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Linkage of Economic Melt Down Essay

It has ups and down when it is up is called boom while when it is down for some period is called recession otherwise known as economic meltdown. This paper therefore seeks to investigate how the economic meltdown has affected the capital market on one and how the capital market affects the development of the Nigerian economy. The study made use f secondary data and analyses the data using regression in order to ascertain the relationship between economic meltdown, capital market and sustainable development in Nigeria.

We found out empirically that the economic meltdown impacted negatively on the capital market and sustainable development in Nigeria. INTRODUCTION . Giving by the recent global economic meltdown that began in America, there is no gainsaying that it is a chain reaction that moves speedily cutting across all economies of the world, affecting their various economic variables negating boundaries between industrialized and non industrialized economics of the world.

According to zenith Economic quarterly review (2008:68), in 2008 alone, it was estimated that about and Linkage of Economic Melt Down By Mackenzie The meltdown that started in United States of America through the bubble in the mortgage fund that spread to all parts of the world:- every

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country taking her share depending on the level of her economic integrating to the outside world economy. It affects currency, imports and export, industrial sector, Capital market, foreign exchange and foreign reserves, fiscal and monetary stability among other agronomic variables.

STATEMENT OF PROBLEM The major concern of the paper is the state of the capital market since the beginning of the recent economic meltdown. For the capital market plays a fundamental role in the development of any economy. It helps both the private and public sector to raise fund for long term project that will help to create employment, reduce the worsening level of unemployment and poverty; help to improve the living standard, and impact positively to sustainable development in Nigeria. However, with the economic meltdown, the state of the Nigerian economy has worsened.

According to the Nigerian stock exchange Fastback (2010:26), the Nigerian Stock Market indicators recorded downward movement in 2008. While Sampson (2008:68) described the fourth quarter 2008 meltdown as like to the Black Monday incidence of 1987. “It is reported that nine of the ten largest intra day point swing that have taken place since 1987 occurred during the ongoing crisis” Due to large losses recorded by some economies, some countries closed their stock market temporarily to avoid further loss or drop in the price of the stock prices for some weeks, It is lagged the “black week”.

However, before the meltdown, the Nigeria capital was rated as one of the most dynamic capital market in African attracting investors from all parts of the world. But the meltdown had put this to a stop and also increase capital flight as many foreign investors are selling off their assets and repatriating capital from the nation’s capital market causing a “bearish” market as the prices of stock is nose dive. The broad objective of this paper is to find the impact of the Economic meltdown on the capital market, while the specific objective is to examine the impact of the

Economic meltdown on the poverty indicators; to identify the effect of the economic meltdown on the overall development of the Nigerian economy. The following questions are important to us as we examine the linkages between Economic Meltdown, capital market and sustainable development. What is the effect of economic meltdown on the Nigerian capital market? Is capital market crucial to Nigerian sustainable development? Is there any relationship between market capitalization and gross domestic product? Can the Nigerian capital market pick up again?

To this end, the rest of the paper is divided into four sections, section two looks at he literature review, section three of takes a look at the methodology and data analysis, while in section four, we conclude and make some policy recommendations. REVIEW OF LITERATURE Economic Meltdown which hinges on business cycle has been various described, defined and explained by different Authorities. Mitchell (2004) defines Business cycle as fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises.

Estes said that cyclical fluctuation are characterized by alternately waves of expansion and contraction. According to Changing (2004:995) Business cycle have no fixed rhythm but they are cycle in that the phases of contraction and expansion reoccurs frequently with uniform similar pattern. The phase of business cycle can be shown in the diagram. The phase of business cycle can be show in a diagram Expansion Prosperity Recession Depression Trough Line of cycle Recovery Economic Activities growth rate PHASES OF BUSINESS CYCLE THE STAGES OF TRADE CYCLE The stages of trade cycle are: v.

Expansion of economic activities ii Peak of boom or prosperity iii Recession, the down trend iv The trough, the bottom of depression. V. Recovery and expansion. Following the stage of trade cycle one will understand that economic growth is not a smooth curve rather it is characterized by up and down in the aggregate economic activities. The expansion of economic activities termed prosperity is followed by increase in demand and supply of output and employment, credit expansion, price rise. This continues till it get to the peak. At the peak, some of the macro economic variables will stop increasing.

Demand will start decreasing in some sector. For the fact that there is lack of perfect information in the economy, producers will continue o maintain their existing level of production. As time goes on, producers will start noticing piles of inventory due to fall in demand. As this continues in a short run, with demand for labor as a derive demand, some worker will be laid off. At this stage some firm will be operating with underused of installed capacity and the turning point at the beginning of recession. As this continues in a long run, investments are reduced, bank credit reduces, stock prices fall and unemployment increases.

This is what we now termed economic meltdown or global economic crisis. OVERVIEW OF THE NIGERIAN CAPITAL MARKET The capital market is the market for medium and long term arm of the financial market. The development of capital market follows logically from the discovery of the joint stock company as an instrument for carrying commerce and for sharing the risks of enterprises. Here, the capital market facilitates the refinancing and perpetuation of Joint stock companies, which no longer need to be dissolved after one venture no matter how successful or disastrous.

Durum (2007:4) observed that the resulting framework for the orderly exchange of securities enable those wishing to join the company to do so and those wishing to leave to do as well. The pricing mechanism ensured that Joiners and leavers could do so at prices as much as possible. The buyer does not need to know the seller nor does the business interrupted. However, the above arrangement and the need for rapid industrial development requiring substantial investment to promote growth in the share of the manufacturing value added in gross domestic product necessitated the floating of Nigeria government security in 1946. Durum 2007:5. ) The legislation for the formalization of securities market started in 1958 with setting up of the Bar back committee. The adoption of the recommendation made led to the estimation and incorporation of the Lagos Stock Exchange (ELSE) in March 1960. The Nigerian Stock exchange actually commenced business in June 1961, and in 1977 it became the Nigeria Stock Exchange (Rasher 2006:1) According to Unyoke (2006), the Nigerian Stock Exchange had listed 263 securities worth about NINE billion made up of debt and equality issue at 2007.

In August 5, 1999, it installed and commenced operation of its Automated Trading System (TATS) an electronic trading facility that enhances optimum pricing of securities after it had installed Automated clearing settlement system on April 1997. This paved way for there Stock Exchange in other parts of the country till date. The instrument or Stock- in-trade of the Nigerian capital market are mainly company share, debenture Stock, bond, loan stock, bond unit trusts Durum (2007:5). While the apex regulatory body in the Nigeria capital market is the securities and exchange commission (SEC).

This body protects and enhances development of the capital market activities. The Nigeria Capital Market plays an important role in the economy among, these include: promoting liquidity to boost productive investment, enhance the performance of the manufacturing sub-sector, facilitates the growth and placement of the industrial sector, contribute towards full capacity utilization, improvement of industrial capabilities, improvement of industrial capabilities and by extension helps foster sustainable economic growth and human development.

According to Durum (2007), the Nigeria Stock Market has undergone three stages in which he called De-experimentations of the Nigerian stock exchange. From 1992-2002 dominated by private equity termed private-equalization of the Nigerian Stock exchange. From 2002 to 2007 dominated by commercial bank term commercial bank stabilization of the Nigeria Stock market and from 2007 to date, the period of cline called economic meltdown.

Concept of sustain development Aruba (2004:303) defines development as a multidimensional process, involving changes in social structures, popular attitudes, national institutions, as well as the acceleration of economic growth; including the reduction of inequality and the eradication of absolute poverty. According to Gullet in Aloud-Gaining et al 2004, De. Three core values, namely life-sustenance, self-esteem and freedom should form the basis for understanding the real meaning of development.

We believe that in the definition or any approach to development should be elastic and human centered and should aim at improving man’s standard of living in all ramification, moving from the basic need of food, clothing, shelter to a higher need such as quality health care services, that leads to healthy life and high life expectancy, high qualitative education and skilled man power with medium and high income Jobs, and all the enhances the quality of life. THE LINKAGE BETWEEN ECONOMIC MELTDOWN, CAPITAL MARKET AND SUSTAINABLE DEVELOPMENT 110, (2009:3) world Bank (2009:1), and Exobiology, (2009. ) observed that the global crisis which began as a meltdown in the united states sub-prime mortgage market in 2007, ad grown steadily into a full blown economic crisis by 2008, wiping out trillions of dollars of financial wealth, undermining global trade and investment and putting the real economy on a course of protracted recession around the world. Oil export is the major source of foreign earning in Nigeria contribution about 80% of the GAP was not left out. According to the dominance of the oil sector has therefore imparted negatively on Nigeria macroeconomic performance, particularly since the emergence of of the global crisis. Raked causing a “bearish” market as the prices of stock is nose dive. As said earlier This paper argued that if this meltdown that have negative impact on the macro indicator continues, sustain development which is measured by the access of the citizen to basic social amenities such as good health facilities, qualitative education, housing, employment ,food security will continue to elude majority of the citizens. This is so because economic growth which is an increase in the material well being is what will transcend to sustained human development. Poverty, unemployment and inequality which translates to the quality of life of the human.

The paper argued that for poverty, unemployment and inequality to reduce the here must be efficiency that result from technical progress that comes from improvement in the efficiency of stock of capital that result from technological and organizational change and improvements in the quality of labor force that result from improved education, training and retraining and health improvement this is the secret of the called developed nations however this cannot happen in the present scenario there the capital market as a institution of economic transformation is nose dive due to the present economic meltdown.

THEORETICAL LITERATURE A lot of theoretical literature about business cycle abounds. According to Changing (2004:995), the theory of business is part of the capitalist system therefore, affects the capitalist economy than the socialist economy. The seeds of recession are contained in the boom in the form of stains in the economic structure which act as brakes to the expansionary part.

This causes scarcities of labor, raw material etc leading to rise in costs relative to price (it) rise in the rate of interest due to scarcity of capital and (iii) failure of consumption to rise due to rising prices and stable propensity to consume when income increase. Here, Changing insisted that the meltdown is purely capitalist phenomenon and has the seed of its own destruction as Karl Max predicted earlier. Weather’ Monetary theory: This theory believes that trade cycle is purely a monetary phenomenon that it is changes in the flow of monetary demand on the part of businessman that lead to prosperity and depression in the economy.

He said that cyclical fluctuation are caused by expansion and contraction of bank credit which in turn leads to variation in the flow of monetary demand on the part of producers and traders. With the credit availability at a cheaper rate, producers increase production, output increases; increase in output production leads to increase in employment. This leads to increase in income and increase in demand According to Weather, prosperity cannot continue limitlessly. It comes to an end when banks stop credit expansion.

Bank now reduces lending due to scarcity of cash, for the money in circulation is absorbed in the form of cash holding by consumers. This will force interest rate to rise and constraint bank credit, banks will now be asking business community to repay their loans. For business community to repay, some will start selling their stocks, this will make the prices to fall. This squeezes the economy; demand will fall and the fall in demand will also cause a emend the labor to fall and unemployment sets in, income falls also.

These are signs of recession. Unable to repay bank loan, some firms will go under and crunch bank fall and stock prices will also fall as many, stock holder will be off- loading their shares due to fear of further fall in stock prices. Hake’s Monetary Over- Investment Theory F. A Hayes formulated his monetary over-investment theory of trade cycle. Trade cycles in the economy are caused by inequality between market and natural interest rates. When the market interest rate is less than the natural rate, there is prosperity economy is in depression.

When the total money supply is greater than saving, it lead to increase in investment and to boom but banks cannot continue to give credit for long due to shortage of voluntary saving. This will cause production to reduce which will bring about recession. Therefore, over-investment in the capital goods industries is the cause of boom and depression according to Hayes, Spiffiest, Classes and Robertson the propounds of this theory. Iii. Summerset’s Innovation theory This theory is propounded by Joseph Schumacher he believes that innovations in the structure of an economy are the source of economic fluctuation.

He also agreed hat business cycle is the outcome of capitalist economy. Here,the economy is at equilibrium but there is an innovation through the entrepreneur the entrepreneur needs technical knowledge and the power of disposal over the factors of production in the form of bank credit this innovative idea is financed by expansion of bank credit, with his newly acquire fund, the innovation start biding away resources from other industries, money income increases, prices begin to rise, thereby stimulating further investment.

The new innovation starts producing goods and there is an increased flow of goods in the economy. With the development, supply exceeds emend, prices and cost of production of goods start declining until recession set in because of the low prices of goods, producers are not willing to expand production According to Schumacher during this period of recession, credit, prices and interest rare decline but total output is likely to average larger than in the preceding prosperity. ‘v. The psychologies theory The psychologies theory of business cycle developed by Proof A.

C Pig to explain business cycle on the basis of changes in the psychologies of industrialist and businessmen. That is, the over reaction of business class to changing condition of he economy that are the major causes of cyclical fluctuation. According to pigeon expectation originate from some real factor such as bumper harvest war, flood, and earthquake, industrial dispute innovation etc but he attributed the causes of business cycle into impulse and condition. Impulse refers to those cause which set a process in motion while condition are the vehicles through which the process passes and upon which the impulses act.

These conditions are decision making centers they are monetary institution market structures trade union etc. According to pig, it is only when expectation are devoid of their realistic basis here may be error in forecasting. Such type of expectation cause disturbance in the economy and result in walls of optimism and pessimism. It starts and spreads to other sectors of the economy. V. The marginal Efficiency of capital MEG or the Keynes theory. Keynes believes that trade cycle is an integral part of his theory of income, output and employment.

Trade cycle are periodic fluctuation of income, output and employment. He regards the trade cycle as a result of a cyclical change in marginal efficiency of capital through copulated and often aggravated by associated changes n the other significant short period variables of the economic system. Keynes insisted that business cycle is cause by decrease in aggregate demand this is investment is cause by fluctuation in the margined efficiency of capital (MEG). The MEG depends on the supply price of capital and their prospective yield.

From these theories they are believe that recession or business cycle is a product of capitalist economy and any economy is affected depends on how the economy is exposed to the outside world. From The theory x-rayed, one finds out that the present economic meltdown is a product of credit crunch from the mortgage finance. There can be attributed to the Weather monetary theory that cyclical fluctuation are caused by expansion and contraction of bank credit which in turn leads to variation in the flow of monetary demand on the part of producers and traders.

Empirical Literature The effect of the Economic Meltdown on the world stock markets. In Brasilia, the global financial crisis hit SAA Paulo stock exchange main index, prioress lost 41% point in 2008 being worst yearly decline since 1971 . Len the primary equity, only four initial public offering were held as against 64 in 2007 its economy that grow by 5. 4% in 2007 cline by 4. 6% in the last quarter of 2008. China’s stock market shed a value of 20 trillion Yang $292 billion in 2008. The shanghai stock market dropped by 17. 3 trillion Yuan. The market wart down by 65% while Sheehan stock market also shed 63% in 2008.

Japan which is are the largest exporter electrons in the world was also hit by the global economic meltdown when a Monday 27 October, Japan’s Nikkei suffers its biggest fall in 26 years dropping by over 6% in one day and by of December 2008 it dropped to 42%. Toyota Motor which is one of the car exporters suffers some loss due to low demand for export. In the united states of American where the global crisis started, the Us stock market shed about 35% of its value during 2008 as the global financial crises, when started in 2007. In New York, the DOD Jones industrial Average lost 35. % in its biggest loss since 1931; NASDAQ was down 42. 3%; while S & P 500 was down 40. 1% Stocks of financial services companies suffered the biggest losses after investor’s confidence plunged following the failure of US financial giant like Washington Mutual, Lehman, Brothers, Alga etc. Source zenith Economic quarterly 2009. While in Africa, the South African capital was hit where it recorded huge losses. The Johannesburg stock Exchange all share index fell 25. 7% points year an year while the market capitalization closed the year at 4. 5 trillion rand’s $ASS (477 billion), dropping 20. % in value from the 5. 6 trillion rand (824. B) it opened in 2007. While in Nigeria the market capitalization dropped from 10. 18 trillion (US 732 billion) in 2007 to close at NO. 95 trillion in 2008). All share index also dropped from 57,900 point to 31 ,450 and foreign investment in Nigerian Stock Exchange fell by a record NINE. 87 billion. (Zenith Economic quarterly 2009). The total market value of 266 securities listed on the Nigeria Stock Exchange dropped Raked capitalization resulted mainly from equity price losses , and the delighting of 64 securities – 11 equities and 53 fixed income securities .

Market capitalization had in 2008 declined by 28. 1 %. By year end , the market capitalization of the 216 listed equities accounted for Nutrition or 71. 04%of the aggregate market capitalization (2008: 213 equities accounted for NO trillion or 73. 1%of market capitalization). Also a year end , 7 subsection recorded increased market capitalization of between 6%and 69. 3%, while 26 subsection suffered a reduction in market capitalization of between 6. 4% and 77. 3%. According to Nigeria stock Exchange Fastback, All share index (AS’) dropped by 33. % or 10,623. 61 points to close at 20,827. 17. The NOSE All share index (AS’) had in 2008 dropped by 45. 8% or 26,539. 44 points to close at 31 ,450. 78. The performance of the index reflects a significant reduction in price of equities during the year. By year end , 23 stocks recorded price appreciations and 1 59 stocks recorded price declines while the prince declines while the prices of 24 remained the same As expected the new NOSE-30 index showed resilience by dropping only 25. 44 points or 3%to close the year at 827. 99.

This is due mainly to the index’s broad-based structure and limited exposure to any sector in particular -two key requirements for products such as Exchange Trade Funds (IETF) and derivatives. The exchange also introduced four sectarian during the year, by year end, however, all the four sectarian indices had depreciated – the NOSE food/beverage index dropped by 32. 63 points or 5. 83%to close at 526. 71 : the NOSE banking index dropped by 159. 45 points or 32% to close at 339. 32: the NOSE insurance index dropped by 391. 59 points or 60. 13% to close at 249. 1 : and the NOSE oil/gas index dropped by 433. 52 points or 60. % to close at 288. 06. Source:NOSE FASTBACK 2010 Section 3 Methodology The data for this work are mainly secondary The data are collected from the Central bank of Nigeria Statistical bulletin and the data for this work is secondary data obtained from central bank of Nigeria Stock Exchange Fastback. We putt simple model ; that Gross domestic product is a function of activities in the Nigerian capital market and sustainable development is a function of gross domestic product .

The variables collected are gross domestic product (GAP), market capitalization, all share price index, of the capital market, overspent expenditure on health, government expenditure on education. From the analyses result using regression analysis, we find out empirically that, there is a positive linear relationship between market capitalization, and gross domestic product, meaning that as market capitalization and increases GAP will increase and as market capitalization decrease GAP will decease showing the link between capital market and GAP.

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