Twelve years after the 2008 Financial Crisis, the global economy is on the verge of another major economic recession. While the economic effects of the current recession might seem identical to the 2008 Financial Crisis, the stimulants of the two economic catastrophes are widely different. This article tries to delve into a comparison between the two and discusses if the lessons from 2008 can help us deal with this recession more efficiently.
The Contrast in The Global Context
While their effects on various economic indicators might be the same, it is important to understand how they are different from each other. We have identified few of the major differences.
Origins: The 2008 crisis was the result of innumerable unsustainable mortgage debt in the USA which later spilled over to the global economy. The crisis originated completely from the failure of the US Financial System.
On the other hand, the Coronavirus Recession is the byproduct of a much larger issue: The Covid-19 Pandemic. It seems unlikely that the economy can go back up and running if the population is forced to be in lockdowns to save itself from the disease.
Real Economy Vs Financial Economy: During the 2008 Financial Crisis, the stock markets crashed all over the world and bank lending almost froze. However, the real economy was still intact. The real economy comprises the non-financial elements of the economy. This meant physical goods were still being produced and trade was still happening inside and across borders.
In the 2020 Coronavirus recession, on the other hand, the real economy has been tanking as well. All the economic activities around the world have come to a standstill.
The Recovery: The recovery process in the 2008 crisis mainly dependent on the fixing of the financial system. The government played with various regulatory measures like interest rates, repo rate etc to try and stimulate the economy.
But that is not the case this time. The financial system is in the backseat and the recovery is completely dependent on scientists and medical professionals in 2020. Until and unless a proper vaccine/medicine for the virus is found, it shall be hard for the economic activities to resume.
The Contrast In The Bangladeshi Context
As we can see, while most economies around the world saw massive declines in their GDP Growth, the same was not the case for Bangladesh. This shows that the effect of the 2008 Financial crisis was nothing notable. This was because the financial economy of Bangladesh was not as globalized as the more badly affected country. Moreover, the majority of Bangladesh’s foreign currency earning came from inexpensive labour and garment export whose demand did not decrease much due to the crisis.
However, the case is much different in the 2020 Coronavirus Recession. The GDP Growth of Bangladesh has fallen at a similar rate to its contemporary economies.
Being one of the most prominent industries in Bangladesh, the effect of an economic crisis on the RMG industry has to be carefully observed.
As we can see, during the 2008 financial crisis, the RMG industry maintained its growth. In fact, due to the demand in fast fashion clothing after the crisis, the industry saw a boom in the following years. However, that is not the case in the current crisis. Bangladesh exported readymade garments (knit, woven) worth only $520 million in April, compared to $3 billion at the same time last year which is an 83% decline. This indicates that the 2020 Crisis is making the RMG industry come crashing down.
Foreign Labour Market
Another important driver of the Bangladeshi economy is the foreign labour market. During the 2008 Crisis, the Remittance Inflow took no hit.
The Remittance Inflows, in fact, had been maintaining its steady growth despite the 2008 Financial Crisis. But that has not been the case in 2020.
It is still too early to say how big a hit the remittance inflow but the dip in the remittance inflow has become evident since January 2020. A more worrying scenario is that due to the extreme contagious nature of the virus, it is unlikely that foreign countries shall be interested in importing labour from Bangladesh.
A Bigger For The Bangladesh Economy than The 2008 Financial Crisis
The discussions in this article have glaringly pointed out that, unlike the 2008 Crisis, the Coronavirus Recession is not a Financial Crisis. The Economic and Financial Institutions have little weapons in their arsenal and are at the mercy of the success of the health sector. However, Bangladesh has seen rapid growth after the 2008 Financial Crisis and some of it can be replicated. A few sectors have been identified which should be looked into.
Concentrate on Local Businesses: It is becoming apparent that cross border trade will be reduced significantly due to the virus. This could be the time for local businesses who had to compete with foreign products to shine. For example, in 2018, Bangladeshi tourists spent USD $756 million in outbound tourism. Due to no outbound tourism being possible now, this revenue could be used in domestic tourism. Moreover, many products whose exports have been halted can now be produced in Bangladesh to capture the market.
Rejuvenation Of The RMG Sector: After any economic recession, the demand for inexpensive goods increases. This is why the RMG industry soared after the 2008 Financial Crisis. The same can be expected to happen after the Coronavirus recession. Thus, it is important that the garment industry is sustained by undertaking different steps like providing stimulus packages, giving diplomatic pressure to foreign buyers etc so that they can sustain in such trying times.
Train The Remittance Workers For Transition to Life In Bangladesh: It seems unlikely that many workers who have returned to Bangladesh shall be able to go back to work in foreign countries. The skilled remittance workers should be given employment in Bangladesh. But since a major portion of the remittance workers are unskilled, it is necessary that they be trained in appropriate fields so that they can be useful in the rebuilding of the economy after the crisis is over.
The IMF predicts the GDP growth of Bangladesh in 2021 to be 9.5%. This shows that, while this crisis has hit Bangladesh a lot harder than the 2008 Financial Crisis, it is nothing that cannot be recovered from. However, under the current circumstances, the primary concern of Bangladesh should not be to revive the economy but to contain the virus. If that is possible within the next few months, the economy should not be a cause for concern.
- 1. Coronavirus: How might this recession compare with 2008?-BBC
- 2. 83% exports wiped out in April– The Business Standard
- 3. Is 2020 Market Crash Like 2008 Crisis? Similarities, Differences-Bloomberg
- 4. Here are key ways coronavirus crisis differs from the Great Recession-CNBC
- 5. World Economic Outlook (April 2020) – Real GDP growth-IMF
- 6. Bangladesh Outbound tourism – travel, 1995-2019– Knoema