By Katherine McGhee
The last global recession that rocked the international economy was a mere two years ago, and due to failures in re-stabilizing the world’s economic landscape, the world finds itself once again headed toward a global recession. In 2021, as international markets began to reopen after COVID-19 quarantine restrictions, there was a glimmer of hope among economists; however, it was short lived as recovery began to stall. Inflation is largely to blame, where it has increased in three of the world’s leading economic and political powerhouses. This has only been worsened by Putin’s war on Ukraine, as the world grapples with Russia’s economic stance on the world stage. It has led to countries such as China and Europe experiencing increases in prices for necessities like grains, metal, and oil. Upsurges in food and energy prices have been another factor leading to heightened inflation. Meanwhile, China has seen an escalation in breakouts of COVID-19 infections, which has led to an increased number of government mandated lockdowns. Prioritizing policy recommendations to counter these issues is where countries have an opportunity to mobilize quickly to combat the upcoming recession by using different forms of economic policy that are state specific. One option for economic policy used by states in previous economic troughs was foreign direct investment. Therefore, the question that remains is whether or not this is still a viable option for countries today.
Foreign direct investment, commonly known as FDI, is the investment of multinational enterprises into foreign businesses. There are two ways in which investing is frequently carried out; the first is through acquiring a pre-established business in a foreign country, whereby investors take over business operations, commonly known as mergers or acquisitions. The second form of FDI is known as a greenfield investment, where a corporation creates a completely new business in a foreign country. Both methods offer corporations a pathway into the markets of foreign nations to reap the benefits of that country's specific demand conditions or factor endowments.
In the 1980’s and 1990’s, FDI was largely viewed as a game-changing solution for economic stagnation, particularly in developing countries lacking robust economies. However, with data from the 2008 recession and the COVID-19 pandemic-induced recession, the short answer to the question of whether FDI as a form of intervention will be an effective mode of economic development is that it is unlikely to offer substantial help in steering the international economy away from a looming recession.
Economists in the late twentieth century recommended increasing flows of FDI during recessions to aid market growth, as seen with how the Latin American debt crisis was solved in the 1980’s. In the World Economic Survey of the UN Department of Economic and Social Affairs, FDI was heavily encouraged for developing countries looking to stimulate their economies. It was used to expand growth and partnership between countries instead of employing other monetary strategies such as loans. However, FDI in developing countries could have an adverse effect, creating an over-dependence on external money to increase economic production.
While economists such as those in the World Economic Survey predicted that FDI could be used as a tool for advancing economies, this principle was abandoned moving into the twenty-first century, especially during periods of decreased prosperity. During the 2008 financial crisis, global FDI fell around 28%, from $1.8 billion in 2007 to $1.4 billion in 2008. Data regarding the current economic state is ongoing, but it is clear that FDI experienced a substantial hit during the 2020 global recession, with levels decreasing by record amounts.
With this in mind, countries must begin looking toward alternative strategies to help increase production levels. FDI alone heeds many benefits, but it should be exercised in conjunction with varying policy decisions to help support a country's economy.
Countries will take alternative paths that are best suited for their specific economy. In advanced markets, one solution that should be considered is automatic stabilizers. These are mechanisms built into a country's government that are triggered when the economy slows, automatically releasing policies such as increased spending or decreased taxes. Despite a state’s size or position in the international economy, all nations should be focused on addressing their debt and prioritizing government assistance for industries that are projecting future growth.
Currently, one of the most pressing issues that has impacted the global economy in the last few years is inflation. It is critical for countries to collectively combat rising prices that continue to plague an already struggling international market. While a simple statement, the reality of solving this problem is an incredibly complicated answer, with no single correct solution. One of the most utilized strategies for combating inflation is raising interest rates, which decreases overall demand. However, increasing interest rates is not a suitable long-term solution, and fiscal policy such as raising taxes tends to be politically unpopular and therefore not a feasible option. Policy recommendations range anywhere from decreasing state spending, investing in childcare, or enforcing globally collaborative fiscal restraint that will fight heightened inflation levels.
The bottom line is that there is no simple fix for the current state of geoeconomics, nor has there ever been. Every country within the global economy is going to have to create different policies, and what works for one state may not work for another. However, basic policy prescriptions such as FDI are no longer profitable or concrete enough of a solution for economic recovery. Countries must utilize all their resources and strategies to decide the best option for combating a recession, while simultaneously understanding their economies' role in a volatile global marketplace. Countries must enact economic policy now, before it is too late. Though a recession is going to happen in the near future, by acting tactfully and swiftly, countries can greatly soften the impact that it will have in their markets, and that of the entire globalized economy.
コメント