SCHOOL OF POSTGRADUATE STUDIES

COLLEGE OF MANAGEMENT AND SOCIAL SCIENCES

DEPARTMENT OF BUSINESS ADMINISTRATION

OKEOWO JOHNSON OLUWANIYI

20PAB02202

MBA BUSINESS MANAGEMENT

Global Economic
MBA

SUBMITTED TO

DR ADEGBUYI OMOTAYO
IMPLICATIONS TO WORLD ECONOMIC:
i. TERRORISM
ii. CREDIT CRUNCH
iii. POWER INEQUALITY

Introduction
Every country's economic activity, including production, consumption, financial
exchanges, and trade in goods and services is included in what is known as the global
economy ("THE GLOBAL ECONOMY | Definition in the Cambridge English
Dictionary","2020"). The global economy is also known as the global economic
system.
In other situations, the terms "international" and "global economy" are used
interchangeably, with the former referring to a collection of national economies, while
the latter simply refers to the sum of those economies. When it comes to defining the
global economy beyond the bare minimum norm of value in production, use, and
trade, there is a wide range of perspectives. They are intertwined with Earth's
topography and biosphere.

TERRORISM
Terrorism is the deliberate use or threat of use of violence by individuals or
subnational groups to attain a political or social aim through the intimidation of a
large audience, beyond that of the immediate victim. A typical pattern of terrorist
actions is followed, regardless of the motivations of the perpetrators. Terrorist
incidents take on a variety of forms, including airline hijackings, kidnappings,
assassinations, threats, bombs, and suicide bombings. In order to force a government
to make political concessions, terrorist attacks must exert enough pressure on the
government to achieve this. If a besieged government believes that the anticipated
costs of future terrorist attacks outweigh the costs of complying with terrorist
demands, then the government will make some concessions to the terrorist demands.
As a result, if a rational terrorist organization is able to increase the consequences of
its campaign, it will be able to achieve its goal more quickly. In addition to casualties
and ruined structures, there may also be an increase in anxiety levels and a slew of
other economic effects to bear in mind.
Naturally, the attacks on September 11, 2001 (hereinafter referred to as 9/11) resulted
in significant costs, which have been estimated to be in the range of $80 to $90 billion
when subsequent economic losses such as lost wages, worker's compensation, and
reduced commerce are taken into consideration (Kunreuther et al. 2003).
Terrorism can inflict costs on a targeted country through a number of methods.
Economic effects of terrorist acts include diverting foreign direct investment (FDI),
destroying infrastructure, diverting public investment dollars to security, and
restricting international trade. Economic growth in a developing country may be
stunted if it loses enough foreign direct investment (FDI), which is a major source of
savings. Like capital may flee a country affected by a civil conflict (see Collier et al.,
2006), a sufficiently strong terrorist campaign may cause capital inflows to plummet
significantly as well (Enders and Sandler, 1996). Terrorism, like civil conflicts, may
produce spillover costs among neighboring countries as a terrorist campaign in a
neighbor dissuades capital inflows, or a regional multiplier causes lost economic
activity in the terrorism-ridden area to resound throughout the region. In other
circumstances, terrorism may harm individual industries as 9/11 did on airlines and
tourism (Drakos, 2004; Ito and Lee, 2004). (Drakos, 2004; Ito and Lee, 2004). The
pricey security measures that must be implemented as a result of large-scale attacks
are still another expense.
In many ways, a country's ability to survive terrorist strikes without experiencing
severe economic consequences is determined by the size and diversity of its economy.
A 300 percent surge in insurance rates was a major blow to Yemen's maritime
industry following the terrorist attacks on the USS Cole and the Limburg, which
caused half of Yemen's port activity to be moved to more competitive facilities in
Djibouti and Oman (US Department of State Fact Sheet, 2002).
In 2019, the economic cost of terrorism in Nigeria represented 2.4 percent of the
country's GDP, a drop by 0.3 percentage points compared to the previous year.
Nigeria has the highest terrorism threat level in Africa as it is one of the firsts in the
globe. Apart from that, instabilities in the country's political, economic, and social
sectors have resulted in violence and deaths. Multiple militant groups are operating in
Nigeria, and assaults on civilian and military targets have occurred as a result of their
activities. Boko Haram, also known as the Islamic State of Nigeria, is the deadliest
terrorist organization on the planet (Statista, 2022).
Economic consequences of terrorism: summary concepts
• For most economies, the economic implications of terrorism are often extremely
minor and of a short-term character.

• Large diversified economies are able to resist terrorism and not demonstrate
detrimental macroeconomic consequences. Recovery is swift even from a large-scale
terrorist strike.

• Developed countries can utilize monetary and fiscal policies to offset the economic
repercussions of large-scale assaults. Well-developed institutions also cushion the
consequences.

• The initial consequences of most terrorist acts are localized, so causing a

displacement of economic activity away from a vulnerable sector to comparatively
safe locations. Prices can then reallocate capital and labor fast.

• Terrorism can prompt a reallocation from investment to government spending.

• The consequences of terrorism on key economic indicators – e.g., net foreign direct
investment – are anticipated to be highest in small economies confronted with a
persistent terrorist campaign.

• Some terrorist-prone sectors – e.g., tourism – have demonstrated large losses

following terrorist attacks.

• Small countries, plagued with substantial terrorist campaigns, demonstrate

macroeconomic consequences in terms of losses in GDP per capital.

CREDIT CRUNCH
Unexpected reductions in the availability of loans (or credit), as well as abrupt
tightening of the conditions required to acquire loans from financial institutions, are
characterized by a credit crunch (also known as credit squeeze, credit tightening, or
credit crisis). In most cases, a credit crunch is characterized by a decline in the
availability of credit that occurs independently of an increase in official interest rates.
When this occurs, the connection between loan availability and interest rates shifts to
the other side. Regardless of the official interest rate, credit becomes less available, or
there is no longer a clear relationship between interest rates and credit availability (i.e.
credit rationing occurs). Many times, a credit crunch is followed by a flight to quality
among lenders and investors, as they look for less risky assets to make their money
grow faster (often at the expense of small to medium size enterprises).
It is typically the result of a prolonged period of irresponsible and unsuitable lending,
which results in losses for lending institutions as well as for those who invest in debt
when the loans get repaid and the full extent of bad debts is discovered (Rajan, 2006).
It is possible that the credit crunch will result in an inflationary spiral, exchange rate
appreciations, widening current account and budget deficits with increasing domestic
borrowing, and macroeconomic stagnation as reflected in declines in output, net
exports and tax revenues as well as declines in government spending in a typical
developing country. The 2007-2009 Credit Crunch, which began in the United States
in July 2007 as a result of a loss of confidence in mortgage-backed securities (Hull,
2009; IMF, 2009a) and later spread to Europe and the Far East, is currently taking a
toll on the global economy, according to the International Monetary Fund (IMF). The
global economy is expected to increase by only 0.5 percent in purchasing power
parity terms in 2009, the slowest rate of growth seen since World War II, according to
predictions (IMF, 2009b). There has been a massive impact of the liquidity crisis in
developed countries, with the failure of many financial institutions, industrial
enterprises, particularly automobile firms, and other businesses. Large-scale credit
interruptions are limiting household spending in both developed and developing
countries, as well as limiting output and commerce (IMF, 2009b). As a result of major
job losses in a variety of industries, unemployment rates are on the increase in many
industrialized countries today, including the United States. Given these developments,
authorities in industrialized economies are putting forth frantic attempts to halt the
crisis and mitigate its potentially catastrophic consequences for the global economy.

Impact of credit crunch on wider economy

Eurozone growth weak since 2008

 The decrease in bank lending resulted in a decrease in investment and a decrease

in consumer expenditure.

 Because of the decline in housing prices, there was a negative wealth effect,
which led to a decrease in consumer expenditure.

 As a result of the recession, the level of government borrowing increased

dramatically. As a result, the United Kingdom and many other Eurozone nations
implemented a degree of fiscal austerity, which consisted in cutting spending and
raising taxes in order to lower levels of government borrowing. However,
austerity measures during a recession have resulted in a further drop in aggregate
demand.
Rise in unemployment in the UK, US and Eurozone. Though unemployment has
fallen quicker in US and UK.

What caused the credit crunch to spread around the world?

The problem began in the United States, but it quickly spread throughout the world

1. Foreign financial institutions purchased collateralized US debt. Many of these

subprime mortgage loans were rebundled into collateralized debt obligations
(CDOs) and sold to financial institutions all over the world as a result. For
example, several banks in the United Kingdom and Europe have exposure to
these mortgage-backed securities. As a result, when defaults increased, European
banks suffered significant financial losses.

2. There is a global credit crunch. The banking system is interconnected on a global

scale. When some banks began to incur losses, they became hesitant to extend
credit to other institutions. As a result, the worldwide banking system was
harmed, and banks ceased lending to one another, making it harder for businesses
and consumers to borrow from financial institutions. The decrease in bank
lending was a contributing factor to the decrease in aggregate demand. Even
countries that had little exposure to subprime lending were impacted by the
global credit crunch, according to the World Bank.
Credit Default Options – illustrate boom and bust.

3. International Trade. As the United States entered a recession, the country's

demand for exports decreased. A significant number of countries saw a decrease
in exports. This fall in worldwide trade played a role in the global economic
downturn.

4. Self-assurance. Consumer and business confidence were eroded as a result of

problems in the financial and banking sectors, resulting in decreased growth.

POWER INEQUALITY
Power is a complicated concept that involves the ability or capacity to do something,
as well as the ability or capacity not to do something. It also includes using a variety
of methods to exert influence, control, or force on another person. Power, or the lack
thereof, can have a significant impact on people's situations and, consequently, on
their physical and mental health.

Power does not reside in the hands of a single individual, but rather in the interactions
that exist between individuals and groups of individuals. These power ties can be
clear and obvious, but they are more commonly concealed and covert than visible.
Power is also situational, in the sense that people can have a great deal of power in
some contexts while being completely impotent in others.

Powers of various kinds

In their 'Conceptual Framework For Action On The Social Determinants Of Health,'
the World Health Organization (WHO) outlined four main categories of power to
consider.

 Power over - where some are able to influence or coerce others.

 Power to - where individuals are broadly able to organise and change existing
hierarchies.

 Power with - the collective power of communities or organisations.

 Power within - individual capacity to exercise power.

Power inequality simply means unequal distribution of power.

Researchers have been studying the link between economic development and
inequality for over a century. However, as demonstrated in this paper, the answer to
how uneven household income influences a country's growth is still not apparent, both
theoretically and empirically.

Inequality and economic growth have a negative association in general. But, as

readers are well aware, a correlation does not always imply a causal relationship.

Theoretically, rising inequality may promote growth through two methods in the
1950s and 1960s. The first is based on the premise that inequality promotes economic
growth by increasing incentives to labor and invest. In other words, if more educated
people are more productive, variations in rate of return will drive more people to
educate themselves. The second factor is increased investment, as high-income groups
tend to save and invest more.
But since then, various voices have warned of the dangers of inequality on growth.

Some argue that increasing inequality reduces professional prospects for the most
disadvantaged segments in society and so reduces social mobility and the economy's
growth potential. Lower-income individuals may spend less in human capital if there
is no adequate governmental education system or grants. As a result, countries with
higher levels of inequality have lower levels of generational social mobility.

Inequality can harm growth by encouraging populist measures (see «Inequality and
populism: myths and truths» in this Dossier). Similarly, whether rising inequality
might lead to excessive credit growth that slows growth (see the essay «Can
inequality create a financial crisis?» in this Dossier).

Many authors have sought to give empirical proof of inequality's impact on economic
growth. But the results aren't always conclusive. This is because it is difficult to
separate the impact of inequality on economic growth from other causes. This is the
main critique leveled at empirical research based on cross-country growth regressions,
which are detailed below.

The relationship between inequality and growth is complex and may not always be
linear. Regardless, a trend can be seen depending on a country's level of development.
Physical capital returns tend to outperform human capital returns in early-stage
economies, therefore greater inequality can lead to faster growth. However, as an
economy develops, the return on physical capital tends to decline while that on human
capital tends to rise, increasing inequality can harm growth.

According to a recent IMF report, rising inequality harms economic growth. For
example, the historical link (1980-2012) between inequality and growth shows that if
the income share of the richest 20% of the population rises by 1 pp, GDP growth
slows by 0.08 pps over the next five years. Increasing the income share of the lowest
20% of the population reduces inequality and enhances GDP growth by 0.38 pps over
the next five years.
Similarly, an OECD research estimates that a three-point increase in the Gini
coefficient (corresponding to the average increase in OECD countries over the last
two decades) would reduce economic growth by 0.35 percentage points per year for
25 years, a loss of 8.5 percent of GDP. The analysis also demonstrates that income
disparity has the most detrimental impact on growth (those at the bottom of income
distribution). For example, lowering the UK's bottom inequality to that of France, or
raising the US's to that of Japan or Australia, would boost GDP growth by around 0.3
percentage points annually for the following 25 years, totaling over 7%. Again, these
projections should not be regarded as the actual effect a shift in equality can have on
growth in each country.

Finally, the research states that one of the main ways in which inequality slows
economic growth is by limiting the poorest people's ability to invest in education. In
reality, in the US, the percentage of children earning more than their parents has
dropped from 90% in the 1940s to 50% in the 1980s.

In fact, less social mobility can signal rising inequality. A number of empirical studies
have found a negative association between inequality and social mobility. This is
because inequality, particularly among the poorest, lowers their ability to invest in
education, which is the major way to improve social rank. In Spain, university
graduates from poorer backgrounds have 14 times the chance of getting professional
and management jobs than those who did not finish secondary school.

In conclusion, while some degree of inequality is necessary in modern economies, the

latest empirical data demonstrates that reducing inequality, particularly among the
poorest, benefits both social fairness and economic growth.
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