Globalization is one
of the most important driving forces of today’s economic growth. The world has
been integrated closer as interactivity increases between borders. Compared to
the past, traveling across the globe is an effortless affair today. With the
aid of Information Communication Technology, people can even communicate across
the globe without having to travel. Economic activities like business meetings,
trading of goods and trading of financial instruments have been enhanced with
the Internet. However, globalization has negatively affected the world too. The
integration of countries has caused systemic risk, defined as “The adverse
effect of an interconnected market, which can lead to the breakdown of the
world wider financial system” (Bernanke, 2009), to increase greatly. This can
be seen from 1997 Asian Financial Crisis and the 2008 Global Financial Crisis.
Even though globalization has undoubtedly improved inter-countries’ trading
relationships and financial relationships, countries have ironically become
more vulnerable to negative impacts of the economic system due to the close
ties they share.
In this essay,
Singapore will be used as an example to show how good governance and economic
fundamentals can mitigate systemic risk, through two main solutions
"Better institution and government policies", and "Good economic
fundamentals".
A good government
with a good institution will be able to protect the economy from unnecessary
risks by implementing good policies. Goldin (2012) states that regulatory
institutions need to shape themselves up to keep in pace with the dynamics of
globalization to maximize gain and minimize losses. Governments need to ensure
the people of the economy are well protected, as they are the main victims
during the crisis. For instance, increasing immigration due to the forces of
globalization has caused Singapore's housing prices to rise drastically.
Investors may take advantage of this situation and push up the housing prices
to gain profit. This may in turn result in a huge housing bubble in the market,
causing a crisis to occur if the bubble bursts. In fact, this happened in
America during the Global Financial Crisis 2008. Hence, to prevent housing
prices from rising, the Singapore government implemented cooling measures to
prevent price hikes. A competent government should possess good foresight to
safeguard its country from crisis. Countries will benefit from globalization
and systemic risk will be minimized if their levels of governance are
comparable. Collaborating and sharing perspectives of good institution and
governance between government bodies is essential to reduce negative shocks
from happening around the world. In order to minimize systemic risks,
governments need to do their part in ensuring the risk of negative impacts in
its economy is at its minimum, just like what Singapore did, to prevent others
from being affected.
The inevitability of
systemic risk makes good economic fundamentals important to countries so that
they can fight against it. During the Global Financial Crisis 2008, Singapore
was the first country in ASEAN to be affected due to systemic risk. With good
economic fundamentals, however, Singapore managed to recover quickly with a
growth of 14.5% in year 2010 (CIA World Fact book, 2011). Singapore also
seized the opportunity during the economic downturn to retrain its workers and
restructure new industries during this period, taking advantage of the low cost (Thangavelu, 2009).
While fighting against systemic risk is definitely not an easy task, countries
could work together in sharing information on how fundamentals of the economy
should be built. Therefore, summits like the East Asia Summit 2013 are very
important. It is also important for individual countries to be transparent in
terms of their economic health in order for other countries to learn from it.
Sharing of information is important for countries to build strong fundamentals
for the economy to fight against systemic risk so that economies do not need to
face extended negative impacts.
In
conclusion, systemic risk is unavoidable as globalization occurs and countries
integrate. Good government policies could help the people in the economy, and
building up good fundamentals of the economy could potentially save the economy
from being affected for prolonged periods of time. This leads individual
governments to weigh the positive and negative effects of globalization and
ponder if certain barriers against globalization should be set up.
(692 words)
References:
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