Globalization creates economies that are increasingly interdependent. This is good news in terms of trade, growth and jobs, but it also presents economies with risks and challenges. A significant problem resulting from globalization is the shocks that impact on national economies over which they have little control.
Some of the problems from globalization are short-term crises, such the financial crash that caused the most recent recession. Some short-term global shocks can be self-correcting. However, some short run events can have long-term effects such as the global oil problems in the 1970’s that altered the market completely.
Long-term global problems require new strategies to create a solution. These problems include global inequality and unequal economic development, global poverty, the exhaustion of non-renewable resources, depletion of the environment and global warming as well as systemic problems associated with inadequate regulation of financial markets.
One risk of a shock originating in one part of the world, or in one industry or market is that impact can spread across a country, a region, or the whole global economy. This creates unexpected turmoil, but policies can be adopted to reduce their impact. Below are a list of the types of shocks that can happen in the markets.
Some events can show a multiple of these shocks:
Examples include a terrorist attack or a one-off change in a commodity price, like a fall in gold prices, which quickly return to the ‘normal’, long run trend.
The oil shock of 2008, when the price of oil spiked when supply could not meet demand, permanently affected the motor vehicle market. Some economists argue that this crisis has led to a growth in a more carbon neutral approach to vehicle design.
Policy induced shocks
By reducing interest rates or increasing the money supply too quickly, policies can create an inflationary shock.
Those changes affecting one region or one industry more severely than another. For example, Finland’s export market share has shrunk by a third since 2008 due to the decline of Nokia and the country’s paper industry, the retirement of a generation of baby boomers, high labor costs, which have made the economy noncompetitive, and the fallout from the Russian crisis. Other EU countries have not suffered in the same way.
Shocks which affect all regions or industries in the same way.
Those that start in the financial markets, such as a sudden change in the exchange rate, or the collapse of a major credit bank.
Supply side shocks
These may be related to costs, such as a sudden increase in commodity prices, or related to changes in physical supply, such as labor strikes, or crop failures.
Demand side shocks
Sudden changes affecting aggregate demand, such as a collapse in consumer confidence leading to a fall in household spending, or a sudden fall in house prices creating a negative wealth effect.
Whilst Brexit is clearly a permanent shock within Britain itself, perhaps ranking just behind the miners’ strikes in the 1970’s and 1980’s it is not yet clear what European or global economic impact it will have. The overall impact of the Brexit uncertainty shock will be large for the UK, fairly small for the remainder of the EU, and negligible for the US and Asia. For example, some major investment banks have this weekend been reducing their 2017 real GDP forecasts by about 2 per cent for the UK, by 0.5 per cent for the EU, and by only 0.2 per cent for the global economy.