How does an economic crisis affect ordinary people? It is a difficult question to answer because it depends on many variables including the strength of the financial sector and the state of public finances. While it is difficult to draw exact parallels from other crises because initial conditions may have been different examining some of the broader channels through which a crisis me be transmitted is useful. An ADB paper on the Asian Financial crisis identifies five main channels of transmission; prices, labour markets, assets, credit and the government budget.
The initial blow tends to be on the currency and the sudden depreciation of the currency leads to price increases in imported goods or those locally produced that carry high import content although the degree of price inflation depends partly on the level of government intervention.
This disrupts trade and investment and leads to contraction of GDP, which translates to a lower demand for labour leading to increased unemployment and under employment. "Reduced demand for labor is reflected in business failures or retrenchment, wage cuts, shorter work hours, or fewer employee benefits."
"Besides reduced employment earnings, many households bear the loss of lifetime savings due to banking failures or of asset values owing to the collapse of stock and real estate markets. Diminished collateral for loans and high interest rates constrict access to credit for investment or consumption. This then forces household to resort to the informal credit market that imposes punitive interest rates".
Inflation also eats away the real value of savings, as the quantity of goods that a given sum of money can acquire diminishes.
The downturn also leads to lower government revenues while a good deal of public expenditure has to be devoted to restructuring financial institutions and debt servicing. "Normally efforts are made to maintain previous spending levels in such basic social services as education and health, but lower real spending in these areas is often inevitable".
Increases in poverty, malnutrition and hunger are possible. A paper by M Ramesh (on the impacts of the Asian Financial crisis) notes: