Effects of global economic crisis, Microeconomics

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The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008. It originated from countries with highly sophisticated financial markets. Lehman Brothers went bankrupt and kick-started a global economic crisis. Subsequently, the spectre of recession has affected even countries with financial markets not dealing with structured financial products derivatives financial instrument asset that had become popular as means of securitization. The financial crisis emerged to a large extent from a severe loss of value of such structured financial products, namely collateralized debt obligations (CDOs) of the American subprime housing credit market. The transmission channels of the financial crisis are extremely diverse. The channels of effect include higher loan interest rates resulting in rationing or even a credit crunch, changes in capital flows and commodity prices, reductions in investment and trade as well as in employment or migration-cum-remittances (Blanchard 2009). The effects of the economic crisis and its aftermath combined with a substantial fiscal crisis in some countries have been harsh on many people, not the least on rural people. Rural people have been particularly suffering from the crisis due to sharp changes in agricultural commodity prices, even stronger rationing of the agricultural credit market, reduced wage rates particularly for unskilled labor due to loss of employment, either rural regional employment or international migratory employment. This contribution concentrates on the effects of the current financial crisis and subsequent recession on the rural landscape, in particular the agri-food sector in the Commonwealth of Independent States (CIS) and the two key sub-regions of Central and Eastern Europe (CEE), namely the new EU member countries as well as the rest of the region

One year after the collapse of Lehman Brothers, more and more leading policy makers in the financial market, among them also Ben Bernanke, the chief of the US Federal Reserve, voiced their opinion that the recession is technically over. Nevertheless, the economic situation, especially employment will continue to be weak for some more. A structured financial product is based on derivatives. A derivative is a financial instrument that is derived from some other asset, for instance real estate mortgages. Securitization offered the promise of a new golden age of risk management by eliminating the mismatch between the long-term assets and short-term liabilities of traditional banks that had been the cause of innumerable financial crises since the dawn of banking. Through securitization, borrowers seeking long-term liabilities could be matched with lenders seeking long-term assets. Nevertheless, with regard to the subprime crisis, securitization also meant that banks pooled their various loans into sellable assets, thus off-loading risky loans onto others. Somehow it is ironic that a financial instrument designed to reduce risk and help lend more securities would backfire so much. Public expenditures in real terms increased by more than 110% in Latvia over the period between 1998 and 2008, compared with an increase of slightly less than 40% in the Czech Republic (World Bank 2010). Holds make up 43% of the population in the ECA region, and they are significantly poorer than their urban counterparts. Furthermore, agriculture contributes about 9% to gross domestic product (GDP) for the ECA region as a whole with 16% of the population is being employed in the agricultural sector (World Bank, 2000).

More than twenty years have passed since the system change in Central and East European countries which include, Central Europe, South Eastern Europe, and Baltic States. These countries have undergone remarkable development since the mid-1990s and have realized a long-cherished desire that is membership of the European Union (EU) from 2004 through 2007. The new EU member states (NMS) seemed to continue their economic development in a relatively satisfactory way even after dark clouds began to hang over the world economy in 2007 due to the subprime loan problem in the USA. However, the global financial crisis arising from the collapse of Lehman Brothers in September 2008 caused NMS to take a direct hit. The NMS have been more or less in economic crisis. The economic crisis has been particularly serious in Hungary and the Baltic states.


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