The economic recession which started in September 2008 was as a result of uncontrolled and untenable lending practices in the real estate mortgages in the US. The collapse of the US stock market affected other major investment banks specifically Lehman Brothers. This culminated into a credit freeze which made it hard for firms to conduct their daily operations effectively. As a result, firms in different economic sectors were forced to reduce their production plan. Some of the strategies which were included entailed downsizing the workers. The rate of unemployment also increased, reducing the employee’s purchasing power. As a result, the level of consumption of goods in different economic sectors also reduced. Reduction in consumption level by US citizens also affected New Zealand. The effect is that the volume of New Zealand Export reduced thus instigating recession. As a matter, New Zealand’s level of unemployment had increased by a margin of more than 7% by the end of 2008 (Foldvary & Fred, 2007, pp. 128-133).
The collapse of the money market in the US as well as the sharp increase in oil prices and low food production fueled the recession. Food supply could not meet demand and hence food prices went up. As the economic conditions of the United States economy continued to deteriorate, banks reduced their lending rates. This led to a situation in which investment capital and loans were hard to get. Commercial and investment banks together with other money lending institutions sharply increased the cost of borrowing to a level whereby the public could not afford or was simply unrealistic to borrow. This situation brought about the credit crunch in both the United States and New Zealand economy (Foldvary & Fred, 2007, pp. 158-163).
These reforms provided a competitive environment that favoured the private sector. The government raised the minimum wage to a level that the labour force accepted almost full employment. The 4% unemployment rate was due to the fact that not all labour could be absorbed into the labour market. Due to the economic recession, unemployment rate in New Zealand increased with a margin greater than 7% since 2008.
US witnessed the highest rate of unemployment which averaged to about10% by the end of 2008, with the unemployment rate during the last quarter averaging to about 4.5%. However, this rate reduced with a small margin to settle at around 9.7% in 2009. The New Zealand government sector was reformed to pave way for more stable macroeconomic policies. The Fiscal responsibility Act was also enacted to streamline planning and government expenditure. This is contrary to the United States policies where economic growth was left to the market forces and hence the level of unemployment kept on fluctuating (Melody & McLellan, 2003, pp. 415-417).
For the last 20 years, US experienced a high growth rate in relation to per capita Gross Domestic Product (GDP). The average per capita growth rate for New Zealand and US averaged to approximatetely1.5% and 2% respectively. As the economic recession affected the United States economy, New Zealand was not spared either as in the year 2008, its gross domestic products dropped with an average of 0.5%. Despite this drop, the annual growth rate recorded a positive rise of about 2.6%. Contrary to the catch-up hypothesis, these growth rates did not make sense. The hypothesis asserts that less developed economies in relation to per capita income grow at a high rate compared to the richer economies. The ultimate effect is that the economies converge in relation to per capita income. This is due to the fact that there are external factors which hinder the rate of economic growth such as scarcity of resources (Smith, 2004, pp. 29-36).
The effect of the credit crunch, increased fuel costs, rising food prices as well as long drought periods lowered production rates in agricultural-related industries. Unlike the United States whose economy is highly dependent on manufacturing and money market sectors, New Zealand is an agriculturalist country and hence its economy is much dependent on agriculture. Due to the global recession and occurrence of drought, the level of economic activities in the New Zealand economy greatly reduced. This in effect resulted to increase in unemployment rate. However the rate of unemployment was not as high as that experienced in the United States. In an effort to maintain low levels of inflation, the Gross Domestic Product must be maintained at a lower level than its potential level in order to control inflation. The wage growth rate must also be maintained at a lower level than the GDP’s growth rate in order to maintain a low aggregate demand. To adjust the inflation through comparing nominal wage between two different periods, economies subtract the respective inflation rate from the nominal wages growth rate. The United States witnessed the largest number of banks which failed due to the financial crisis in the last decade. As a matter of fact, a total of 100 major banks collapsed due to the crisis in US. On the other hand, there were no major banks which collapsed in New Zealand. The minor collapse witnessed was instigated by panic withdrawals which were being conducted by the depositors. This was due to the decline in the level of confidence amongst the depositors (Rampell, 2009, pp. 69-70).
This results from the volatility that characterizes the banking system. New Zealand banking system has adopted a strict regulatory system compared to US. The banking system is regulated by the Reserve Bank of New Zealand (RBNZ). RBNZ is responsible of formulating and implementing monetary and fiscal policies. The 1933 Banking Act also known as the Glass-Steagall Act, was repealed in 1999 by the New Zealand government. The Act allowed Federal Reserves in specific countries to regulate the interest rate in relation to saving accounts. On the other hand, US financial market is characterized by a high degree of freedom compared to New Zealand. As a result, the financial institutions had the freedom to develop new financial products. However, these products did not have sufficient security, and thus posed a risk to consumers. This is one of the factors which contributed to increased collapse of financial institutions in US (Melody & McLellan, 2003, pp. 312-315).
Although the economies of the United States and New Zealand governments are different in terms of structure and development, most of the problems encountered after the credit crunch are similar. The governments in both countries can use several monetary and fiscal policies to steer economic growth beyond where they had been before the recession. The policies include, use of expansionary measures such as expanding infrastructures and public goods. Through increased spending, the government releases money held in its reserves to the public in form of employment as well as acting as a consumer through buying of materials. The governments can also formulate policies that require the banks to lower their loan interest rates. This should be controlled through the central bank. The central bank should lower its lending interest rates and hence the commercial banks. This will increase the peoples borrowing power and hence increase activities in the economy. The New Zealand government should institute a policy that encourages a shift of the economy from an agriculture orientation to a manufacturing one. It should also assist and encourage industrialization since manufacturing economies are not greatly affected by climatic conditions and the prices of manufactured goods are always higher and with low fluctuation rates. The New Zealand natural unemployment rate has been below 4% up to late 1980’s, but due to continued drought in the last decade and the effect of the credit crunch, it rose highly from late 1980’s:
To increase employment rates, the governments should assist in reviving the collapsed industries and financial institutions such as banks through receivership while funding them until they are financially viable. This should be followed by enactment of laws that should regulate performance of the same. The government should also provide a scheme that promotes major industries and services that drive the economy through subsidies and export compensation in order to increase exportation rate and hence improve balance of payment. To increase its disposable revenues, the governments ought to reduce the income tax. Low income tax increases individual and corporate ability to save and hence invest. This lowers the rate of borrowing forcing the banks to lower their interest rates to attract more borrowing. This increases money available for investment.an hence employment creation.
Consequently, this is likely to raise the consumption rate, increase the overall demand and also stimulate production. To overcome the problem of high cost of energy, the governments should construct power plants to substitute oil. Moreover, they should also promote research through funding researchers and research companies that deal with fusion of power as well as other alternative fuels. Lastly, both countries have been hit by acute water shortages. The governments should therefore formulate policies that support water harvesting through construction of several reservoirs and desalination plants. If all these policies are taken into consideration, the problem of unemployment, high costs of power, effects of drought and low aggregate demand for goods and services would be greatly reduced. Both countries would consequently increase their economic growth and hence pull out of the recession at a faster rate (McLellan, 2004, pp. 97-102)
Foldvary , F. E. (2007). The Depression of 2008. Berkeley, California: The Gutenberg Press.
Melody, G., & McLellan, N. (2003) Productivity in New Zealand 1988 to 2002, Working Paper 03/06, New Zealand Treasury.
McLellan, N. (2004) New Zealand performance: context and challenges, a paper presented to Treasury’s productivity workshop, New Zealand
Treasury. 2010. Web.
Rampell, C. (2009). ‘Great Recession’: A Brief Etymology. The New York Times.
Smith, C. (2004) ‘The long run effects of monetary policy on output growth’, Bulletin, 67(3), pp. 29-36.