Money. COPING WITH RECESSIONS


	COPING WITH RECESSIONS MANAGING PEOPLE GLOBALIZATION AND THE WTO MANAGING FOREX RISK FOREIGN DIRECT INVESTMENT MNC INTERNATIONAL PORTFOLIOS

2. COPING WITH RECESSIONS

The conventional definition of a recession is a period when aggregate output declines for two consecutive quarters. They occur quite frequently – the US, for instance, experienced seven recessions in addition to the Great Depression during the twentieth century. They do not necessarily occur in tandem around the world. It is reasonable to assume that they will continue to occur periodically, so any business must have a strategy for recession survival.

Some economists argue that recessions are good for the economy because they drive inefficient firms out of business and force all firms to cut waste and use their resources better. Acting quickly to cut costs is likely to be effective once it is clear that that a recession is underway; assuming that growth will be permanently uninterrupted is likely to be fatal.

OIL PRICES AND THE GLOBAL ECONOMY

When OPEC raised oil prices in the 1970s it caused chaos in many economies that led to stagflation and a considerable transfer of wealth from oil-consuming to oil-producing nations. Could it happen again?

In the late 1990s, there was concern that oil prices had roughly tripled in less than two years, but it is unlikely that the global economy will be affected as severely as it was in the 1970s. For one thing, there was a sharp price drop in 1977 and most of the subsequent price increases were simply a return to previous levels.

More importantly, the world learned from its mistakes; the developed countries have shifted substantially towards less energy-intensive technologies and use oil much more efficiently. Even large price hikes in oil are unlikely to affect their economies seriously. Developing countries, however, are intense energy users and are much more vulnerable.

Much depends on the strategy of the oil exporters, many of whom have fiscal and current account deficits and have been postponing infrastructure projects. If they spend themoney gained from increased oil prices on these projects, it will be recycled back to the rest of the world rather than being stored as foreign currency reserves, as it was in the 1970s.