What is an economic crisis?

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

1. What is an economic crisis?

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

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 export raw material, for example.

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

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

Types of economic crisis

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

• Agrarian crisis . Caused by climatic oscillations and other phenomena that affect the yield 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.
• Offer crisis . Those in which the supply  of a good or service is insufficient to meet the current demand, causing the excessive increase in the price of the same, 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 falling demand, which imbalances the economic cycle and causes the fall in replacement costs of sellers and producers.

2. Characteristics of an economic crisis

Economic crises are characterized by the inconvenience of operating 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 is difficult to predict the course 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 .

3. Causes of an economic crisis

Among the most common causes of economic crises are:

• Bad economic policies . The faulty or erroneous application of economic policies by governments can ignite the wick of a local economic crisis.
• Natural, social or political catastrophes . Like earthquakes , revolutions or wars , which disrupt normal economic performance and alter the type of demand that exists.
• Fluctuations in the price of the raw material . As is the case with oil , whose oscillations have a direct impact on consumer countries and producers as well, sometimes abruptly alternating periods of bonanza with those of recession.

4. Consequences of an economic crisis

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

• Slowdown ,  contraction  or economic depression . Depending on the severity of the crisis, the economy may slow down, recede, or plunge deep into it, costing years to recover its stability.
• Social impact .  The crisis often puts social and cultural plans in check, leading to adjustments and reducing the quality of life of the population.
• Political impact . The crisis faces it with cuts and extremely unpopular rate increases, which leads to protests and strikes that can politically destabilize entire countries.
• Poverty . Crises mostly affect the weakest socioeconomically, increasing poverty and in some cases leading to misery.

5. 1929 economic crisis

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

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

6. Other examples of economic crisis

Examples of economic crisis abound, for example:

• The oil crisis of the 70s . As a result of instability in crude oil prices, there was a global economic impact between 1973-74 and 1978-79.
• The crisis of Spain in 1993 . Consequence of the implementation of economic measures that did not include the country’s own cycles, everything was placed on a temporary bonanza and the cycle brought the deficit.
• The crisis of  the  Chavista Venezuela . As a result of poor economic planning for a decade and a half, the one that was a rich country in South America has been facing a growing shortage of food products and an unstoppable hyperinflation since 2013.