question

Explain the crises that have affected the world economy; the oil crisis of the 1970s, the debt crisis of the 1980s, the crisis in the ERM in 1992, and the crisis in East Asia in 1997/98. To what extent does the world’s experience with crises allow them to be better anticipated?

Answer 1

1. 1970s OIL CRISIS

​oil crisis of the 1970s was due two specific events that occurred in the Middle-east

• the Yom-Kippur War of 1973 : US intervened in the Yom-Kippur War on the side of Israel (against Egypt and Syria ) and supported Israel with arms. This decision by US had a disastrous effect for the US economy. In return Arab delegation of OPEC responded with an embargo of oil sales to the U.S, Canada, the UK, Japan and the Netherlands, which shocked the oil market and created a shortage in supply.
• Iranian Revolution of 1979 : in 1979, the Shah of Iran , Mohammad Reza Shah Pahlavi was exiled after mass protest and strikes and a new leader , Ayatollah Khomeini the title of Supreme Leader. The workers of the oil sector had been actively protesting during the revolution, which led Iranian oil production to a halt. This amounted to a huge loss of production which led to a large dip in the export of oil.The lower level of productions caused prices to rise.

Both events resulted in disruptions of oil supplies from the region which created difficulties for the nations (US, Canada, Australia ,Japan etc.) that relied on energy exports from the region. These nations experienced large shortages in petroleum supplies and as a result suffered high prices.

2)    1980s DEBT CRISIS

In the 1980s several less developing countries in Latin America and Africa defaulted on their debt repayments which led to major international debt . The origin of this problem dates back to 1970s when they borrowed heavily to fund industrialisation. During this period oil prices shot up over 300% due to oil crisis and most Latin American economies being net importers of oil faced higher import costs. By 1983 they had borrowed to approx 50% of their GDP. Growth in these Latin American countries had slowed down and thus they struggled to repay debt.

3)    1992 CRISIS IN ERM

ERM crisis was caused by combination of poor policies such as desire for European integration exchange rate stability and bad luck.In mid july 1992 tension within the ERM began to build up –

• The first wave of disturbance hit on the lira, then on sterling and then on a variety of other currencies. Lira weakened repeatedly inspite of Italy lowering its interest rates. The pressures on both lira and sterling became so large, that both were suspended from the ERM .
• Finnish Markka faced pressure so strong that it abandoned its peg with the ECU.
• Sweden abandoned its peg to the ECU and later by November and December, devaluation of both the Portuguese escudo and the Spanish peseta and the abandonment of Norway's ECU-peg.
• In January 1993, Ireland started witnessing pressure .Germany reduced interest rates in February, March and April which reduced the pressure on those currencies that had not yet been realigned.

4)   1997/98 CRISIS IN EAST ASIA

Financial crisis in East Asia started after the collapse of the Thai baht in July 1997. East Asian economies experienced a surge in capital inflows to finance productive investments that made them vulnerable to a financial pressure. That pressure–and inadequate policy responses–led to a region-wide financial crisis and the economic disruption. financial sector weaknesses were also a major contributor to the crisis.

The above mentioned crises in different parts of the globe have provided a guideline to correct economic policies.economic watchguards like IMF and world bank have taken response of these crises and give suggestion as well as assistance to crisis ridden countries.There has been many changes in BASEL norms too. These changes are in line with the corrections and safeguards against the crises that have happened in the past and also provide cash cushion to prevent any further crisis