Today, when we turn on our radios; or turn on our television sets; or browse the internet; or read the newspaper, there are two common words we come across; these words - recession and depression. Worldwide these famous words have become the topic of conversation at most places of work, social events and even church services. Chances are that many of us hear these words and become confused; as they are often used interchangeably and in the wrong context.
There is an old joke among economists that states: recession is when your neighbor loses his job; a depression is when you lose your job. The difference between the two terms is not very well understood because there is no one universally agreed upon definition; as many economists will define the terms recession and depression differently. In economics, the term recession generally describes the reduction of a country's gross domestic product (GDP) for at least two quarters. The usual dictionary definition is "a period of reduced economic activity", a business cycle contraction. The United States-based National Bureau of Economic Research (NBER) defines an economic recession as: "a significant decline in the economic activity spread across the country, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales." In 2008, a recession was suggested by several important indicators of economic downturn. More specifically, in December 2008, the NBER declared that the United States had been in recession since December 2007, and several economists expressed their concern that there is no end in sight for the downturn. The preconditions for the 2008 recession were: (1) commodity boom, (2) the housing bubble and (3) inflation. Some contributors to this downturn included high oil prices, high food prices, and a substantial credit crisis leading to the bankruptcy of large, well established investment banks as well as commercial banks across the globe. The areas to be affected by this recession are trade, unemployment, return to volatility and the financial markets. Many countries have already experienced recession in 2008. The countries currently in a technical recession are Estonia, Latvia, Ireland, New Zealand, Japan, Hong Kong, Singapore, Italy, Russia and Germany. There is now much debate over the origin of the recession. On 15 October, 2008, Anthony Faiola, Ellen Nakashima, and Jill Drew wrote an article in the Washington Post titled, "What Went Wrong". In their investigation, the authors claimed that former Federal Reserve Board Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and SEC Chairman Arthur Levitt vehemently opposed any regulation of financial instruments known as derivatives. They further claimed that Greenspan actively sought to undermine the office of the Commodity Futures Trading Commission, specifically under the leadership of Brooksley E. Born, when the Commission sought to initiate regulation of derivatives. Ironically, it was the collapse of a specific type of derivative, the mortgage-backed security that triggered the economic crises of 2008.It has also been debated that the root cause of the crisis was the overproduction of goods caused by globalization and the vast investments in countries such as China and India by western multinational companies over the past 15-20 years, which greatly increased global industrial output at a reduced cost. On the other hand, Professor Herman Daly suggested that it is not actually an economic crisis, but rather a crisis of overgrowth beyond sustainable ecological limits. So how can we tell the difference between a recession and a depression? A good rule of thumb for determining the difference between a recession and a depression is to look at the changes in GNP. A depression is any economic downturn where real GDP declines by more than 10 percent. A recession is an economic downturn that is less severe.Before the Great Depression of the 1930s any downturn in economic activity was referred to as a depression. The term recession was developed in this period to differentiate periods like the 1930s from smaller economic declines that occurred in 1910 and 1913. Put differently, a depression is simply a recession that lasts longer and has a larger declined business activity.By this yardstick, the last depression in the United States was from May 1937 to June 1938, where real GDP declined by 18.2 percent. If we apply the definitions above, the Great Depression of the 1930s can be seen as three separate events: (1) an incredibly severe depression lasting from August 1929 to March 1933 where real GDP declined by almost 33 percent, (2) a period of recovery between 1934 and 1936 and (3) another less severe depression of 1937-38. The United States hasn't had anything even close to a depression in the post-war period. The worst recession in the last sixty (60) years was from November 1973 to March 1975, where real GDP fell by 4.9 percent. In short, what the world is experiencing now is a recession and not a depression. History has showed that all nations can recover from both. Today‚ recessions should be seen as an opportunity to make our economies stronger and more sustainable. Small open economies, like the Virgin Islands, simply need to look inwardly to find the right combination of innovation, creativity and determination to forge ahead in these uncertain times. For example, tourism worldwide is taking a tremendous beating; as tourists have changed their travel patterns and interests drastically. Islands and countries that have invested millions in the tourism industry are now searching for new ways to make their product distinctive from others. In the same vein, the Virgin Islands can consider establishing a Heritage Tourism product or simply expand the Cruise ship Tourism activities on land.
Reform in other economic sectors should also be considered; but whatever the reform turns out to be, it must be reform that is sustainable. To repeat, with the right combination of innovation, creativity and determination, a better Virgin Islands economy can result; even at this juncture of worldwide recession.
Notify me of follow-up comments