Economic Crisis – Concept, causes, consequences and examples

We explain what an economic crisis is, its characteristics and the causes of this phase. Also, its consequences and some examples.

Economic crisis
An economic crisis has effects such as economic recession, contraction, and depression.

What is an economic crisis?

By economic crisis we understand a certain phase of an economic cycle that is characterized by having negative effects, such as the economic recession, contraction or depression, which means that the flow of money begins to be scarce.

The economic crises are a frequent phenomenon of contemporary societies, especially those belonging to the so-called Third World, whose industrial and economic bases are not always very solid or depend on the market price of the raw material for export, for example.

In any case, in today’s interconnected world, the global economy often experiences fluctuations and stumbles in the face of unforeseen events or regional failures that destabilize the financial system as a whole.

This can occur in various magnitudes and it usually causes social, patrimonial and even political damage, since it is an important source of unrest in the populations, especially when it is fought with unpopular thrifty measures.

Types of economic crisis

According to its triggering nature, it is possible to speak of various types of economic crisis, such as:

  • Agrarian crisis. Caused by climatic fluctuations and other phenomena that affect the performance of agricultural production, reducing the amount of food produced to meet constant demand.
  • Supply crisis. Those that are consequences of unforeseen events that cut the distribution chain, such as natural disasters, prolonged strikes or border closures.
  • Supply crisis. Those in which the supply of a good or service is insufficient to satisfy current demand, causing an excessive increase in its price, which immediately affects the economic capacity of consumers, who must sacrifice other things to continue consuming. Energy crises are usually of this type.
  • Demand crisis. Caused by excess supply or a fall in demand, which unbalances the economic cycle and causes a fall in replacement costs for sellers and producers.

Characteristics of an economic crisis

Economic crises are characterized by the operating drawbacks of the economic system for a long time, negatively affecting the quality of life and other social and political areas.

In addition, they have two important characteristics: instability in the markets, which makes it difficult to predict the direction to follow and therefore untimely, risky actions, which may well contribute even more to the crisis; and on the other hand, the eventual transmission of said instability of a certain sector or geography (isolated) to the rest of the systems or at least to the surrounding ones (centered), in case of being too prolonged in time.

Causes of an economic crisis

Economic crisis
One cause of economic crisis can be fluctuations in prices.

Among the most common causes of economic crises are:

  • Bad economic policies. The faulty or erroneous application of economic policies by governments can light the fuse of a local economic crisis.
  • Natural, social or political catastrophes. Like earthquakes, revolutions or wars, which interrupt normal economic performance and alter the type of existing demand.
  • Fluctuations in the price of raw materials. As is the case with oil, whose fluctuations have a direct impact on consuming countries and on producers as well, sometimes abruptly alternating periods of bonanza with those of recession.

Consequences of an economic crisis

The consequences of economic crises are always negative and tend to be the following:

  • Economic slowdown, contraction or depression. Depending on the severity of the crisis, the economy can slow down, recede, or sink deep, then taking years to regain stability.
  • Social impact. The crisis often jeopardizes social and cultural plans, leading to adjustments and reducing the quality of life of the population.
  • Political impact. The crisis confronts it with highly unpopular rate cuts and increases, leading to protests and strikes that can politically destabilize entire countries.
  • Poverty. The crises affect mainly the weakest socioeconomically, increasing poverty and in some cases leading to misery.

Economic crisis of 1929

In the year 1929 there was a great global economic crisis that became known as the Crisis of 29 or the Great Depression. This originated in the United States, as a result of the fall in bonds on the Wall Street stock market known as the “Crac of 29” or “Black Tuesday”, and which quickly spread to all countries of the world, causing a drop in national income, tax revenues, business profits and prices in general.

This resulted in an increase in unemployment by 25% in the United States and in some countries by 33%, in addition to a decrease in international trade from 50 to 66%.

Other examples of economic crisis

Examples of economic crisis abound, for example:

  • The oil crisis of the 70s. As a result of the instability in oil prices, there was a world economic impact between 1973-74 and 1978-79.
  • The crisis in Spain in 1993. As a consequence of the implementation of economic measures that did not include the country‘s own cycles, everything was bet on a temporary bonanza and the cycle brought with it the deficit.
  • The crisis in Chavista Venezuela. As a result of poor economic planning for a decade and a half, the once rich South American country has faced a growing shortage of food products and unstoppable hyperinflation since around 2013.