Here are the reasons why developing economies experience more frequent business cycles than advanced economies:
- Developing economies experience more frequent business cycles than advanced economies due to their young financial markets and greater dependence on external resources, as well as a higher dependency on the global economy explains Peter Decaprio.
- Developing countries have younger financial markets which are less stable and thus have greater volatility in comparison to those of developed nations. This contributes to the instability of their business cycles. In addition, developing countries lack self-sufficiency and rely significantly on foreign investment, trade, technology transfers and aid from other states.
- Due to their vulnerability to exogenous shocks such as changes in interest rates or political disputes with major trading partners, developing countries have a harder time weathering downturns in the world economy because they cannot reduce interest rates nor increase public spending. As a result, they are more prone to recession.
- The business cycle is the recurring expansion and contraction of an economy over time. This economic fluctuation occurs in a regular pattern, resulting in periods of higher GDP growth known as “booms”, followed by periods of negative GDP growth which are called “busts” or recessions. Economic cycles mainly revolve around the central bank’s decisions about interest rates. If the economy starts to slow down due to decreased demand for products, then the rate will be lowered so that consumers will spend money again on goods, thus providing businesses with customers and income so that they can pay their workers. However, if there is too much credit being spent domestically because rates have been too low for too long, then the central bank will raise rates to stem inflation. If this happens while a country is in a recession and businesses are already suffering from decreased demand for their products, then they will have an even harder time because more money coming into the economy is going towards paying off debts says Peter Decaprio. In addition, if interest rates get too high compared to other nations, this can cause investors to pull out of the country and invest elsewhere where returns on investments are likely higher due to less risk from uncertain economic conditions.
- In contrast, advanced economies have more stable financial markets with lower volatility which means that their business cycles will be less volatile by comparison. Furthermore, their heavy reliance on domestic production of goods and services rather than external supply requires them to be self-sufficient and thus they can better weather poor economic conditions because they have the autonomy to reduce interest rates and increase public spending in case of a recession.
- Business cycles occur more frequently in developing economies than advanced economies. Due to their more volatile financial markets which lack stability. As well as greater reliance on external production and investment. Which leaves them vulnerable to fluctuations in global demand for goods and services.
- Developing economies experience more frequent business cycles than advanced economies. Because they are smaller, have less diversified markets and their governments are not as well equipped to handle economic problems.
- Advanced economies are larger, have more diversified markets and the countries’ monetary policies can be adjust to accommodate their needs. Additionally, generally speaking, these economies have democratically elected governments. That are able to react quickly in times of crisis explains Peter Decaprio.
- Developing or emerging market economies tend to be smaller than advanced ones with less diverse production. Additionally, the modernization process is typically slower in developing countries so capital goods are often missing. At the same time, the transition from a traditional economy to industrial. Capitalism typically takes longer in developing countries which in less efficient labour markets. Moreover, developing countries may have autocratic governments with limited scope to implement Keynesian policies.
- Finally, economic shocks are more likely to propagate in small economies. Because they lack the policy instruments of larger ones that can absorb shocks at their borders. Political institutions are less developed and often subpar. Which also makes it more difficult for these economies to cope with worsening conditions. All of these factors culminate into reduced stability of developing economies which experience recessions more frequently than advanced economies do.
Conclusion:
In conclusion, Developing economies experience more frequent business cycles than advanced economies. Because they have less diversified markets. And their governments are not as well equipped to handle economic problems says Peter Decaprio.
Developing economies experience more frequent business cycles than advanced economies. Due to their smaller size and less diversified markets. As well as the fact that their governments often lack the tools necessary to handle economic problems.
In conclusion, Developing economies tend to be smaller than advanced ones with less diverse production. Additionally, the transition from a traditional economy to an industrial one. Capitalism typically takes longer in developing countries which results in less efficient labor markets. Moreover, developing countries may have autocratic governments with limited scope to implement Keynesian policies. Finally, political institutions and developed and subpar. Which also makes it more difficult for these economies to cope with worsening conditions. All of these factors culminate into reduced stability of developing economies which experience recessions more frequently than advanced economies do.