How your financial health is affected by external factors

Gone are the days when wealth creation used to be somewhat predictable process and one could, in relative terms, ensure money and its mobility. In the current age of globalization and information technology, our financial health is dependent on several things that are not in our control. In this article, I would like to highlight some of the factors that have direct impact on our individual well-being but are beyond our 'direct' control.

Nature of government and its policies

A lot depends on the ideological leanings and policies. In an authoritarian state, the wealth distribution would be 'preferential' meaning that individuals or groups supportive of the state would get more and those on the other side of the line would receive the bare minimum. Of course, one could argue that the people have the power to change the regime if it hinders the well-being of the society, but many example like North Korea, Iraq, Cuba etc. do suggest that it is not so easy to stand up against these regimes. Also, in democratic setup which is widely perceived as fairly equal and equitable, we can notice that the government policies have profound impact on people's wealth. While monetary policies determine the circulation and the value of money in the economy, fiscal policies are used to regulate people's confidence in economic activities and abilities of the government.

Geopolitical limitations

Another important factor is country's location and size. A small country lacking domestic market might have to be dependent on the external markets for export and other business activities and stay focused mainly on service sector and high-value adding industries. Any changed in the external circumstances could have a direct impact on the nation's well-being and thus on the people's. Similarly, if a country is not strategically located, it might be out of the radar of all sorts of capital inflow like foreign direct investment, portfolio investments, technical collaborations, defense cooperation etc. Since these factors are crucial in foreign policy formulation and implementation, they can be a good measurement of the strength and wealth generation capacity of a nation.

Natural calamities

This factor has always been a crucial one since the evolution of mankind but has become much more relevant in the times of rapid climate change. We all know that factors like flood, drought, tsunamis, hurricane, earthquakes etc do have severe consequences for many economies. Even the mightiest nations cannot help but feel the pinch of these natural calamities as the post-calamity reconstruction and rehabilitation programs usually demand a huge sum that are beyond the means of several nations, and thus, they get trapped in the repayment of the loans for many years leaving the people in bad shape

Oil prices

It is impossible to avoid oil prices while talking about wealth and lifestyle. Oil has become inseparable organ in our lives. No matter how much we strive to get rid of this commodity and spend hours burning mid-night candles looking for some non-conventional sources of energy, in the foreseeable future, oil will continue to be important in deciding our wealth level. So those who have an easy access to this commodity are understandably able to avoid the heat as compared to those who do not have that easy access. And since oil prices determine the prices of all necessary commodities, we need not elaborate more how it affects people.

Country specific major commodity

Just like Oil, there are other commodities that can be deciding factors in the overall wealth of a nation. Example can be given of nations that are rich in certain natural resources and are able to convert the Mother Nature's blessings into revenue. If a country is endowed with precious metals or minerals, then it is relatively easier for a nation to pay the huge import bills. For countries with no natural resources like South Korea, the development or economic growth comes at a very heavy price paid in man hours.

Wealth effect

Lastly, and perhaps more importantly in the current intertwined global economy, wealth effect has a direct impact on our finance. Wealth effect, in simple words, means how wealthy one feels - irrespective of the real wealth. Sometimes, we feel wealthier even if we have heavy loans on our heads and sometimes we feel poorer even if we have no outstanding big payments to make. This regulates our mental perception of money and need for it, and ultimately determines our spending behavior leading to the increase or decrease in our existing wealth. When we feel poorer in general, we tend to refrain from fresh investments and end up with no further wealth creation. But when we feel optimistic about the present and future, we tend to make more investment with expectation of further value addition. An interesting example is Japan that went into a long recession over a decade, and people's lost confidence in the government efforts made them withdraw all the money from banks and markets propelling the country in a much deeper crisis.

So, in nutshell, we can see that we are living in an interesting age where we are affected by every activity taking place in any corner of the globe regardless of our participation. The know-how gap among people has evaporated thanks to rapid information dissemination and user-friendliness of modern technology. This could be a good signal that if we fail to work for mutual prosperity, we might be heading for a mutual destruction.